06 February 2010

Fortune Editor Suggests That the US Treasury Will Have to Start Defaulting On Its Bonds

Disclosure: The title of this blog entry is almost as sensationalistically misleading as the headline of the Fortune news article below.

Social Security is broke and will need a bailout, "even as the bank bailout is winding down" according to a Fortune story by Allan Sloan. Notice how cleverly the correlation is made between bank entitlements because of speculative excess and what is essentially the paid for portion of a retirement annuity invested solely in Treasury debt.

And bank bailout winding down? That is an illusion. Wall Street has placed its vampiric mouth into the heart of the monetary system, and has institutionalized its feeding. The bank bailout will be over when quantitative easing it over, the Treasury stops placing the public purse in guarantee of toxic assets, and the Fed stops monetizing the Treasuries.

Social Security is broke IF the Treasury defaults on all the bonds issued to the Social Security Administration, not only in its interest payments, but also by confiscating the trillions of underlying principal for which it has issued bonds.

It is broke IF you expect Social Security to act as a cash cow to subsidize other government spending, in a period of exceptionally low interest rates due to quantitative easing to subsidize the banks, and diminished tax income receipts because of a collapsing bubble created by the financial sector.

It is broke IF there is no economic recovery. Ever.

We are not talking about future payments. We are talking about the confiscation of taxes already received, and of Treasury bonds. Granted those Bonds are not traded publicly, but the principle is the same. It is about the full faith and confidence of the US government.

I am absolutely shocked that an editor of a major US financial publication would so blithely presume to suggest that Treasury debt is no good, and that the US can default, albeit selectively, at will. At the same time they promote a 'strong dollar' as the world's reserve currency out of the other sides of their mouth. Do they think we are idiots? It appears so.

If the Treasury does not honor its obligations, if America can treat its own people, its fathers and mothers, so shamefully, what would make one think it would not dishonour its obligations to them, should the need and opportunity arise?

The flip answer might be, "It's gone, the government has stolen the Social Security Fund already. Too bad for the old folks, no matter to me." Well, if that is the case, my friend, what makes you think there is any more substance to those Treasuries you are holding in your account, and those dollars in your pocket? What is backing them? Are they not traveling down the same path of quiet confiscation ad insolvency? People have a remarkable ability to kid themselves that someone else's misfortune will not be their own, even when they are in similar circumstances.

The US has not quite reached this point yet I think. But it may be coming. First they come for the weak.

Is this merely a play to resurrect the Bush proposal to channel the Social Security Funds to Wall Street? It seems as though it might be. Or merely another facet of a propaganda campaign to set Social Security up for more reductions besides fraudulent COLA adjustments as the financial sector crowds out even more of the real economy through acts of accounting theft and seignorage.

Let us remember that if the Social Security Fund is diverted from government obligations, the Treasury will be compelled to issue even more debt into the private markets to try and finance the general government obligations. The only difference will be that Wall Street will be able to extract more fees from a greater share of the economy. That is what this is all about, pure and simple. Fees and subsidies for the FIRE sector.

It should be kept in mind that Social Security payments feed almost directly into consumption, which is a key factor to GDP in a balanced economy.

What next? Commercials depicting old people as rats scurrying through the national pantry, feeding on the precious stores of the nation? How about the mentally and physically disabled? Aren't they a drain on SS as well? Better deal with them. Some blogs and chat boards are calling for a population reduction, and the shedding of undesirables, as defined by them. This Wall Street propaganda feeds that sort of ugliness. "It can't happen here" is as deadly an assumption as "It's different this time."

If this is what passes for economic thought and reporting, sponsored by a major mainstream media outlet from one of its editors, God help the United States of America. It has lost its mind, termporarily, but will likely lose its soul if it does not honour its oaths, especially that to uphold the Constitution against all threats, foreign and domestic.

Next in Line for a Bailout: Social Security

by Allan Sloan
Thursday, February 4, 2010

Don't look now. But even as the bank bailout is winding down, another huge bailout is starting, this time for the Social Security system.

A report from the Congressional Budget Office shows that for the first time in 25 years, Social Security is taking in less in taxes than it is spending on benefits.

Instead of helping to finance the rest of the government, as it has done for decades, our nation's biggest social program needs help from the Treasury to keep benefit checks from bouncing -- in other words, a taxpayer bailout.

No one has officially announced that Social Security will be cash-negative this year. But you can figure it out for yourself, as I did, by comparing two numbers in the recent federal budget update that the nonpartisan CBO issued last week.

The first number is $120 billion, the interest that Social Security will earn on its trust fund in fiscal 2010 (see page 74 of the CBO report). The second is $92 billion, the overall Social Security surplus for fiscal 2010 (see page 116).

This means that without the interest income, Social Security will be $28 billion in the hole this fiscal year, which ends Sept. 30. (Lots of people and institutions are in trouble if you assume that the Treasury stops paying them interest income on the bonds which they have purchased, starting with the banks. And that income is already little enough because of the quantitative easing being conducted by the Fed to bail out the financial sector, which you represent at your magazine. - Jesse)

Why disregard the interest? Because as people like me have said repeatedly over the years, the interest, which consists of Treasury IOUs that the Social Security trust fund gets on its holdings of government securities, doesn't provide Social Security with any cash that it can use to pay its bills. The interest is merely an accounting entry with no economic significance. (You can say the same 'accounting entry' thing about any Treasury debt that is in excess of current tax receipts. And the Treasury doesn't provide any 'cash' to SS because it does not have to, it is probably the only major government program operating still at a surplus. Social Security payments do not go into the aether, they proceed almost directly into national consumption, which is GDP. - Jesse)

Social Security hasn't been cash-negative since the early 1980s, when it came so close to running out of money that it was making plans to stop sending out benefit checks. That led to the famous Greenspan Commission report, which recommended trimming benefits and raising taxes, which Congress did. Those actions produced hefty cash surpluses, which until this year have helped finance the rest of the government.

But even then, it was clear the surpluses would be temporary. Now, years earlier than projected, Social Security is adding to the government's borrowing needs, even though the program still shows a surplus on paper.

If you go to the aforementioned pages in the CBO update and consult the tables on them, you see that the budget office projects smaller cash deficits (about $19 billion annually) for fiscal 2011 and 2012. Then the program approaches break-even for a while before the deficits resume.

Social Security currently provides more than half the income for a majority of retirees. Given the declines in stock prices and home values that have whacked millions of people, the program seems likely to become more important in the future as a source of retirement income, rather than less important.

It would have been a lot simpler to fix the system years ago, when we could have used Social Security's cash surpluses to buy non-Treasury securities, such as government-backed mortgage bonds or high-grade corporates that would have helped cover future cash shortfalls. Now it's too late...

Read the rest here.