Best of the Week
Most Popular
1.How U.S. Dollar Destruction Threatens the Global Economy - Steve Forbes
2.Why UK House Prices Will Continue Rising - 'It's Immigration Stupid' - Nadeem_Walayat
3. Bitcoin Price at Beginning of a Move up? - Mike_McAra
4.Gold Price to Plunge, Visiting Fort Knox - David_Hague
5.Silver Price Forecast - Metal to Gain Ground in August on These Factors - Jim Bach
6.Gold And Silver Will Rise With US Dollar Demise, Just Not Soon - Michael_Noonan
7.Bitcoin Price Strong Move Possible - Mike_McAra
8.Israel Gaza War Crimes - Soldier's Ordered to Shoot Civilians Including Children - C4News - C4News
9.UK House Prices Crash Warning - Daily Mail Cognitive Dissonance - Nadeem_Walayat
10.UK House Prices Boom - Top Quick Cheap Tips to Help Sell Your Home - Nadeem_Walayat
Last 5 days
Gold Rising Interest Rate Fallacy - 22nd Aug 14
Jackson Hole: Myth of the All Powerful Central Banker Continues - 22nd Aug 14
Partying On In The Terror State - Thank God for Nuclear Weapons - 22nd Aug 14
The Something for Nothing Society - Lifecycle of Bureaucracy - 22nd Aug 14
Hitting The ISIS Panic Button In The Middle East - 22nd Aug 14
US Stock Indices 10-Year Consolidation Patterns ... Upside Breakouts? - 22nd Aug 14
Gold and Silver Price Getting Set To Explode Higher - 22nd Aug 14
Deflation's Final Curtain Call - Part II - 22nd Aug 14 - Clif_Droke
Gold Big Picture: Most Important - 22nd Aug 14
How the “Uncertainty Factor” Drives Crude Oil Prices - 22nd Aug 14
Inflation, Interest Rates, and Why You Should Own Gold - 22nd Aug 14
U.S. Interest Rates Can Rise States Fed President - 22nd Aug 14
Why Emotional Discipline is Key to Trading Success - 21st Aug 14
Getting the Most Value from Your “Geriatric Cruiser” - 21st Aug 14
Mafia Boss Claims Stocks A Bubble, Buy Physical Gold and Silver - 21st Aug 14
Outrage! On The Beheading of Our Media Brother James Foley - 21st Aug 14
Stock Market Crash a Historical Pattern? - 21st Aug 14
The Black Box Economy - 21st Aug 14
The Bond Market is taking Advantage of Janet Yellen`s Dovishness - 21st Aug 14
Meet Your Investment Manager - 21st Aug 14
Gold and Silver Trading Alert as U.S. Dollar Soars to New Highs - 21st Aug 14
President Obama Strongest Statement Yet on Israel Gaza War - 20th Aug 14
Peak Gold? Russia To Surpass Australia As World No 2 Gold Producer - 20th Aug 14
AI, Robotics, and the Future of Jobs - 20th Aug 14
Stock Market Investors What's Your Exit? - 20th Aug 14
The Gold War - Thinker, Trader, Holder, Why? - 20th Aug 14
Ukraine Interest Rates Soars to 17.5% As External Debt Cannot be Repaid - 20th Aug 14
Rising Interest Rates and The End of Stimuland - 20th Aug 14
Inflation Watch: $245,000 to Raise a Child in United States - 20th Aug 14
Inside the Stunning Deal That Put Apple and IBM on the Same Side - 20th Aug 14
The US Gold in Fort Knox is Secure, Gone, or Irrelevant? - 19th Aug 14
Bitcoin Price On The Brink of a Possible Reversal - 19th Aug 14
Why Tesla Stock Price Will Double in the Next 12 Months - 19th Aug 14
Europe's Economic Malaise: The New Normal? - 19th Aug 14
The Coming U.S. Economic Collapse Will Trigger a Revolution - 19th Aug 14
Market Bubbles, Bubbles Everywhere - 19th Aug 14
This is Your Economic Recovery With and Without Drugs - 19th Aug 14
Stock Market Strong Start to Jackson Hole Week - 19th Aug 14
Iraq, Ukraine - Oh, What A Tangled Mess We Weave - 19th Aug 14
How to Apply Moving Averages as a Trading Tool - Video - 18th Aug 14
Why Short Stock Traders Are Losing Money This Week - 18th Aug 14
Stock Market Rally May be Complete - 18th Aug 14
Why Chinese Citizens Invest In Gold - 18th Aug 14
Palladium Reaches 13-Year High Over $900 oz as Gold Trading Volumes Surge 66% - 18th Aug 14
Understand and Profit from Surging European Volatility - 18th Aug 14
No Escape from The Dollar as The Currency Standard - 18th Aug 14
Stock Market New Highs Less Certain - 18th Aug 14
German Stock Market DAX About To Drop - 18th Aug 14
Stay on Board - Stock Market Big Picture - 18th Aug 14
Europe Economy Is Tanking, QE Is Coming - 18th Aug 14
Are You Ready for The Greatest Technology Revolution Yet? - 17th Aug 14
Why King Coal is Bigger than Oil or Gas - 17th Aug 14
U.S. Empire of Death and Lies - 17th Aug 14
Ukraine - Whose Spin Are We Caught Up In Here? - 17th Aug 14
Time Decay And No Escape For Abenomics - 17th Aug 14
India BSE SENSEX The Party Is Over In Bombay - 17th Aug 14
Stock Market Uptrend Looks Underway - 17th Aug 14
The Key Role Of Conspiracy Theory In Dumbing Down Society - 17th Aug 14
The Federal Reserve in Denial Mode - Bond Market Explained - 17th Aug 14

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

The Biggest lie in Stock Market History Revealed

California Bankrupt, If You Live in California, Here's What You Do...

Interest-Rates / US Bonds Jul 07, 2009 - 08:28 AM GMT

By: DailyWealth

Interest-Rates

Best Financial Markets Analysis ArticleDr. Steve Sjuggerud writes: Would you lend money to someone who is completely broke and in a mountain of debt... and only demand 3.75% interest?

That's what California is forcing many people to do today.



California is out of money. But it still must pay people. So it's paying in "IOUs" instead of cash. By the end of this month, California will have handed out over $3 billion in IOUs. These IOUs are only supposed to last for a few months. And they pay a 3.75% annual interest rate.

How will this end?

Some investors are getting excited – they earn interest AND can potentially buy these IOUs at a discount to face value in exchange for cash.

Me? I have no interest in these things. I've seen this exact game before... It happened in Argentina in 2001. The lesson was this: You don't want to lend money for a tiny bit of interest to a broke state that has no problem changing its laws on you.

In 2001, the province of Buenos Aires ran out of money. So it started issuing IOUs called "patacones" that paid 7% interest.

What's a patacon? It looked like money, but it matured a year in the future. The man on the street was confused... Many merchants flat-out refused to accept patacones (though McDonald's offered a special "Pata-Combo").

"One peso buys a cup of coffee or a newspaper... but what will you be able to buy with one Patacon?" an Argentine woman asked the Wall Street Journal in 2001. She had no idea how prophetic her words were...

Long story short, a U.S. dollar's worth of patacones held in late 2001 were worth about 30 U.S. cents a year later at maturity, after the Argentine peso crashed. And that's much better than money issued by other Argentine states... For example, the "federal" issued by the province of Entre Rios north of Buenos Aires was worth maybe 10 cents on the U.S. dollar a year later.

Now, I don't expect a repeat of Argentina's crisis in the States. I don't expect the California IOUs to fall to 30 cents on the dollar.

At the same time, I'm not interested in giving cash today for a patacon, er, a California IOU that promises to pay me back at some future date with only a small amount of promised interest for my troubles.

The government of California is broke. If you're unfortunate enough to receive California "patacones" try to get rid of them. Use them to pay your taxes, sell them to the knuckleheads on Craigslist... do whatever you can.

But don't hold them. The historical record of broke governments issuing IOUs doesn't offer much promise. The "reward" of 3.75% interest versus the risk simply isn't worth it.

Get rid of your California "patacones" if you get 'em...

Good investing,

Steve

P.S. These IOUs are different than municipal bonds. Some California municipal bonds actually could do just fine – particularly "revenue" bonds, which pay you back directly from the project the bonds financed, like a toll road.

http://www.dailywealth.com

The DailyWealth Investment Philosophy: In a nutshell, my investment philosophy is this: Buy things of extraordinary value at a time when nobody else wants them. Then sell when people are willing to pay any price. You see, at DailyWealth, we believe most investors take way too much risk. Our mission is to show you how to avoid risky investments, and how to avoid what the average investor is doing. I believe that you can make a lot of money – and do it safely – by simply doing the opposite of what is most popular.

Customer Service: 1-888-261-2693 – Copyright 2009 Stansberry & Associates Investment Research. All Rights Reserved. Protected by copyright laws of the United States and international treaties. This e-letter may only be used pursuant to the subscription agreement and any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), in whole or in part, is strictly prohibited without the express written permission of Stansberry & Associates Investment Research, LLC. 1217 Saint Paul Street, Baltimore MD 21202

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Daily Wealth Archive

© 2005-2014 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

KingofthePaupers
09 Jul 09, 06:07
IOUs to pay taxes with like Patacons?

Jct: There's nothing wrong with small denomination California State IOUs if anyone can pay their taxes with them. When Argentina"s government workers were faced with cuts, their unions talked 6 state governments into paying them with small-denomination state bonds which could be used to pay for state services and taxes by everyone.

When the local currency is pegged to the Time Standard of Money (how many dollars per unskilled hour child labor) Hours earned locally can be intertraded with other timebanks globally! In 1999, I paid for 39/40 nights in Europe with an IOU for a night back in Canada worth 5 Hours. U.N. Millennium Declaration UNILETS Resolution C6 to governments is for a time-based currency to restructure the global financial architecture.

See http://youtube.com/kingofthepaupers


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Free Report - Financial Markets 2014