Bush: There is No Trust!

The BBQ Pit
81

One more thing.

Back to the argument that we are funding current spending using the regressive social security tax, rather than the somewhat progressive income tax.

No argument there. Yep, that’s exactly what’s happening. And as anyone who has ever been self employed knows, you aren’t really paying 6% of your income in social security, you’re really paying 12%. Yes, your employer matches that 6% with another 6% of his own. You claim that money isn’t a tax on your salary? Interesting. Your employer doesn’t give a rat’s ass whether he pays you x and you pay .06x and he pays another .06x to the government, or whether he pays you 1.06x and you pay .12x to the government. He pays exactly the same amount, you get exactly the same amount, the government gets exactly the same amount, except it never shows up on your paycheck the first way. Less painful that way, I suppose.

And of course, you pay that 12% on the first dollar you earn, with no personal deductions. And it caps at some point, so if you make a lot of money you only pay a small portion of your total income in social security taxes compared to some working shlub. And all

That’s the real scandal, not the “trust fund” that “we” “are” “owed” and that “Bush” “took” “away”.

Dump the separate social security tax, increase income tax rates to be revenue neutral, and pay for social security out of the general fund. That’s fair. But I still don’t see how it’s Bush’s fault that we don’t fund things this way.

82

Again, I’m not convinced that we will have to raise taxes anymore then normal to pay back the trust. We’re always paying back the deficit from past years, starting in 2018 we will just be paying some of it back to the trust fund instead of to private individuals (or other countries or whoever else holds treasury bonds).

An illustration: consider that in 1982, before the creation of the trust fund, we surely had a national deficit, say it was(made up number) 100 billion dollars, all of which was bought by private entities. At that time the gov’t promised to pay back the debt to the buyers, with interest, in pre-agreed amounts of time, for the purpose of the illustration we’ll say that it is in 35 years. The next year, when the SS fund was created, we can assume that the deficit was probably more or less the same. Now however, some of the debt was bought by the trust (say 10 billion) and the rest by private individuals. Now in 2017, we have to pay back 100 billion plus interest to the private buyers of the debt. In 2018, we have to pay the same amount, just now 10% goes to the SS program instead of to private individuals. We don’t have to raise taxes anymore then we normally would though, since we’re spending the same as we would if we’d sold all of the debt to private investors.

Back on page one before the thread developed into a “share your
thoughts on SS” it was specifically about Bush’s comments that there was no SS trust. This follows a pattern of scare-mongering he’s used to drum up support for privitization which, whether you think its a good idea or not, most people agree won’t solve the problems Bush is talking about anyways. I doubt anyone thinks SS’s funding is in anyway Bush’s fault.

83

Right. It is certainly not clear that not having the surplus would have caused Republican administrations to exercise more fiscal prudence - after all our late, lamented surplus was during a period of adding to the trust fund. If the debt hadn’t been sold to Social Security, it would have been sold to others, say the Japanese. Is it really better to have the debt in private hands? Do those who claim the trust fund is a myth think the private holders of debt will never sell it, and will only roll it over? If the debt were in private hands, interest rates would no doubt be higher and we’d be in worse shape than today.

Really, the only explanation for this gloom and doom is as an excuse to cut benefits and government services. Look at how differently the problem was handled in 1983 when there was a real immediate crisis. Yeah, that Reagan was a commie to Pubbies today.

84

I’ve always loved the incongruity of Fleming v. Nestor, the case that had a Communist arguing his private property rights to public funds. :smiley:

85

Thank you. That’s very decent of you. I’m really not playing partisan here.

To be specific, there was a time when the trusts had monies that were invested in special treasuries. In 1968 those securities were terminated and the monies moved into the the General Fund of the US government and spent.

Since that time there have been no actual monies in the trust funds and no actual bonds.

Ok. I am more than willing to do the explaining and provide the necessary links to back up anything you need documented so that you may see and understand the facts of the matter. At that point you may judge for yourself.

I understand your confusion. The Government calls the social security trust funds “trust funds.” They say that there is something in there called “bonds.” However, neither “trust” nor “bonds” fulfill the definitions of these words as they are universally applied in all other circumstances. These terms have very specific meanings.

A bond, by definition involves the exchange of consideration between two parties. A bond is a liability. It means that one party owes another party consideration. The “bonds” held in the “trust” fail the definition in several ways.

First off, there are not two parties involved. There is a single party. The US Government. A single party cannot owe itself in this capacity. It is what is known as a “wash.” Let us say you have some money earmarked to buy a new car, and that you have been disciplined in saving your “car money,” and you treat it differently than your spending money. Let us say you have a financial crises and you have to take $1,000 from that money to pay a medical bill. You promise yourself that you will put back $1,010 dollars next week after you get paid again.

Have you issued a bond? Do you have a debt? No. You do not. You haven’t borrowed anything because you’ve use money. There is no third party. It is a wash, and the manuever exists only in your head to help you keep track of things. It has no actual financial obligations attached to it.

Let’s assume that you object to this. Let us say that you beleive the government is so large and diverse that Social Security and the General Fund constitute actual seperate entities.

Well, that’s your opinion. The government’s opinion was made law in 1968 as regards this particular circumstance. They are not seperate entities. They are one. That was the justification for the commingling of funds.

Let us go a step farther. Let us say that the Social Security trust funds are seperate entities from the Government even though law and the Government itself say otherwise. After all, both laws and governments can be wrong.

If this is the case and the right way to look at it, let’s see what happened between the General Fund and the Trust Funds:

The Government took all the money from the trust funds in 1968. They have not ever returned a single penny to those funds. They have never paid interest. The terms of the bonds make no provision for a return of principle or interest. The bonds have no indenture. If there is no repayment of principle, if there is no indenture, if there is no interest repayment, if there is no obligation between the trust funds and the general fund, than in what sense is there a bond?

Another way: By definition, a bond is a liability. The General Fund owes no liability to the trust funds. Therefore there are no bonds.

As for trusts, the social security “trust funds” violate just about every definition of trust funds out there, beginning with the fact that they have no responsibilities for any assets.

I’m saying that it is a fact that there are no bonds. The Social Security Funds contain no assets and have no obligations.

What they are worth though is another matter that I will get into shortly.

86

There are a lot of reasons, some of which I will try to touch on a little later. The simplest reason though is that neither the General fund nor Social Security contain any assets that are investable. The former runs at a deficit, the latter does not hold assets.
“But Scylla,” you “Surely when I send in my taxes and the government cashes the check, they are holding my money and this is an asset. Lots of people send money to the government, and surely at some point in time before it’s all been spent, the government has a lot of money sitting around.”

Well, no. They don’t. Not ever.

They explanation why they don’t sounds crazy, and I’ll get to it real soon. Let me answer a slightly different question first.

Why doesn’t the government take all the physical and electronic dollars that it has, open and account somewhere and invest them. Some of what John Corrado said explains why not. The limitations of Modern Portfolio Theory also say why not. Modern Portfolio Theory is only applicable on long term investments. Since the Government runs at a deficit and the dollars will be spent, there is not enough time for Modern Portfolio theories methodologies of investment to produce an advantage.

87

Do you remember the day you first learned where babies came from and how they were made. Chances are you were a naive child yourself. You said “NOOOOOO!” You were shocked, outraged, disgusted. You couldn’t beleive it.

At the same time you could just tell it was true.
While it sounded horrible at first, after a while you got used to it.
This is the kind of experience that I have in store for you in this post. It is absolutely crucial to an understanding of the Social Security issue.

Monetary theory right now is kind of like Alchemy and Medecine in the 1600s. The fact of the matter is we don’t really know for sure what we are doing.

However, we know enough to know that we don’t know what we need to know. We know what we are missing and we have a pretty good idea of what the things we need to know are going to look like and what we can do with them.

For example, if we had good monetary theory we would not need taxes and the government would not need any source of revenue outside of managing the currency. Weird huh? It’s true.
The government is unlike any other entity in the economy in that it manages the currency and controls the money supply.

Money itself is simply a medium of exchange. It has worth because we all believe it does. We all beleive it does because it is extraordinarily useful and convenient for us to hold this belief. Finally, the Government orders us to believe it. It says right there on your money that you have to accept that it has worth. That is the purpose of money.

I grow eggs. You sell cars. I want to buy a car, but you have no need for eggs.
How do we work an exchange? Without a medium of exchange that is generally agreed upon there is almost know way that we can work a deal. No commerce, no economy. So we need money. The primary purpose of money is to be fungible. Fungible means that it is easily converted into other things without any net loss in the conversion. It also means that all monies are the same. One dollar is as good as any other dollar. There is no distinction in terms of worth between any two dollars. They are wholly and completely interchangeable.
There are so many eggs in the economy, and so many cars. There is a finite number of goods and services. The job of the Treasury and the Fed in managing the money supply is to make sure that there is neither too much, nor too little of “money” the fungible medium of exchange to provide for the transition of assets.

If their is too little money, money becomes “tight” and interest rates fo up. Goods and services are are difficult to exchange for money, because the liquidity that money provides is more valuable then the goods and services it can be exchanged into.

If there is too much money for a relatively few goods and services, than money is “easy.”
Money is supposed to be like the baby bear’s pooridge, neither tight, nor easy, just “just right.”

The government’s job is to put it out there so that it can be the medium of exchange.
The astute among you will realize an important fact though. Money is pretty useful. A fungible currency represents value in and of itself. The institution that provides money is providing a good and/or service.

This good/service has value. If you doubt it, try walking into a dealership and buying a car with a bunch of eggs.

This value means that the government should, can, and does, extract value for the consideration it gives in providing a fungible currency.

Let’s examine how:

Let’s say the total value of goods ands services to be bartered and exchanged or saved a liquidity, excluding money is X. For the sake of simplicity, let us pretend that the necessary amount of cash to provide for this is also X.

So, the government issues X dollars all of the commerce that is supposed to happen happens and their is sufficient liquidity, right?

Wrong!!!

IF that’s all the money that is issued, than money becomes very “tight.” It is hoarded. It doesn’t move, commerce stagnates, and money actually deflates which means that the same amount of money buys more today than it did yesterday.

In fact, this happened in Japan recently, and lasted most of a decade.
But why would this happen?

Because in issuing X amount of money, you fucked up. Money’s means as a medium of exchange is inherently valuable. X does not take this into account. Money itself is a valuable product of commerce. If that value is not extracted by the issuer than the issuees will attempt to extract it and it will fail as a medium of exchange because it’s value is greater than the products and services which it is supposed to be exchangealbe for!

So, a stable money supply must be X + Y. This is the amount of money the economy requires.

So, if you are issuing the currency for the economy, you must circulate X + Y dollars to provide a stable currency even though there is only X goods and services to be purchased. In other words, in order to keep the economy solvent you must buy Y worth of shit yourself!

Let me say that another way: If you are issuing a stable currency for an economy, by definition you must extract the value from the economy that the stable currency provides. If you do not, the currency is not stable!!!
Holy fucking shit!!!
The Government must take in value in exchange for liquidity.
Here’s the million dollar question. Can anybody give me another name for the government extracting value from the economy???
Anyone?
It’s called “Tax.”

88

Well, come on, I’m all ears for part four…
Please tell us how these “tax” hold my Led Zeppelin posters to the basement walls. :stuck_out_tongue:
Seriously, I appreciate your explanations in this thread.

89

(Continuing)

So. If the government were managing the money supply perfectly it could derive all the value it needed to perfrom its functions simply through the issuence of currency. Since the services the government provides are a part of the economy this is true by definition.

We all know the government prints the money and controls how much is printed. Now we understand why.

We also now understand that every form of tax dollar that the government takes in is in fact an admission that it’s doing a poor job in managing the money supply. When the government takes dollars back in the form of taxes it is fixing its fuck-ups in managing the money supply.
The government takes an awful lot back in terms of taxes, so it must be fucking up an awful lot, yes?

The problem is that the people running the government are a part of the economy and make use of the liquidity of money, as does the government itself.

Money is so damned useful that the government itself is blind to thinking in any other fashion except in terms of money. So, the government says it has a shortfall, or a deficit, when in fact it has no such thing since it prints the money.

To give you an example outside of money, let’s consider something else that works the same way. Let’s look at stock.

Stock represents ownership in a corporation. The more stock expressed as a percentage of shares outstanding that you own, the more of the company you own, right?

Let’s say you own 10% of IBM. If you buy another 5% of the percent of the stock you know own 15% of IBM, right? You betcha.

What if IBM the corporation buys 15% of the stock of IBM. What percentage of the company does it own? What happens if IBM buys back its own stock?

What actually happens is this: IBM cannot own itself as an entity in this fashion. Since a share of stock in IBM represents ownership in IBM everytime IBM owns shares everybody else who owns shares in IBM has the value of their ownership increase. IBM buying back shares from somebody is exactly the same as if everybody else who owned shares in IBM purchased a proportionate amount from the seller.

If you own IBm, and IBM buys back shares the value of your ownership increases. IBM isn’t actually buying anything. YOU ARE!!!

To reflect this such a transaction is handled as Treasury stock, buy the company engaging in the buyback. These shares are out of circulation and are considered unissued and no longer represent or count as the company’s market value.

When IBM buys back shares, those shares cease to exist.
In a very similar fashion, anytime the Government takes in a dollar from the economy that dollar ceases to exist as currency. Anytime the government takes in a dollar it is removing currency from the economy. Anytime it buys something, it is issuing currency.
This is greatly simplified, and there are other ways in which the government manipulates the money supply and other factors at work, but this will do for our understanding of the money supply and how it relates to social security.

90

I’m with ya right until this last part. Let’s say that I own 15% of IBM (I wish) and a bunch of other people own the other 85%. Say IBM buys back their stock, but not mine. Do I now own 100% of IBM? Since I hold all of the outstanding shares, It makse sense that I would, but what I want to know is can IBM then turn around and sell those shares they just bought back to Michael Moore, making me only a 15% shareholder again?

91

Scylla, kudos for a fascinating and pellucid discussion of the one subject that gives me chilblains when I try to fathom it. You’re doing a masterly job on it, and I look forward to seeing your full discourse.

Completely OT, and grist for a different thread, perhaps in GQ or GD: When you conclude this, can you give an equivalently simple explanation of why Social Credit theory would not work? I’ve been exposed to it a number of times over the years, and can see that it arrives at a bizarre conclusion, something like the mathematical “proof” that 1 + 1 = 2, but I cannot see where the “divide by zero” step that invalidates it might be located. Thanks in advance for considering doing so.

92

Yes, you would own 100%. And it could issue more shares, but whether it did or not would actually be up to you. They couldn’t do it without your consent.

93

The entire “there is no trust” argument can be stated much more simply and clearly.

Companies and governments can borrow money, by issuing bonds. These bonds might be backed by a claim on the companies assets, or in the case of governments, a claim on future tax revenues. If the company goes bankrupt, its assets get sold and the bond holders get some part of their money back. Governments can’t go bankrupt, because they always have the power to raise funds through taxation.

Now, it’s not usually a good idea for a government to refuse to redeem the bonds it has issued, because people would be unwilling to lend it more money in future. This is actually a real concern for the US, because it does need to borrow money regularly.

However, in respect of the trust fund, a case can be made that the money is owed to US taxpayers, but what they have a claim to is money taken from US taxpayers. That is, themselves. If the US government refuses to redeem those particular bonds, foreign lenders should be unconcerned, because it’s purely a matter internal to the US. The case is actually very strong, when looking at the US as a global borrower.

It’s a bit different from the perspective of an individual US taxpayer. Someone in their forties, say, has been lending money to the US government for twenty or so years, with an explicit promise that that money would be repaid by future taxpayers.

The US government suddenly says that it’s changed its mind, and it’s not going to repay the money after all. Said someone in their forties really is just shit out of luck.

94

{sidebar}

Note that your own financial position doesn’t necessarily change when you suddenly become the sole owner of IBM, nor does it when new shares are issued to Michael Moore. The value of a company depends on the assets that it owns, and on its future earnings potential.

To make things simple, let’s say that a particular company only has real assets, e.g. a bunch of office buildings. The company has 100 million shares on issue, and they’re currently trading at $1. You own 15 million shares, so your holding is worth $15m.

The company decides to sell some of the buildings, and it raises $85m by doing so. The company now has $85m in cash and a few office buildings. If it’s still trading at $1, your holding is still worth $15m. Note that the market implicity values those office buildings at $15m.

The company uses the money to buy back 85 million shares from all of the other shareholders except you. You are now the sole owner of the remaining few office buildings. Are you better or worse off? It all depends on what you could sell the buildings for. If it’s more than $15m, you’re better off. If you can’t, then you’re not.

If you decide to issue 85 million new shares, and Michael Moore buys them all for $1 each, you no longer control the company. However, the companies assets are now the $85m in cash it got from Michael Moore, plus the buildings. Your stake is still worth about $15m.

{/sidebar}

95

That’s right. And Scylla did that.

96

Well, I guess if I was crazy, lacked education, and had no fucking idea what I was talking about, I might think that too.

97

For me, the main problem with this plan is its source. Which is to say, men whose idea of a sane and sensible fiscal policy is to simultaneously reduce taxes while launching a ruinously expensive, and needless, military adventure. No trust? Just so. Exactly that.

98

(continuing)

When the government makes a statement saying that it has a budget, or a deficit or otherwise expresses its financial standing what it is actually doing is evaluating its monetary policy and describing its stance concerning monetary policy and the money supply.

That’s all that it means. The government really doesn’t have a deficit or an excess (remember, it can print all it wants)

Some of the astute among will realize that something is wrong. Defining something in terms of itself is circular logic. The government making statements in terms of money is inherently circular and meaningless.

They do it because… it is convenient. It is useful to try and relate the government extraction of value for consideration in these terms because that is the stick by which we measure everything else.

So, what does this mean as regards to the Social Security trust funds?

Investors and foreign currency holders and economists and so one view the governments statements not just in terms of dollars but in the larger context of monetary policy to give them validity.

Inherent in every statement of financial condition of the government is the context that the government is going to attempt to keep its currency fungible, and stable. These statements also provide information as to what the government currently thinks about its currency and what it intends to do with it.

When the trust funds of Social security were moved into the general fund and spent what the government was saying was that it needed to extract value from the economy significcantly above and beyond what it could reasonably extract from Y.

This is an alarming statement, akin to the government saying it just going to print up a bunch of money and spend it. Such a thing is likely to produce severe inflationary pressures, and a lack of confidence in the currency and treasury instruments. In order to get anybody to buy treasuries and deal in terms of the currency the government would have to offer treasuries that had a higher interest rate than the inflation they proposed to create, or else, why would anybody in their right mind buy them.

Moving the money from the trust funds into the general fund and spending it was an alternative. By doing so, the government was telling currency and bondholders that the social security obligation did not count in terms of fiscal policy and would not be honored to the detriment of the money supply. It was no longer a consideration for monetary investors.

Another way of saying this is that the government subordinated Social Security so that it was no longer an obligation in these terms.

99

(continuing)

Social security is not an obligation of the Federal Government in terms of monetary policy?

What exactly is it, then?

It is a net extraction of value from the economy, a tax.

If you are paying into social security, down the road you are hoping to recieve a benefit from the government. If you are receiving Social Security you are receiving a benefit.

The latter is not an obligation of the government in any fiscal sense. The benefit is subject to revision, change or termination at any time.

In the fiscal terms that the government reports on its condition to currency and treasury holders, it does not count social security as an obligation.

There are no trust funds with monies in them, and there are no bonds in them as they represent no liability or indenture or obligation of the government.

They don’t count. They are strictly hypothetical.

100

If you start the thread I’ll be glad to talk about it. There is really no reason why it could not work.

Let’s say a villager holds a party and gives away all his posessions. He is now a rich man because everybody is obligated to him. He is going to go to a lot of other parties and get a lot of stuff for a long time. He goes to bed happy in his wealth.

Let’s say you sell your business and your house and all your posessions and you put the cash in the bank, millions and millions of dollars. You check into a hotel and go to bed very happy because of your wealth.

What’s the difference?

They are effectively the same. The only matter for difference is the relative confidence and strength of these obligations.

If it’s a good village, that confidence is very high in the former case and the villager is very secure in his wealth just as you would be secure in your wealth in direct proportion to the confidence you had in the currency.

In both cases neither has any posessions, but both are wealthy.