Out of curiousity, what do you think happens to your money if you go buy a corporate bond? For example, I have $10,000. I buy bonds issued by a corporation, any corporation. I get the promise that my money will be returned with interest. What do you think happens to the $10,000 cash I plunked down? Does the corporation put it in a savings account or something? Is the same money returned to me later?
If you’re referring to me, let me be clear. I haven’t changed my position on this issue. The American government is not investing money when it buys American treasury bonds. And if you don’t understand the difference between the American government buying American bonds and buying Canadian bonds, you don’t understand economics on a very fundamental level. And let me repeat, for the seventh or eight time, that it’s not a matter of risk.
Yes? Was there a time I didn’t?
The fact that you’re asking this question shows you still don’t understand the issue. What the government is doing is not the equivalent of buying corporate bonds.
Let me try one more time and see if I can shake anything loose.
Let’s say I’m working and I want to plan for my retirement. So every month I put a thousand dollars into my checking account and leave it there (it’s admittedly not a great financial plan). I figure I’m saving $12,000 a year this way and at the end of my thirty year career, I’ll have $360,000 saved for my retirement.
I decide I should be putting aside more money for my retirement. So I begin a second plan. Every month I write a check to myself for a thousand dollars and put it in a box. So I figure now when I retire, I’ll have another $360,000 waiting for me - all I’ll have to do is cash all the checks in the box. There’s no risk - the checks are all good and the money is there in my account.
What you guys are doing is thinking I’m actually going to have more money when I retire. You seem to think as long as the checks are covered, they count as an investment. But writing checks to myself is not an investment just like the government buying government bonds is not an investment - even if the checks and bonds are good.
Here’s another example - in Canada, we have RRSP’s, sort of like an American 401K - money goes in tax-free, but withdrawals are taxed, but “I own my RRSP”. One option would be to use that massive savings amount to be my mortgage holder. I borrow, say, $250,000 from the RRSP to pay for the house; then I make regular mortgage payments to that fund - i.e. myself. In effect, my RRSP would hold a debt from me (making much better interest than the bank’s bonds).
Yes, my RRSP is only as secure as my ability to pay back. (Canadian tax law requires mortgage insurance in this situation).
However, my obligation to pay is a legal requirement, enforced by law under penalty of tax costs, bad credit etc.
Same thing with Social Security - it’s a separate fund/pocket, with it’s own bank account. Loans to the government are no different than if they’d be loaned to individuals.
As keeper of the main bank, and the guys who make the rules, yes, the government could do anything it wanted - pass a law saying it did not hav to pay, pass a law seizing the SS account, print oodles of (electronic) money to pay off the debt, etc. Eachc hoice has implications for the economy and teh world.
You’re still talking about risk, which as I’ve said is not the issue.
Not quite. The US government is bound by the Constitution to repay.
It would take an Amendment to literally do anything it wanted, which would require (essentially - the details aren’t important here) the approval of a super-majority of the states.
The fact that the US government literally can’t do anything it wanted even within its own laws is one reason the US is a safer place to park money than most.
I’m sorry that I seem to keep picking on you, Little Nemo. You seem like a nice guy. But you continually misrepresent me, and disrespect me.
It now sounds like you’re standing by your earlier statement:
I still think your position is confused, but I don’t want to argue semantics. In fact, I’m tired of arguing with you at all. But would you ever answer my question: Would it be “fundamentally different” if Soc Sec bought Canada’s bonds instead of U.S. bonds? How about if you knew U.S. Treasury would then need to borrow another 2 trillion and got it from Canada which suddenly had found itself with 2 trillion extra greenbacks on hand? :dubious:
Yes? Was there a time I didn’t?
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Earlier you wrote:
Your latest statement implies you think I’m still wrong about the “martingale.” Care to nominate one of the Board’s mathematicians as referee and wager on his decision? 
How so?
Also, SS isn’t a merely second bank account. It’s also a second job (income stream). And, for whatever reason, a second job for which the income and outflows are accounted separately from the first. But that’s somewhat irrelevant
Even in the real world, certain account types/investment classes can be protected from the effects of bankruptcy, debt, tax liens, or other changes in personal finance.
Overly simple analogies fail because they’re overly simple.
There are better mathematicians on the board, but I’ll volunteer if they don’t.
Only if you have a reputation for paying off your IOUs that is so good that entire financial markets use your IOUs as the baseline of “0 credit risk”.
For you, yes. For the government (at least in the sense of “make more money” meaning “earn more money through labour/investment”) no. Government can do two things that you can not: Confiscate money from other people, and manufacture money ex nihilo, which is one of the reasons why the US government has a better credit rating than you do.
More so, I’m trying to make the point that one entity can have multiple “pockets”, or funds, or whatever. Yes, a consolidated balance sheet can combine the two, but in all other respects they are separate entities and the fact that the left pocket borrowed from the right pocket does not mean the debt is not enforceable.
With any promise to pay, the question is “how good is that?” A promise to pay is only are reliable as the payor. As payors go, the USA is a pretty good risk.
Changing the rules may take a bit of effort and no doubt it would be incredibly socially disruptive, but that does not negate the fact that the government, being both player and umpire, can change the rules however it wants.
Another point - for all the complaints about medicare, future costs, etc - No! Every civilized first world country has socialized medicine, and unlike the USA, they pay for it out of taxes. Taxes are in some cases a bit higher than in some US states, but they cover health care and the usual - roads, police, etc. It’s just the doctors in the USA may not like the methods used to accomplish this - i.e. doctors don’t get filthy rich.
The only unknown - in the USA and every other western country - is what are the implications in the coming decades of the major demographic change? I guess we can only wait, plan, and see what happens.
I guess my point wasn’t expressed clearly enough, but no, it really can’t change the rules however it wants. It’s limited by the Constitution, which can only be changed by approval of the states, not the central federal government itself.
If we want to use baseball analogies, the player is the legislature/executive, the umpire is the Supreme Court, but the rules-setting body - the MLB - are the states themselves.
There’s almost no chance the states would approve a Constitutional Amendment absolving the US government of its obligation to repay debts. And there’s no legal way the federal government itself can coerce the states to approve such a change.
That only leaves the US federal government the option of ‘cheating’ and not playing by the rules or sucking it up and paying off its obligated debts.
No, we’re not talking about risk. Say your mother goes into a nursing home. She has a small life savings, and every month receives a substantial pension check which goes into her account – which you manage for her. Now, let’s say you want a new boat, or to remodel your kitchen, or take a vacation in Cancun for two weeks. But you don’t have enough income to pay for it, and can’t raise more in practical terms – you can’t work more overtime to raise it.
What you seem to be saying is that it’s perfectly OK for you to take the money out of our mother’s account to pay for what it is you want to spend it on, so long as you put an IOU in the folder you use to keep track of her money. And if, down the road, you find it hard to pay back what you owe her account, it’s perfectly fine to give her only 75% on the dollar.
It doesn’t matter whether you want to give the money to the relief of the poor, build something that will last for the ages, or blow it all on hookers and drugs. What matters is whether the money in your custody is yours to spend as you list, or not.
Now, it’s possible – likely. considering what I know of your character – that I’m misconstruing what you’re trying to say. I ask you to deconstruct my analogy and point out where I’m misreading you in constructing it.
My question was in response to “the money has been spent and its all gone” reasoning that attempts to explain that the IOUs are “worthless.” If you don’t think the bonds are worthless, then why do you keep interjecting in my efforts to show someone who does believe the bonds are worthless why they are wrong? Shouldn’t you also be disagreeing with tdn’s argument that the bonds are “worthless” rather than disagreeing with my efforts to show why he’s factually wrong?
If I’m reading this correctly, you’re asserting that we believe you will have doubled your money by writing checks against your cash on hand. Nobody is saying that the Trust Fund doubles its money by double-counting its assets, so I can only assume that I’m misreading you somehow.
I would not use that analogy at all, but I would say that as long as the checks are backed by deposits, the checks are valid. But one cannot double-count assets and only single-count liabilities, as you seem to be doing in this example. I would also point out that in this example, the checks are written against an existing asset (the cash in your checking account), whereas bonds, from whatever source, are a promise to pay from future revenue, rather than an existing asset. In short, I’m really not clear what the example has to do with anything.
But this is simply meaningless in the SS context. If Congress wanted the Treasury not to redeem the bonds it issued to SS, it is fully and legally capable of making that happen. It can decrease SS benefits or increase the SS tax to make the shortfall go away. It could set up an entirely different funding source for the SSA. It could simply direct the SSA to repay to the Treasury every dollar that the trust fund receives from redeeming a bond.
The formalists in this conversation keep coming back to the fact that one of the SS outputs is called a bond. What the realists keep pointing out is that all of the other inputs and outputs to the SS system are fully within Congressional control, so that any bond obligation can be effectively worked around and thus disregarded.
That’s the fundamental difference of owing money to oneself. SS and the government’s general operations nominally look like separate systems, but they are fully unified under the control of Congress, which can move money into, out of, or between them in any way it wishes.
You seem to be insisting on the obvious – but useless – point that self-debt is self-cancelling. Suppose Mr. A writes a $100 check to Mr. B for pig food, Mr. B endorses over to Mr. C for fertilizer; for fun let’s have Mr. C spend it on cocaine, and Mr. D (the drugdealer) celebrates by buying $100 worth of pork from Mr. A. Mr. A now owns the check he himself wrote! If he tries to deposit it in his bank, the teller is likely to look at him funny and suggest he just tear it up. They will cash the check however (convenient if Mr. A has to pay for blank checks).
But what would be really peculiar is if Mr. A refused to accept the check from Mr. D on the grounds that it becomes worthless self-debt if he accepts it!
You’ve declined to answer what alternative form you think SSTF should keep its surplus. Greenbacks? Another form of U.S. gov’t obligation, hence self-debt.
When the Pentagon receives funds from Treasury, should it insist on Euros or Yen? U.S. Dollars are just “worthless self-debt.”
One hates to repeat the obvious over and over but … Little Nemo, you are aware that the sum of all debt owed by the U.S. Treasury to people, corporations, banks, etc. is only $11.8 trillion? If “self-debt” held by agencies like SSTF were banned, this would rise to $16.7 trillion.
A prescription for coherent thought is to compare alternatives, rather than repeat semantic truisms. So, let’s ask again: Is it wrong for SSTF to invest in U.S. Treasury bonds and, if so, where should it invest instead?
Wow. Literally. Wow. I honestly don’t think I’ve read something so far off the mark since the time someone accused Der Trihs of being a apologist for the Bush administration.
That’s the exact 100% opposite of what I’ve been saying. That’s what you guys are saying and what I’m arguing against.
Using surplus SS taxes to buy government bonds is the equivalent of putting IOU’s in a folder. And that’s a bad idea.
Seriously, how did you misunderstand everything I said so completely?
This is exactly correct and a very simple way of saying it.
From a personal point of view, I couldn’t be happier that I misunderstood yoi. I think it’s because we have such a thicket of metaphors and analogies in this thread that almost any argument is susceptible of being misread.
Which brings us to an interesting, and so far unanswered question: Before we “unlocked the lockbox” in the early 90s, what did happen to the SSTF surplus?
IMO, borrowing from one fund with a surplus to balance another fund with a deficit is quite acceptable, so long as there is suitable provision for repayment of the money borrowed to the proper fund. But I can see why others might object.
Where I part company with the “switching pockets” analogists is in their claim that no money “really” changes hands. The SSTF is money with a dedicated purpose. It is also an important part of our social fabric nowadays.
I think you are not getting my point. As I’ve stated a number of times I am fully aware that buying bonds with SS surplus does not produce debt. BUT, if government takes the revenue from those bonds and spends them on a bridge or whatever instead of budgeting for future SS outlays then we are indeed producing debt. Seems pretty simple to me.
Let’s look at the alternative…and this is the point I don’t understand. If we had zero debt and only spent what we took in then the extra SS tax would be a surplus to the government. The SS trust fund is required to invest this surplus in bonds which results in a net positive cash flow to Treasury. Okay, now what happens to that extra money if they don’t spend it? Is it just cash in Treasury?