I, the goverment, have a business with unlimited power to tax, and almost unlimited resources. This makes my ability to raise money almost unlimited. This gives me almost unlimited credit.
Just because I’ve spent this year’s resources, it doesn’t mean my resources have run out, or will ever run out.
Is this very hard to understand?
However, my ability to raise money depends on how reliable I am about paying back previous loans, regardless of my ability to tax and my resources.
If I default on all of my debt, lenders will not trust me.
The SS trust fund is debt gauranteed by the US goverment.
A lot (!) of other debt is gauranteed by the US goverment.
It’s all done through T-bills.
Declaring T-bills non “real” is not a wise step.
Is this really that hard to understand?
I’m guessing you are not familiar with the word deficit.
Is that right?
I’m guessing you don’t know how the deficit is financed. It doesn’t involve magic wands or entries in a ledger. The debt is sold to people. Using T-bills. Backed by the US government.
And if we refuse to back those instruments, nobody will buy our debt. Game over.
At what point did Bush or anyone else suggest that the debt would not be paid?
The point is, once you reach the point where the influx of money into the system is less than the annual liability, the government must start subsidizing the system from general revenues.
Instead of thinking about debt instruments, think in terms of wealth. This is real wealth we’re talking about here, regardless of how the paper is worked out. The root problem is that fewer people will be creating wealth, and more people will be spending it.
I figure it this way. If we were going to borrow all that money anyway (big assumption, I know) better to borrow it from ourselves (SS Trust Fund) than borrow it on the open market.
If we borrowed it on the open market, we’d still have to pay it back, so that’s no different, you might even have a higher interest rate. SS would then have to invest its excess money in the open market, which is risky, there’s always a chance that you don’t get the returns you expect. Investing the SS fund in our own debt is safer all the way around.
As long as our total level of debt is manageable, it doesn’t matter that part of it covers SS. Of course, if we borrowed (and spent) extra to cover the trust fund, that’s a different story.
You and the President did:
The only reasonable interpretation is that the President and the government does not stand behind the debt that makes up the social security trust fund. The trust fund consists of treasury bills. Treasury bills make up the debt that funds the government.
I don’t think you are looking at the whole range of ingenuity in Congress. Of course they won’t refuse to back debt instruments. On the other hand, people holding public debt do not care what the Federal Government does with its internal accounting.
For example, congress could have the Social Security Administration “forgive” the debt of the Treasury. Alternatively, Congress could transfer the bonds from the Social Security Administration to the Treasury. The Treasury would then possess its own bonds and could cancel them. The only limit to the shenanigans available is the point where the public gags and votes the Congress out.
Congress won’t default on the debt but no one really cares what it does with the internal bookkeeping.
By way of illustration, I bring you the 10 Myths about Social Security, direct from the US gummint:
To 19forMe: It’s not a matter of internal accounting. We’ve already sold those instruments to investors. We can pay them pack, or default.
Apologies, I thought the above cite was from the SS administration, it’s from a private advocacy organization. I still stand behind the information posted.
Not at all. The government can simply cut benefits (to the extent they can get away with it politically). That avoids having to “honor” the debt without explicitly defaulting on it.
Not at all. The government can simply cut benefits (to the extent they can get away with it politically). That avoids having to “honor” the debt without explicitly defaulting on it.
Permitting the government to invest directly in private capital markets is fraught with danger - especially when you start talking about the large number of dollars that are wrapped up in Social Security. It was, in 1998, postulated that at it’s peak in about 2020 the Social Security fund will hold $2.9 trillion dollars in assets (federal bonds). Notably, the total value of all shares of stock in all the major markets in the U.S. is only about $6 trillion. Do you really want government to own 50% of corporate America? Do you really trust Congress to invest wisely this much money? And to do it without political considerations?
But if you are in favor of investing social security taxes in private capital markets, why not just eliminate the dangers above and let individuals invest directly? Quite frankly, I wouldn’t want any part of a fund that has the U.S. government as manager.
No, this will not default on the treasury bills. It might amount to a default on a promise to retirees, but that is not the same thing. Cutting benifits is not in and of itself a default on the SS trust fund. Go back and read the laws which created it. They never promised to secure specific benifit amounts.
I was referring to the bonds held by social security. They are separate from the bonds held by the public and other third parties. Congress could provide for the elimination of the debt to social security and continue to pay the public debt.
The disaster of defaulting on debt only really applies to third parties. The US Government credit rating is based on the understanding that the third party will not get the shaft.
Various taxes and levies are supposed to be spent on particular items but can be spent on other items. The resulting debts between the government funds has very little to do with the public debt. For example, there is a small tax on stock market transactions. That fee is nominally supposed to pay for SEC enforcement. The cash goes to the general fund and the SEC is “underfunded.” The difference with social security is the US Treasury printed legal documents proving the debt. This does not stop funds from shifting among government agencies.
The Congress could order the Treasury to issues a new bond to Social Security to pay for a redeemed bond. It could then order Social Security to accept the new bond for the old bond. Congress controls both sides of the deal. Ultimately it will be a political decision of how much Congress will borrow from the public and raise from taxpayers to pay to retirees. The legal niceties of bonds between agencies of the government will not matter.
I think you far underestimate the consequences of defaulting on the SS trust fund. Many people invest in and keep Treasury bills because of the sterling reputation the US government has for paying them back. Defaulting on a substantial portion of those T-Bills outstanding (SS currently hold half of all the outstanding debt) would seriously crimp our credit rating. It would not kill it. Some investors have no other place to go. But the world is not what it was 20 or 30 years ago. Investments in European or even some Asian bonds are not nearly as risky as they might have been (compared to US bonds). And if the US simply wrote off half of the outstanding bonds I’d venture to say that in comparison many of those other vehicles would start looking much better indeed.
My Aunt bought me some treasury bonds when I was born which matured. I used the money to help pay for my college tuition, at which point I wrote a nice thank you note to my Aunt. Did the government “subsidize” my tuition? Should I have writen that note to the Treasury Department?
I disagree. From the perspective of the third party bond holders, what matters is the treatment of third party bondholders. They just want to be paid. Anything that makes it more likely that they will be paid is good news for them.
Let’s take an extreme example. If in a fit of insanity, Congress abolished Social Security, kept the payroll tax and nullified the special bonds held by Social Security the entire US Government would be on much firmer financial footing. It is now much more likely that the existing third party bonds will be repaid.
The only harm done to bond holders will be the uncertainty of what will happen next once every Congressman is chased from office by a mob of voters.
I agree the President shouldn’t dismiss it as mere IOU’s but the oposition shouldn’t equate them with third party debt. If Congress decides to eliminate the debt, they can. Social Security simply wouldn’t press the case in court because Congress makes that decision for the Agency. If a later Congress decided to reimpose the debt, that would also be their perogative.
The debate is not really about the bonds held by Social Security. It is about the social contract we live with. The Congress and President will make that decision on political grounds.
Well it was mutually benfiicial, so if you do, they should send you one too.