David Cay Johnston on the Crony Capitalism, and Part 2 on Plans for Funding For Your Old Age

"A pension is not a 'gratuity.'  A pension is wages you could have taken in cash, but prudently and conservatively set aside for your old age.   It's your money.  If your employer, for every pay period, does not set aside and designate it to go into a pension plan, your employer is stealing from you. The way to get this is to require pay stubs to itemize the amount of money that has been contributed to your pension plan."

David Cay Johnston


“Capitalism is at risk of failing today not because we are running out of innovations, or because markets are failing to inspire private actions, but because we’ve lost sight of the operational failings of unfettered gluttony. We are neglecting a torrent of market failures in infrastructure, finance, and the environment. We are turning our backs on a grotesque worsening of income inequality and willfully continuing to slash social benefits. We are destroying the Earth as if we are indeed the last generation.”

Jeffrey Sachs


"We are coming apart as a society, and inequality is right at the core of that.  When the 90 percent are getting worse off and they’re trying to figure out what happened, they’re not people like me who get to spend four or five hours a day studying these things and then writing about them — they’re people who have to make a living and get through life.  And they’re going to be swayed by demagogues and filled with fear about the other, rather than bringing us together.

President Theodore Roosevelt said we shall all rise together or we shall all fall together, and we need to have an appreciation of that.

I think it would be easy for someone to arrive in the near future and really create forces that would lead to trouble in this country. And you see people who, they’re not the leaders to pull it off, but we have suggestions that the president should be killed, that he’s not an American, that Texas can secede, that states can ignore federal law, and these are things that don’t lack for antecedents in America history but they’re clearly on the rise.

In addition to that, we have this large, very well-funded news organization that is premised on misconstruing facts and telling lies, Faux News that is creating, in a large segment of the population — somewhere around one-fifth and one-fourth of it — belief in all sorts of things that are detrimental to our well-being.

So, no, I don’t see this happening tomorrow, but I have said for many years that if we don’t get a handle on this then one of these days our descendants are going to sit down in high-school history class and open a textbook that begins with the words: The United States of America was … and then it will dissect how our experiment in self-governance came apart."

David Cay Johnston, May 2014

Gold Daily and Silver Weekly Charts - About Those Special Issue Bonds and Full Faith and Credit

I was expecting another 'hit' on the futures contracts around the May-June contract dates I have posted several times.

Perhaps the antics today will be all for now. Let's see what happens.

Someone said something unintentionally funny about the Social Security Trust Fund bonds and the reliability of the US government today that I ordinarily would ignore, but it may serve to illustrate a point.

This fellow seems to think that defaulting on the Social Security Trust would be fine and good, because 'the money is not there, it is spent.'

That can be said about almost ANY bond that is ever issued. The bonds are essentially instruments with certain terms backed by 'the full faith and credit' of the borrower, or some other designee. The money received for them is almost always 'spent' or in the case of a trust invested in some other instruments. That is the purpose of issuing the bond, whether they are for a retirement plan, a school, or a missile defense system!

In the case of Social Security there are two types of bonds that are now held, both 'special issue' meaning that they are not publicly marketed through the primary dealers. This is a bit of a change, in that the Trust formerly held both public and special issue bonds.

The Social Security trust funds are financial accounts in the U.S. Treasury. There are two separate Social Security trust funds, the Old-Age and Survivors Insurance (OASI) Trust Fund pays retirement and survivors benefits, and the Disability Insurance (DI) Trust Fund pays disability benefits.

Social Security taxes and other income are deposited in these accounts, and Social Security benefits are paid from them. The only purposes for which these trust funds can be used are to pay benefits and program administrative costs.

The Social Security trust funds hold money not needed in the current year to pay benefits and administrative costs and, by law, invest it in special Treasury bonds that are guaranteed by the U.S. Government. A market rate of interest is paid to the trust funds on the bonds they hold, and when those bonds reach maturity or are needed to pay benefits, the Treasury redeems them.

You can see a listing the Treasury bonds held by the Social Security Trust here.

The key point is that the special issue bonds are not subordinate debt, or a secondary obligation, but fully guaranteed by the full faith and credit of the Treasury. I have never actually held or read one of the bonds, but this is my understanding of it, and would accept detailed and specific language that shows that they are susceptible to selective default based on the wording of the bonds or a specific statute and not some interpretation of other documents.

Yes, the Congress can make changes to the Social Security System as they have done in the past, although they generally make those changes gradually, and set future dates for the changes. They have even denied a person in the past from collecting Social Security (Flemming vs. Nestor) because of the transgressions against the state, in this case a non-citizen who was deported for their activities in the Communist party at the height of the Red Scare. It is not a general precedent, and finds no application in general case law with which I am familiar, although I no longer have access to Lexus.  It will stand as a specifically narrow ruling so long as it is not challenged or expanded by some other case(s). That is how law of precedents works.

The government can also revoke your right to vote should you be convicted of a specific class of criminal offense. Does this mean that the government has broad powers to deny the right to vote to anyone it wishes for any reason, or that it can easily do so?

But the key point is that it does not really matter since this does not affect the underlying value and guarantees of the special issue bonds in the Trust fund which is the whole point of this. Not one bit. When it comes to the bonds, they are backed by 'the full faith and credit' of the Treasury, the same as any other bonds it issues.

And as such, they are no different than the bonds issued for public sale by the Treasury which are held by China in exchange for their own inputs for example. And this includes bonds of zero duration, which are Federal Reserve Notes.

What I find a little repugnant about some of the arguments about the Social Security Trust is that they are sometimes put forward by people who would like to see the obligations defaulted upon, in order to provide extra tax cuts to the wealthy for example.  That is a matter of policy and law going forward, and has nothing to do with the status of the special issue Bonds of the Treasury.  If some people wish to take from the old and the poor and give to the rich they will have to find some other justification than the value of the Special Issue Treasury Bonds.

By the way, this argument about the existence of the Trust Fund has its roots in the Bush II Administration.  Who would have guessed that?

"Some in our country think that Social Security is a trust fund – in other words, there's a pile of money being accumulated. That's just simply not true. The money – payroll taxes going into the Social Security are spent. They're spent on benefits and they're spent on government programs. There is no trust."

George W. Bush, February 9, 2005

It is not clear to me that Bush II understood what he was saying, understood the legal and economic issues and their implications, or really did not care.  If some politicians would like to say the money taken from the public and held in Trust is not there, that the bonds are a fraud and subject to default, then they ought to be able to say who stole it and when, because theft and betrayal it surely is, and as bad or worse than the theft of customer money from the accounts at MF Global, which similarly vaporized by unknown hands, or so they claim. 

And that hardly lends itself to trust, for who can have confidence in the full faith and credit of a thief and a betrayer of trusts, who goes so far as to rob the elderly and the disabled?   Is this the government of Washington, Jackson, Roosevelt, Jefferson and Lincoln?

How are the mighty fallen, and their oaths of duty and honor perished.

But these are all plays on words in the manner of Washington and the financiers. There is a Trust and it contains special issue bonds guaranteed by the Treasury.  Some confusion arises because they are not marketable bonds, which means that their value does not vary, and the Banks cannot get their mitts on them to take a piece of the action. So technically one might think that they are not assets. But they are liabilities and are included in the calculation of the public debt.

These comments were criticized as laying the groundwork for defaulting on almost two trillion dollars worth of US Treasury bonds, or more likely facilitating the transfer of the obligations of the Trust into private investments such as US equities. At the same time in 2005 Wall Street brokerage firms were lobbying heavily for the suspension of Social Security in favor of privately held retirement accounts, managed by them of course. George W. was most likely just reading the talking points for his constituents.

Fortunately it did not matter because the President has no power to default on the sovereign obligations in the Trust even by Executive Order; only the Congress has that power. And no matter what existential truthiness arguments pundits like George W. Bush would like to make to justify it, the action would be to declare a selective default on over two trillion in US government bond obligations.

But perhaps more important than the arbitrary respect for legality, the principle of the law of the markets is an impediment to be overcome. Creditors become very uneasy when they see an organization or government that starts to default on its sovereign obligations, particularly foreign holders of the debt who are often as disadvantaged in the local power structure as the weak and the old.

But the punchline of the whole thing was this. This person went on to suggest, in colloquial language, that indeed the bonds are obligations, but so are Greek bonds. And if you can't pay you can't pay.

In other words, US bonds backed by the 'full faith and credit' of the US government are no different than Greek bonds.  To that I might add, not yet, but give it some time.  lol

In one of the instances where I might agree with Modern Monetary Theory (MMT), a sovereign issuer of its own currency never really has to default on its bonds, if the terms of payment are in their own currency, and they have the right and ability to create any amount of that currency which they wish. The US has this ability, and unfortunately for Greece they do not.

Where I disagree somewhat with MMT is that this is a bit of sophistry, a technical nicety. Yes, they may avoid a technical default on the longer duration bonds, but a sovereign issuer most certainly can and has defaulted on the value of their currency, or their bonds of zero duration in a fiat currency regime. In most cases it is a protracted erosion of value, and the US has been doing a good job of this for the past 75 years or so to say the least.

The only 'currencies' that do not bear such counterparty risk from the issuer, that do not rely on the full faith and credit of some issuing authority, are gold and silver. And this is why they have been used throughout history as such, because they are natural currencies from their very characteristics of durability and relative scarcity.

Governments can and have interfered with gold and silver, and made it their own, setting the value. They have even seized it in the past on some pretext. But they have also handed tickets to families and sent them to relocation camps as well. There is a chasm of difference between what can happen and what will likely happen, and what the possible responses to arbirary actions and even the oppression of tyranny might be

And there you have it. The case for the direct ownership of gold and silver, the only currencies that do not rely on the promise of a temporal government or entity, but stand by their own value from their very nature.

*Technical Note: When I refer to Federal Reserve Notes as government bonds of zero duration, one can consider that shorthand for 'government zero coupon bonds of unrestricted duration.' Thanks to Knukles for forcing me to the additional precision. lol.

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.


Fortune
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.

The Next Phase: Looting Social Security, 401Ks, IRAs and Whatever Is Left?

After what we have seen in the last eight years in particular, why do we assume that there is any boundary to the venality of powerful men? That there is ever enough?

Crony capitalism gives way to coolie capitalism. The belief in the priority of the privileged few to possess the greatest share of the nation's wealth endures.

Where is the justice? Where is the reform?

"Greed is a fat demon with a small mouth and whatever you feed it is never enough."
Janwillem van de Wetering

“Experience demands that man is the only animal which devours his own kind, for I can apply no milder term to the general prey of the rich on the poor."
Thomas Jefferson

"The more we do to you, the less you seem to believe we are doing it."
Dr. Josef Mengele

The Nation
Looting Social Security
By William Greider
February 11, 2009

Governing elites in Washington and Wall Street have devised a fiendishly clever "grand bargain" they want President Obama to embrace in the name of "fiscal responsibility." The government, they argue, having spent billions on bailing out the banks, can recover its costs by looting the Social Security system. They are also targeting Medicare and Medicaid. The pitch sounds preposterous to millions of ordinary working people anxious about their economic security and worried about their retirement years. But an impressive armada is lined up to push the idea--Washington's leading think tanks, the prestige media, tax-exempt foundations, skillful propagandists posing as economic experts and a self-righteous billionaire spending his fortune to save the nation from the elderly.

These players are promoting a tricky way to whack Social Security benefits, but to do it behind closed doors so the public cannot see what's happening or figure out which politicians to blame. The essential transaction would amount to misappropriating the trillions in Social Security taxes that workers have paid to finance their retirement benefits. This swindle is portrayed as "fiscal reform." In fact, it's the political equivalent of bait-and-switch fraud....

Read the rest of the story here.

Discussion of this topic at Economist's View here.

Privatized Social Security, Italian Style

Here are a few lessons which can be learned from the Italian experiment with privatized Social Security:

1. The average person does not understand, and is incapable of understanding and accepting, the relationship between higher return and higher risk.

2. The Wall Street bankers and economists apparently do not understand this either, so we ought not to be too hard on the average person for their shortcomings.

3. Higher risk investments are always and everywhere inappropriate choices for a fixed income investment plan with near term payment goals.

4. When the going gets tough, everyone will expect to get bailed out, in shameless geometric proportion to their social standing, influence, and personal income.

5. When it comes to economics the average person will suspend their common sense for as long as is possible.

6. Those in positions of power will promote the suspension of common sense and popular delusions for the sake of confidence. This is why it is called a confidence game.

7. If the fundamentals of an economic plan are 'confusing,' seeming to provide superior returns for extended periods of time with no effort, it is a fraud. (eg. the US dollar.)

8. Whatever pension plans are promoted for the public MUST include all government officials, including the Ministers, Legislators, and Judiciary, to have any hope of success.

9. Whenever the private financiers 'help' the legislators make a troublesome problem disappear the eventual losses are certain to be especially heavy.

10. Despite what this Bloomberg story says the US avoided nothing because of voter outrage; the public and private pension funds are simply being stolen. (See #6 above).

Bloomberg
Italian Pensions Sapped by Private Funds Bush Backed
By Andrew Davis and Alessandra Migliaccio

Jan. 5 (Bloomberg) -- Italy did for retirement financing what President George W. Bush couldn’t do in the U.S.: It privatized part of its social security system. The timing couldn’t have been worse.

The global market meltdown has created losses for those who agreed to shift their contributions from a government severance payment plan to private funds meant to yield higher returns. Anger is rising both at the state, which promoted the change, and money managers such as UniCredit SpA and Arca Previdenza, which stood to profit.

Prime Minister Silvio Berlusconi’s administration is now considering ways to compensate as many as 1.2 million people who made the switch, giving up a fixed return for private plans linked to financial markets. It’s also letting people delay redemptions on retirement funds to avoid losses after Italy’s benchmark stock index fell 50 percent in 2008, destroying 300 billion euros ($423 billion) in wealth.

Italy’s experience shows how difficult it is to solve a problem facing governments from the U.S. to Europe to Japan as populations age and the old system of taxing workers to support retirees becomes unsustainable. Bush failed to persuade Congress to let workers put a portion of their Social Security taxes into privately invested accounts as voter opposition increased.

Standard Plan

For a quarter of a century, employers in Italy have paid about 7 percent of each worker’s annual salary into the severance system, called TFR. Workers received lump-sum payouts whether they retired, were fired or simply changed jobs.

Someone earning 80,000 euros a year would receive more than 200,000 euros in TFR after 35 years on the job and more than 60,000 euros after a decade of work. The fund pays a fixed return that aims to exceed inflation.

The program was a tempting target for a government struggling to meet its pension obligations. Italy spends about 14 percent of gross domestic product on pensions, the most in the European Union. Spain spends 9 percent and the U.K. 7 percent.

Italy has the EU’s lowest birthrate of 1.3 children per woman. By 2050, the country will have fewer than two working-age people for each person over 65, the lowest ratio in the EU, according to Eurostat, the bloc’s statistics agency.

Pensions Cut

Previous governments adopted measures to lower pension payouts and force workers to retire later. Benefits will drop to as little as 30 percent of a worker’s final salary from about 75 percent now, creating an incentive for Italians to seek higher returns by moving severance funds into a complementary plan.

Gaetano Turchetta, a Rome office manager, made the irreversible move to a private plan after a union representative boasted of the potential for 20 percent annual returns. The 43- year-old father of three now says he would sign with “two hands and two feet” if he could switch back.

“What do I want from the government?” he said. “Just not to become a burden on my kids.”

The TFR plan was meant to dent Italy’s risk-averse culture and lure more people to investment funds, said Biagio Masi, head of Banca Sella SpA’s insurance unit, who called the shift a “world-shattering change in mentality.” (Government as debt dealer for the bankers - Jesse)

Low Investment Rate

Eight percent of Italians invested in stocks in 2008, half the level of 2002, according to an Oct. 30 report commissioned by Acri, the country’s savings bank association. About 80 percent favored keeping their savings in the bank and 25 percent have a private pension or life insurance, the report said.

Money managers such as UniCredit, Italy’s largest bank, and Arca Previdenza, the biggest pension fund manager, lobbied customers to make the change, seeing it as an opportunity to kick-start a moribund fund management industry. (Fee Seeking - Jesse)

Funds under management in Italy have shrunk by a quarter in the past seven years, according to the Bank of Italy. The value of pension funds is equal to about 3 percent of GDP, compared with more than 90 percent in the U.S.

Even with full-page newspaper ads, billboards and telephone hotlines spurring Italians to switch, only 1.2 million people, or 10 percent of the eligible private-sector workers, chose to give up the TFR for private plans before the June 2007 deadline, according to fund regulator Covip. Italian lawmakers approved the reform at the end of 2006. It was part of the 2007 budget proposed by former Prime Minister Romano Prodi’s government.