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SSTF June Trading Report
The SSTF has (finally) released its June trading results. June is a big
month for the Fund. Every June they aggregate all of their cash
positions and reinvest the proceeds in newly issued securities with
maturities from one to fifteen-years. There a few observations I would
like to make regarding these results. First a look at the trading
blotter. I will reuse sections of this report later on so don’t get hung
up now on these big numbers.
There were a total of 36 separate transactions during the month. Not a
big deal for your average day trader. But consider the size of these
deals. The total turnover for the month was $612 Billion. That ain’t
hay. The total assets held by the Fund were about $2.6 T so SS turned
over the equivalent of 25% of its book in just one month. Two
observations:
-I constantly see reports in the media on SS that argue that there is no
money in the TF. That the assets are not real. That there is no
liquidity in the securities held by the Fund. That it is a Ponzi
accounting scam. A look at the June results prove that those claims are
all false. The extreme naysayers of SS should look at this and wake up.
These are very real assets. They are liquid.
-From the CBO to other government officials to Wall Street and most
other economists we are getting a measure of the nations debt that is a
function of the Debt Held by the Public. The CBO thinks our debt is 53%
of GDP because they conveniently forget about the intergovernmental
accounts (where SS fits in). The total IG account is $4.5T and has trust
funds that are comprised substantially of special issue treasury
securities.
Both sides of this need to wake up and smell the coffee. These debts are
very real. They are legally as binding as those securities held by the
Chinese Central Bank. When we talk about our debt these should be
included. Our debt is not 53% of GDP. It is 92%. Debate over.
The Fund acquired a strip of newly issues securities with its excess
cash. The maturities range from 1-15 years. As you can see from the
following the entire $270 billion of new investments was set at one
common rate of 2-7/8%. This is the arithmetic average of all Treasury
maturities beyond four years. What this means is that the TF is immune
from the investment death trap of ZIRP. Consider the first investment of
$14.996 billion with a maturity of one year. The fund gets a return of
2-7/8 on that. The fair market rate was just 25bb. The difference on
this one transaction? It comes to a tidy $395mm. Who would not like a
risk free investment and earn 2-5/8 over market? I would love to buy
into that. But this “special deal” is only available to the TFs. Why is
it that they get such a good return?
-I conclude that the TF is costing us much more than just the payroll
taxes that are collected. To get a real sense of the cost you have to
add in the interest. Our economy has to pay that as well. The total
interest tab in 2010 will be ~$118 billion. The average yield on the
portfolio is 4.7%. The recent fair market rate on an eight-year average
life Treasury investment would be about 2.2%. The Fund is enjoying an
above market yield of 2.5% currently. That comes to $63 billion a year.
The formula that sets the interest rates is now 50 years old. It should
be reviewed. It is no longer a viable methodology. Our short term
financial position is being impaired so that SS can “look better” long
term. We are kidding ourselves.
The flip side of this is that the Fund's % income is declining even with
the formula that beefs up its results. Look at all the high coupon
stuff that has rolled off. The folks at the TF must be sad to see these
bonds mature. They have been living off of this fat income for years.
Consider the $29.7b of 5.5% bonds the Fund has been holding for
fifteen-years. That money was re-invested at 2-7/8%. The difference over
the next 15 years comes to a whopping $800mm per year or a total loss
of revenue of $11 billion. And that is just one small portion. The bonds
that came due and a graph of the interest rates the fund has realized
in the past:
The Fund has projected that this rate will return to 6% on average. I
don’t think they consulted with Ben Bernanke on this. Ben is going to
keep rates at artificially low levels for years. Even though the Fund
benefits from a dumb 50-year old formula their revenues are going down.
In a few years the numbers will be off “plan” and people will be
scratching their heads wondering why.
The TF receives interest from Treasury in December and June. For June it
was $59B. They will get a similar number in December. So for the full
year % will be $118b. The assets of the Fund will rise in the year by
about $80b. This is the fundamental problem with the Fund. They are
losing money in their operations, but still show a growing surplus due
to interest income. But we know that the interest is (A) declining and
(B) it is artificially supported by a half century old methodology.
In June the Fund took in $56.8 billion in payroll taxes. They paid out
$63.1 billion in benefits (includes $4.4 B of RR benefits). This is the
only number you need to know. On a cash basis the Fund is losing
billions every month. For June it was $6.3b. The interest income that
hides this problem is just noise.
For the record; my numbers for July, August and September. It comes to a
shortfall of $21 for the Q. By way of comparison Q3 2007 was in surplus
by $10.6B. And some say the Fund has not “turned the corner”. Another
thing we are kidding ourselves about.
July: +50.9 (PR), -58.7 (benefits). Net: -7.8B
August: +50.9 (PR), -58.6 (benefits). Net: -7.7B
September: +53 (PR), 58.8 (benefits). Net: -5.8B
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Let me get try to get this straight. Forget about the internal accounting machinations in the US Government for a sec. The SS has negative cash flow, right?
So, when a newly retire individual gets his first check, that money will have to come from somewhere, like Uncle Sam going into more debt, selling assets, taxes etc. Even the US Treasury understands this: from last years trustee report "Neither the redemption of trust fund bonds, nor interest paid on those bonds, provides any new net income to the Treasury, which must finance redemptions and interest payments through some combination of increased taxation, reductions in other government spending, or additional borrowing from the public."
Therefore, Uncle Sam will find a way to pay out these monies until the day they can't anymore.
Tks for these comments. Especially those that voiced opposition to the notion that the bonds in the fund are negotiable and liquid. These points are all valid.
I look at it differently. An extreme example to make a point.
We get into a row with the Chinese one day and Congress passes a law that Treasury can't honor the bonds the Chinese are holding. At the same time we affirm that will continue to pay our buds in Japan, Korea and England on time.
The stock market would fall by half in a few days. No one would get a mortgage for a decade. Big companies with big debt like GE would pack it up. The US would be shut out of the global capital markets. Unable to borrow we would just print money endlessly. We would have a depression that was deeper and longer than that of the 30's.
Okay we agree. That will not happen. It is man bites dog.
In my view a default on the bonds held by SS or other TFs would have exactly the same affect as us defaulting on the Chinese. This stuff has the identical full faith and credit of the US government. It is cross defaulted.One goes they all go.
The only way out of this is to borrow more money from the Chinese etal. But at the yields being offered there is just not enough takers in my book. So when SS bonds come due we will pay them off with money created by the Fed.
How long can that plan last?
Sorry, Bruce, you're wrong that default on SSTF or any other intragovernmental debt would disturb China. Because it wouldn't affect anybody. If the US government wanted for some reason to get rid of intragovernmental debt, which is not going to happen because it's meaningless anyway, but if it did, the US government could easily explain that this was purely an accounting system change and wouldn't affect non-governmental holders of Treasuries. Why would China care about the US government changing its internal accounting procedures?
What matters are the laws that determine how much benefits the government is obliged to pay out to SS and Federal Disability and Medicare and federal pension recipients etc. As long as those aren't changed, all the intragovernmental debt could be annulled tomorrow and it wouldn't make any difference to anybody.
But you're starting to get it when you say the only way we'll be able to fund Social Security is by borrowing more from the Chinese et al. Social Security, Medicare, the federal portion of Medicaid and federal pensions are all consuming rising portions of GDP. The federal government will have to either cut benefits, cut other federal spending, raise federal tax rates, or increase borrowing.
American political culture is far too populist to attempt any of the first three anytime soon. Obama and the current Congress's plan boils down to passing laws or keeping laws on the books that they themselves don't intend to enforce, which nominally would reduce futures deficits in the extremely unlikely event that they were enforced, and to base their fiscal forecasting on a hyper-V-shaped economic recovery.
So, yes, this plan is obviously doomed to fail, and the likely result will be continued deficits in the 10% of GDP range, and credible private forecasters finally getting on the ball and demonstrating that the fiscal pressures through the rest of the decade are much, much worse than the government is admitting. Monetization as I'm sure you understand is no way to avoid the crisis.
Here's a longer article I wrote some weeks back on this:
http://keynesianfailure.wordpress.com/2010/08/10/lies-and-the-lying-liars-who-tell-them-a-fair-and-balanced-look-at-this-years-medicare-and-social-security-trust-fund-reports/
There is some very interesting mathematics in the way the strips of bonds are structured for the SSTF. As all bonds have the same coupon, the net result is there is a higher cash flow up front and a lower cash flow at the back end. This is a classic positive carry trick loved by all entities that use accrual accounting. The problem is, carry trades always end badly.
What is particularly ugly for the SSTF is that future payments are CPI adjusted, so the fact that the longer dated debt has a negative real rate of return is really not good.
Bruce
-I constantly see reports in the media on SS that argue that there is no money in the TF. That the assets are not real. That there is no liquidity in the securities held by the Fund. That it is a Ponzi accounting scam. A look at the June results prove that those claims are all false. The extreme naysayers of SS should look at this and wake up. These are very real assets. They are liquid.
Me
The instruments that SS trades are not liquid as this implies a market. They are liquid only to Treasury, a single buyer. That makes them illiquid to any real value. SS by default is a HUGE ponzi scheme. Steal from current depositors(taxpayers) to pay the geezers who paid in originally, far less, without hope that demographics/future funding/current purchasing power will remain. SS has been borrowed from for decades, with funding going to General Fund. All of these points negate yours above, and thus, the very thesis of the article.
Bruce is usually so cerebral: however, this article is the biggest failure of Bruce yet. Just flat out wrong. FAIL.
Updated S&P500 charts:
http://stockmarket618.wordpress.com
Or imagine a scenario in which there was an SSTF, which accumulated $2 trillion plus interest during the first decade, but then, a new party took power that fully repudiated the SSTF. The result would be ... absolutely no real difference whatsoever. During the next two decades the primary deficit would have to subsidize the SS's $200 billion annual deficits, adding to $400 billion annual consolidated deficits, and in the end, public debt of $8 trillion plus interest.
In all cases, the amounts and timing of the money flows between the primary budget and SS are exactly the same, the only differences are the names put on them (intragovernmental subsidies vs intragovernmental lending/interest/redemptions).
this guy Krasting kind of lost a bit of his mind..
###
The extreme naysayers of SS should look at this and wake up.
These are very real assets. They are liquid.
###
so how exacty it's supposed to be seen ' luquid/real assets and etc'
because of some kind of generated web page SAYS SO...
hah hah hah..
alx
Is there any part of our US economy that is not fraudulent?
No, not when the money that makes it go around is statistics and unicorn tears.
Here's a simplified demo that explains why Social Security is a de facto pay-as-you-go system.
Imagine we had a block-shaped baby boom so that for one decade Social Security's dedicated revenues exceeded its payouts by $200 billion per year and the next two decades its dedicated revenues fell short of payouts by $200 billion per year. Imagine the rest of the federal government ran a $200 billion annual primary deficit throughout all three decades, and all other off-budget programs ran balanced budgets. At the start of these three decades, the government has zero debts.
In a pay-as-you-go system, during the first decade, Social Security's surpluses would subsidize the primary deficits, making a balanced consolidated budget. During the second and third decades, the primary budget runs its own deficits plus subsidizes SS's deficits, giving consolidated budget deficits of $400 billion annually. The public debt incurred during the three decades would be $8 trillion plus interest.
With a SSTF, during the first decade, SS's surpluses would be lent to the general budget, making a balanced consolidated budget and a trust fund that would grow to $2 trillion plus interest. During the second decade and part of the third, SS would deplete its SSTF, drawing exactly $200 billion each year, with each year's reduction in principal being equal to that year's interest income subtracted from $200 billion. That annual $200 billion in interest payments and principal redemptions would add to the consolidated budget, making for $400 billion annual consolidated deficits. During the year that the SSTF ran out, SS would collect $200 billion from the primary budget, part of that being the last SSTF principal and interest, and the rest being subsidized by the primary budget. The consolidated deficit that year would be $400 billion. For the remainder of the third decade, the primary deficit would subsidize the SS deficit, making annual consolidated budget deficits of $400 billion. The public debt incurred during the three decades would be $8 trillion plus interest, exactly the same as if there had not been an SSTF.
Hmmm Hmmm: it would be nice to know where the PPT's action is/was on the chart, and for what.
Thank you Bruce. This is a post i would have expected from Leo since he is a pension guy.
I am 59 now and do not expect to see a dime . have shut my business as i am in housing and assumed from all i read and heard that the economy was about to fall of a cliff. It sorta did as in the construction industry most of us arent working and wont be unless things turn around.
It cant turn till it falls, as many crimes were and are committed.
So i am prepared to get up again after the fall. Now i am learning this could go on indefinately. I dont believe it can, but i am a nobody who knows very little. Been in business 30 years and now the businessman part of me is freaking out. Tired of sitting around the house and want to go back to work before i lose all sense of self worth.
You just might consider looking at Belize for retirement.
try argentina or uruguay . if you don't have enough to live on open a coffee shop. pretty cheap for basics.
Bruce,
Tom in the above post in absolutely correct. Yes, the bonds in the SSTF represent real money. This real money comes from social security taxes, which until just recently took in more money than needed. The excess money went to "buy" bonds in the SSTF. About these bonds in the SSTF, it is possible to say, one, they pay no interest; two, they cannot be sold; and three, the Treasury Department (and the US Gov. in general) makes absolutely no provision in the general budget to amortize them. To redeem the bonds, the government will have to get money from the same place it gets money to pay Obama's salary, fund Medicare, Medicare, pack up hay-bails of one hundred dollar bills to distribute all around in Iraq, etc. etc
What the SSTF really is -- is fraud, an overcharge of working America of about one trillion dollars, all now spent, lost, gone with the wind.
Outstanding again, Bruce. You have been extra hot lately.
good work Bruce, but can you clarify something for me? These "special issue" bonds are not marketable, they are redeemable only to Treasury, yes? In which case Treasury would have to turn around and issue another piece of paper to cover that redemption. That is, those "real assets" only have value to two parties - the SSTF and Treasury. As such, the real assets that you and I care about are not in the SSTF, because if we had one of those securities, we could not redeem it. It's toilet paper for us, yes? The physical dollars that come in from payroll taxes are spent as part of the general fund and replaced in the SSTF with a made up security that has no value to anyone outside government.
Am I missing something or thinking about this incorrectly? Your hard work is appreciated, thanks for the great info.
Bruce, I'm not being an "extreme naysayer" by explaining that the Social Security's assets are a mirage. Social Security is part of the federal government. It's assets are all federal government debt - that is, claims against itself. In a consolidated federal balance sheet, they net to zero. They are unimportant except to internal accounting.
There are only two ways Social Security can get cash for these assets: by redeeming bonds, or by collecting its interest in cash (rather than in bonds). In either event, Treasury is the payee, and Treasury can only raise the cash from taxes, or by increasing its borrowing from the public.
Social Security's holdings are not liquid: they are a special variety of nonmarketable bonds. Besides, Social Security is not allowed to sell its bonds to the public.
The amount in the SSTF is the amount by which Treasury's general budget is legally obligated to fund Social Security's dedicated budget. But the money is not saved. Treasury needs to raise it from taxes or borrowing as Social Security redeems it.
and Thank God they can't sell their debt to the public because once that happens the public would no longer be able to control the benefit. Good points all but totally misplaced since "the Fund" has it's own "fund raising" called a "payroll tax." I've heard "this is no small thing" and "it don't matter if u rich or poor--u pay." Needless to say we have "payroll tax 2" in the form a "universal health insurance premium." this is a VERY interesting concept and VERY profound, indeed. Should the Republicans win expect that tax to stay in place and Mr. Buzzsaw to do some real singing when it comes to health care spending. This could reduce the deficit in a profound and dramatic way and in a very short period of time. I find it faschinating that the Dem's simply WILL not cut health care spending in even a token way going into the election. In my opinion BIG mistake. It makes the Iraq war look like the "foreign adventure" it truly was. In other words "CHEAP!"
+1
Great post. Nice to see actual math with implications.
Very interesting, thanks for this information.
Any idea why they would be redeeming those 2011's?
Turned the corner (NOT) bitchez!
Thanks for your hard work, Bruce. Enlightening stuff.
Bruce, nice report. Have a question for you below based on what you wrote here --- ""I constantly see reports in the media on SS that argue that there is no money in the TF. That the assets are not real. That there is no liquidity in the securities held by the Fund. That it is a Ponzi accounting scam. A look at the June results prove that those claims are all false. The extreme naysayers of SS should look at this and wake up. These are very real assets. They are liquid.""
Are the media / blog reports referring to the fact that all that SS money has really been borrowed by the US Treasury and it owes the SS fund a bunch of IOUs ? Are you suggesting that the SSTF actually has "liquid" assets (as shown in these tables) that are seperate than what is stuck with the UST ? Or do these tables also represent money stuck with Geithner at al ?
Great job as usual, but your very analysis shows that it is all an accounting trick that means nothing--2 7/8% indeed. Social security is spending more than it is taking in--show me where they have done any market transactions to pay for the differential. Answer--none,just worthless IOU's.