Perhaps The State of California deserves condign scorn for failing to pass a budget and resorting to the issue of IOU’s to pay its obligations. I would tend to agree, but perhaps Clusterstock.com pressed the joke a bit too far with the offer to buy up California IOUs at fifty cents on the dollar. The State IOUs have to be worth more that – don’t they?

At present, no officially condoned aftermarket exists to convert the Terminator (others may prefer that we call it The Predator, The TrueLie or The HGH) into a valid means of exchange. Joe Weisenthal, author of the polemic linked above, had to be sadistic enough to investigate. Here’s what he found.

We’ve been calling around to various pawn shops, check cashing places, rare coin dealers and even a Wells Fargo branch. So far none have said they’re going to be doing business in CA IOUs, so it looks like our offer ( 1 Terminator = 0.5 USD) is the best you’ve got going for you.

Assuming quiescent inflation, this would seem give us an implicit exchange rate of 1 Terminator = 1 USD. At least that’s the rate if you aren’t in need of a cash infusion any time soon. Realistically, neither of the happy-talk stories I just suggested above will remain true for long.

The foreign countries and domestic investors who loaned the USG the $787Bn for the Chula Vista Dog Walks and Austin Frisbee Golf Courses that were absolutely necessary to avoid US unemployment reaching 8.1% expect fair and just remuneration. If you work as an economist for either President Obama or Governor Schwarzenegger, that means you have to pay for it, Dips—!

At this point, the USG holds two options, it can print more money, or it can default. If the government prints more money, a California employee’s Terminator-denominated paycheck retains a certain residual value. That value depends upon the prevailing level of inflation spread over the Terminator-holder’s best guesstimate of when California will deign to reassume control over it’s own state finances.

If we assume inflation in the realm of 6% (we’ll use Obama stress-test methodology and pretend nothing really bad ever happens when Barack Obama is in charge), we can speculate on what a Terminator should be worth in valid currency, based on three scenarios.

Scenario 1 stipulates that the terminator remains the official California means of exchange for six months. Inflation at 6% degrades the value $0.029 over that period. A realistic exchange rate would be 1 Terminator = $0.97. Over 1 year, the Terminator issued today would be worth six cents less next year. 1 Terminator = $0.94. Over a two-year period of time during which LA and Oakland no doubt get burned, the Terminator loses $0.111 in value and 1 Terminator = $0.889 USD.

All of these quotes do not take into account the moneychanger’s fee that may get well neigh exorbitant, should Wells Fargo and Louie’s Pawn Shop stay out of the market on principal. This leads us to the realization that the State of California has just cut the salaries of every state employee and given all of its business partners a haircut. People watching the US Treasury will notice this as well. China, Japan and many other nations hold IOU’s from the US Government.

Thus, it comes as no surprise that less jocular people than Joe Weisenthal are taking up the idea of market-making in California butt-wipe script. Buymyiou.com offers cash up front for your government IOU. I’ll go as far as Caveat Emptor in terms of vouching for the website operators.

Craigslist offers a similar service. FT.Com gives details below.

“If you are receiving a Cali-fornia IOU and you need cash immediately, please contact me. I may be of assistance,” reads one posting.

It’s touching when neighbors help out neighbors. Wall Street bucket shops are getting in on this as well. No good buzzard leaves a carcass unpicked.

“We have a whole team working on it,” said Barry Silbert, chief executive of Second-Market, a company that trades illiquid assets such as bankruptcy claims, private company stock and toxic assets.

Mr Silbert said hedge funds, municipal bond investors and other institutions were interested. Trading volume will depend on how many IOUs the state issues and how long banks accept IOUs for deposit at face value.

All of this speculation, however predatory and disreputable, does serve a purpose. It gives an impartial observer a good sense of two things. It tells us how likely people judge California to be a good credit risk, and it tells us just how well people think the USD will be performing next July.

A high volume of script trade on Craigslist or Wall Street would suggest a large number of people are desperate enough or pessimistic enough to take their haircuts now. It would also represent a new low-water mark for our national economic health and for the principles of federalism.

It surprises me not at all that Barack Obama, and his anti-federalistic administration seemed far more eager to bailout GM than CA. Nothing could drive a stake through the heart of federalism any more effectively than letting a bunch of deluded Californians go 1970’s on us and do their own thing.