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.

SP 500 and NDX Futures Daily Charts - Waiting for Greece and the Fed

The economic picture in the States is not good. It is muddling along, but is hardly sustainable or robust.

But the great attention of the markets now is focused on the Greek elections in mid-June, and what the Fed will do in the next meeting which is a few days later.

Taibbi: The Epic Failure of the SEC

"The big thieves hang the little ones."

I cannot argue with what Matt Taibbi says here, having quoted others like Bill Black about the same situation in great detail.

But in fairness to the SEC, this is hardly the case of a single regulator falling into porn-surfing indolence while they wait for another turn through the Wall Street revolving door.

The SEC is just another branch of regulatory incompetence and capture in good company with the CFTC and the FED, which gained even more regulatory powers in the recent 'reforms.' There are a few good regulators but they tend to be isolated and beleaguered.   The sad case of Brooksley Born was a good example of how bad regulatory policy drives out the good. 

This non-specific failure implies that there is much more than an SEC organizational or funding problem, and more likely systemic failure involving misplaced priorities and conflicts of interest that flow down from the Congress and the Administration among others. 

I would like to think that the people are getting a bit tired of handsomely paid and highly comped corporate and political 'leaders' who, when the time comes, don't know anything about anything that is surely within their direct responsibility. There are little to no downsides for failure if you are on the right side of the glass ceiling and a vetted member of the players club, a master of the universe.

And that moral hazard may be the most powerful attraction and incentive to bad behaviour of all. Power attracts the corruptible, without respect to race, gender, or creed.

Rolling Stone
SEC: Taking on Big Firms is 'Tempting,' But We Prefer Whaling on Little Guys
By Matt Taibbi

If you want to see a perfect example of how completely broken our regulatory system is, look no further than a speech that Daniel Gallagher, one of the S.E.C.’s commissioners, recently gave in Denver, Colorado.

It’s a speech whose full lunacy is hard to grasp without some background.

It’s by now been well-established that the S.E.C.’s performance in policing Wall Street before, after, and during the crash has been comically inept. It would be putting it generously to say that the top cop on the financial services beat has demonstrated particular incompetence with regard to investigations of high-profile targets at powerhouse banks and financial companies. A less generous interpretation would be that the agency is simply too afraid, too unwilling, or too corrupt to take on the really dangerous animals in this particular jungle. 

The S.E.C.’s failure to make even one case against a high-ranking executive involved in the mass frauds leading to the 2008 crash – compare this to the comparatively much smaller and less serious S&L crisis twenty years earlier, when the government made 1,100 criminal cases and sent 800 bank officials to jail – became so conspicuous that by the end of last year, the “No prosecutions of top figures” idea became an accepted meme in mainstream news media coverage of the economic crisis.

The S.E.C. in recent years has failed in almost every possible way a regulator can fail to police powerful criminals. Failure #1 was that it repeatedly fell down on the job even when alerted to problems at big companies well ahead of time by insiders. Six months before Lehman Brothers collapsed, setting off a chain reaction of losses that crippled the world economy, one of Lehman’s attorneys, Oliver Budde, contacted the S.E.C. to warn them that there were problems with the company’s accounting; the agency blew him off. There were similar brush-offs of insiders with compelling information in cases involving Moody’s, Chase, and both of the major Ponzi scheme scandals, i.e. the Bernie Madoff and Allen Stanford cases.

Read the rest here.

James Koutoulas Says JP Morgan Is Still Hiding Large Amount of MF Global Customer Money

I do not agree with Rick Santelli's throwaway line in the beginning that there was probably no illegality involved in JPM's trades in London, and certainly not with regard to Facebook where it appears that there was blatantly selective leaking of undisclosed negative financial information ahead of the IPO. And the corollary suggestion that any investigations there are a waste of time.

The trades themselves *may not* have been illegal, but as in most things, the felony is in the coverup and the deception for actions that may or may not themselves have broken but merely bent the law. After all, Watergate was all about 'a third rate burglary.'

Although I have been critical of Louis Freeh in the past for his stonewalling of financial information from MF Global claiming attorney client privilege, withholding it even from Federal investigators and regulators, I thought it was a bit unfair to criticize him for his $25 million in fees for managing the Chapter 11, without mentioning that James Giddens is also billing substantial fees for the MF Global bankruptcy for the brokerage portion of it.

Mr. Giddens billed $170 million for Lehman's bankruptcy for example. His fees for MF Global are not yet disclosed because he asked for an extension for filing them with the court to June 8. Bankruptcies, tort claims, and divorces are often rewarding ventures for the lawyers.

Interviews with Mr. Koutoulas are so rare that any deserve to be shared, even if the interviewer steps all over the interview with selective outrage. The extended corporate infomercial is what passes for financial journalism in the States these days, and in much of the 'straight news' as well unfortunately.

I enjoyed the suggestion that almost $800 million in customer money was transferred late in the game to JPM in London to satisfy margin calls. This was the personal conclusion I put forward about two weeks after the incident.

I also believe that JPM had deep knowledge of MF Global's finanical leverage, condition, and exposure as their banker, which they used before and after the fact.

And I agree that Obama's track record on Wall Street reform is shameful, and a continuation of the Bush policies without real reform. But the idea that Romney will somehow change that is, alas, a terrible fantasy. The torch of corruption is being passed from administration to administration now without regard to party affiliation. That is how bad it has become.

How about JPM's positions in the silver market Rick? Think we need an independent investigator there too in the face of four years of stone-walling by the CFTC? Or do we demand justice only where it might be embarrassing to the Democrats without really hurting Wall Street?

But as I have said before, my goal is to just get the MF Global customer money back for them. I have given up any hopes that justice will be done. So I am grateful for Mr. Santelli's attention. There is far too little of it being given to these gross injustices and violations of trust.

It seems as though ordinary people have few friends or champions these days, just various packs of vultures picking over their bones with fees, scams, and snares.