For starters, just think of the shenanigans a few trillion bucks makes possible. “Hey, I’ll give you a generous campaign contribution if you’ll help pass a bill that requires investing X% of the sovereign fund in my industry.” “I’ll give a cushy job to your no-account son-in-law if you support a policy that the sovereign fund will only invest in companies that meet Y criteria (must be unionized, or must have some percentage of American-made content, or must invest so many dollars in the inner cities, or steer jobs to this or that state, etc.).” If you make some “arbitrary” criteria, such as percentage net profit, then you give great incentive to cook the books, or at least focus (even more than they already do) on this quarter, this year, not where the company will be in five or ten or fifty years, when those retirees are looking for their money.
Plus, “10% of Apple and 10% of Exxon” is wildly unrealistic; market capitalization of the NYSE is currently approaching $20 trillion, but intragovernmental borrowings currently amount to more than $5.5 trillion, so we’d need to own more like 20-25% of American big business. (Is your fund limited to the NYSE? If not, what other exchanges make the cut, and how much will they pay to make sure they’re on the list?)
The prospect of the political system deciding how to manage companies makes it a non-starter, I agree as I’ve said before. Massive potential for wealth destruction there.
However even if you formed some kind of viable ‘blind trust’ system to prevent that, there are two other huge problems. The timing problem, ie now the govt must (practically, politically must and will) pay out promised current benefits. To do that it either has use payroll tax revenue, or it doesn’t have that revenue because that money is going to buy assets like stocks (in private accounts as in the big proposed change defeated in the Bush years, or if it’s not privatized but still buying stocks). If it doesn’t have the payroll tax it can redeem the treasuries it owns…but those are redeemed by tax payers just paying other forms of tax like income tax. The money has to come from taxpayers, except to the extent postponed by issuing additional debt. That increase in debt is a huge obstacle.
Then the other big macro problem is that even if we assume the expected return on stocks is 7% (real, presumably something like 4% is probably more realistic now), that’s in a situation where there isn’t massive investment of tax dollars in stocks. If you invest enough in stocks you change the economics of stocks, push up the prices, push down the expected return, incentivize more stock and less debt issuance. The latter isn’t necessarily bad, but in the limit if companies were all financed by stock issuance the return would have to be lower than it is now with significant leverage (ie a lot of issuance is debt with lower expected return and risk than stocks). You can’t pull the whole investment world’s return up by its own bootstraps by shifting to stock on multi $1tril cumulative scale. A single investor can, the whole country can’t.
There are many arguments against investing huge sums of federal money in the stock market, but I want to address the statistics you claim. I’ll use this page for all data except inflation rates.
During the century which began 1910, I see 9.50% net annual return on the S&P 500 with dividends reinvested versus 5.14% return on 10-year government bonds with coupons reinvested. The net inflation rate was about 3.1%; and 9.5-3.1 = 6.4% is indeed “about 7%” as you stated.
During the century with began 1810, the advantage of stocks was somewhat less. The net annual return on stocks was 7.20% compared with 4.67% for the T-bonds.
It is not true that the S&P 500 succeeded over any 5-year period. In fact there are 20-year periods over which the T-bond outperformed the S&P 500; these periods include those beginning
In most of the first decade of the 19th century;
In most of the 1830’s, i.e. 20 years before the Panics of 1854, 1857;
In 1911, i.e. 20 years before the Great Bear of 1931;
During the market top of 1928-1929; and
In 1988, i.e. 20 years before the Crash of 2008.
But finally, an important fact which is often overlooked: the stellar performance of the U.S. stock market is a fact about the past which cannot necessarily be used to predict the future.
In the sentence “The U.S. stock market performed very well over almost any 20-year period ending anywhere between 1880 and 1965.” If you replace the word “U.S.” with “German” you will need to replace “very well” with “very poorly” !
The tragedy of November 8th should remind us that yesterday’s America holds no guarantee about the future America.
ISTR this idea was seriously floated during the George W. Bush administration. It didn’t take long for people to point out that even a simple, routine transaction of the U.S. government buying or selling stocks just to balance its portfolio would be seen as “picking winners and losers” and distort the market.
Even just buying into an index fund would involve moving billions of dollars in and out of the market. How’d you like to cash out a little of your kid’s college fund to pay for tuition on the same day the Social Security Administration sells $77 billion worth of stock to get the cash for that month’s payments?
This is ultimately, I think, the piece needed to rest my case.
My argument is as follows - if the government needs to have a big fund of money so that it isn’t dependent on taxation on a particular year, the most stable way to hold that money is to invest it in productive assets. Conventional wisdom is wrong. T-bills are not as inherently valuable as owning 10% (or 25% as a poster above pointed out) of Exxon or Toyota.
Everyone here’s counter is that the government can’t be trusted, and that it’s possible to screw up. Well, guess what. We can’t just make the government go away. We’ve already decreed it shall hold trillions of dollars in order to partially fund the retirements of many millions of people. So either it does things a mediocre way or a good way or a bad way.
The T-notes held by the SSTF can be considered self-cancelling self-debt but it is easy to draw misleading conclusions from that. In particular, note that if the SSTF had invested its money elsewhere, the Treasury would have had to make up the difference, perhaps by borrowing from China.
In fact, that gives the bottom-line of such a “sovereign fund” proposal — on balance the U.S. government would borrow from the Chinese and use the proceeds to prop up the stock market. The tendency would be to raise interest rates and raise stock prices. Viewed this way, does it still seem clearly a good idea?
A recent thread pointed to evidence that S&P 500 stocks are already very overvalued relative to other stocks, due to indexing effects. If the sovereign fund followed the index it would accentuate that problem. But deviating from the index would invite political corruption.
One thing is very clear. Such large-scale government-driven stock purchases would be a bonanza for Wall St. and financial services related to Wall St. It would also be a big boon to present stockholders, who would see stock prices rise in response to forced government buying. (Contrariwise, when demographics require that the fund sell, share prices would be driven down — the “sovereign fund” could end up playing the Buy High/Sell Low game.) It’s no wonder that politicians connected to the rich elite are eager for some such program to be adopted.
I don’t think most of the posters are saying the government can’t be trusted (I certainly don’t feel that way). Your idea just has lots of practical, philosophical, and political problems that are likely insurmountable for implementation. Most fundamentally, how is the government going to pick which stocks to buy? As mentioned upthread, any announcement by the SS fund that it’s going to invest in a particular stock is going to create a huge distortion in the market.
But the problem with investing in productive assets is, when you need your money what must you do? Sell the asset. Or collect the dividends from the asset.
So suppose there’s a recession and your tax revenue is down. No problem we just keep collecting those dividends from our SWF. Ooops, there’s a recession. Turns out our assets are not performing well, dividends are smaller. Waaah! So we have to sell. Except it’s a frickin recession, prices for these assets are down. And dumping billions of dollars on the market just makes it worse.
The answer is, what if we just collected dividends, not from a selected portfolio of assets, but from every asset in the country that is doing well. We could call this “taxation”.
If the point of the SWF is for the government to be a mostly silent owner and just piggyback on the wealth creation overseen by steely-eyed businessmen and skilled craftsmen and sturdy yeomen, then we don’t have to actually own these assets. We just demand our piece of everyone’s action. Your action is down this year? No problem, you owe less? Your business was a huge success this year? Great, now pay me. We don’t give a shit what you own or how you made that money, just give us a cut of everything. Taxes, taxes, taxes.
In a society where actually collecting those taxes is difficult, then directly owning productive assets may be the only way to actually collect revenue. And so in older times the crown personally owned lands and factories because squeezing the nobility was difficult. It’s easier nowadays.
Any time your tax revenue declines due to economic downturn you’d have the exact same problem with your wealth fund, for exactly the same reason your tax revenues are down. These are highly correlated funds, not counter.
Look, if your main argument is that congressmen should be arrested for something that nearly happened, I’m not really sure that there’s a common basis of understanding of how government functions at a very basic level to have a conversation about fiscal policy.
Just because there’s a conspiracy theory that lawfully issued debt isn’t lawfully issued debt doesn’t mean there is one whit of basis for your opinion. As Uncle Cecil wrote, the basis for all unsecured debt is similar in that you won’t find anything tangible but law requiring the repayment of debts, whether it is the 14th Amendment in the case of the USG or contract law in the case of Fortune 500 corporations. That doesn’t mean that the worldwide bond market is an “accounting trick.”
Which brings up another major drawback: if the government buys stock, the can pick winners and losers. Don’t like a company? Dump their stock and see the price fall. A political crony’s company is having an IPO? Buy their stock an d jack up the price. Invest in one company over its competitor? People will do the same, thinking the government has to choose the better investment. Not good for those who already have stock in the competitor.
[QUOTE=Ravenman;20081887Just because there’s a conspiracy theory that lawfully issued debt isn’t lawfully issued debt doesn’t mean there is one whit of basis for your opinion. As Uncle Cecil wrote, the basis for all unsecured debt is similar in that you won’t find anything tangible but law requiring the repayment of debts, whether it is the 14th Amendment in the case of the USG or contract law in the case of Fortune 500 corporations. That doesn’t mean that the worldwide bond market is an “accounting trick.”[/QUOTE]
Conspiracy theory? What the what???
Once the SS trust fund really started building up money in the 80s, many respectable pointed started pointing out that it was being drained off to pay for Reagan’s huge militarly spending & tax cuts for the rich. E.g., Daniel Patrick Moynihan was constantly introducing bills to get it to stop. Daniel Patrick Moynihan was hardly a conspiracy nutjob. He was one of the most intelligent people to ever serve in the US Senate.
As to other “debt” situations: A company listing a big IOU to itself from itself isn’t in debt to itself in any way shape or form. It’s not a debt!
(The really big mystery is why people don’t realize that if it were a debt it would also be an asset. A contradiction in terms.)
This is an incredibly simple basic fact.
And …
There would have been no need to borrow more money from China to fund all the Reagan excesses. The solution would have been to not throw so much money at the military and not cut the taxes to the rich so much.
If people were unhappy about really investing the trust fund in stock funds or whatever, the only solution would to have not raised SS taxes to create the excess funds.
Then we’d be pretty much in the same boat we are now, trust fund wise. We will make up the difference with tax increases as we go forward.
ftg, I suggest you shouldn’t present things as facts that are not accurate representations of what is going on. The Social Security system walks, talks, and acts independently of other government functions. Tons of laws recognize that.
And it’s worth noting that Moynihan’s proposals would have crushed the solvency of the Social Security system. Late in his career, he advocated cutting FICA taxes primarily in order to “unmask” the “true” size of the deficit – a position that I believe was based on politics and not the well-being of Social Security. And as intelligent as he was, I think developments over the last twenty years have so far shown him to be wrong on basically every criticism he made about the system in his later career. If he were right, the system would have already collapsed.
So if Congress votes to stop honoring Treasury bonds, in violation of the 14th, who stops them? Maybe “arrest” was a bit much, but as far as I can tell, the Federal courts would not be able to force Congress (and the President) to pass/sign laws that allow for those debts to continue to be paid. Similarly, Congress could direct whichever agency actually redeems those bonds to stop redeeming the ones held by SSA.
The court issues a writ of mandamus to the secretary of the treasury requiring payment of the government’s debts in accordance with the 14th amendment. No law of congress or lack of said law can override the constitution.
Standard and Poors wanted a deficit reduction deal, and they criticized the budget deal that year as being insufficient. They were NOT predicting a default. S&P wrote three pages about how there ought to be more spending cuts and tax increases, and used the word “default” exactly twice – and once of those was in reference to the 2011 budget deal as “removing” the threat of default.
While I do think the “Social Security debt id a fraud” group are partly alarmist , they are also far more correct than the flipside argument. The IOU’s placed in the program are legally and economically meaningless. It doesn’t matter how much you really want them to mean something - they don’t.
The government was taking in far more than it needed in order to pay the debt. It would have been the executive branch’s responsibility to pay the debt and debt is always the first thing that gets paid not the last. Some of the government would have had to shrink but the debt would have been paid.