Will the Real Debt Crisis Please Stand Up?

Please go directly to my latest post and leave your comments here:

http://pensionpulse.blogspot.com/2010/03/will-real-debt-crisis-please-stand-up.html

This table from the NYT article sums it up:

On that sober note, have a great weekend.

Cheers,

Leo Kolivakis

Comments

[Gromit]

An aristocracy of sixty and seventy year olds are going to scoop the pot.

By then, it will be too late to protest. In fact, it's already too late.

[Mr Lennon Hendrix]

Title quotes a "M"aster "M"ason.  Cool.  I will go read your post now......

.....$79 trillion for the US.....wow. 

[Anonymous]

I've heard that in the US Social Security has now reached the point where it spends more than it takes in, partly due to fewer people paying (high unemployment) and more people electing to take benefits at age 62. That was projected to happen in 2016, but it's already here. I also read somewhere that SS has historically purchased 25% of all US Treasuries.

If the above is true, does that mean SS will now become a net seller of USTs?

[rapier]

Why is this issue so clouded.

SS does not buy ordinary run Treasuries at auction. Instead the SS excesses ever month are given to the Treasury and go into the General Fund. In return the Treasury gives the Social Security Adminstration's trust fund an IOU. This is legally referred to as an intragovernmental IOU which began to be used, I believe, during WWII. Then with the war demands for funds so desperate and those needs outstripping congresses ability to appropriate the money quickly enough the Treasury allowed money appropriated for say the Interior Department to be lent to the War Department. The War Department would give Interior an IOU.  There are many complex legal and consitutional issues involved in this but the most relevent one is that these IOU's were tested in court, I cannot site the case, and the courts ruled that these IOU's carried the 'full faith and credit of the US', per the constitutional language that makes payment of US government debt an absolute constiutional mandate.

Everyone sort of knows but it does not sink in that Treasury obligations are supreme in the world because the Constitution says they have to be paid. There is no constitutional way for the Treasury to default.

OK, back to SS's Treasury IOU's.  While these are not ordinary bonds "purchased" like others they are real constitutional obligations. Unless or until the courts say otherwise. Which would happen if the court ever sees the question. When it comes to matters of the financial and corporate elites this court always finds in their favor. Since the day Greenspans commission designed this scheme the elites have counted on the default on these IOU's. The beauty of this scheme is that each year SS was putting tens of billions into the general fund that years deficit is reported as less than would otherwise be because this income is included but the IOU's are not. The IOU's are counted the next day as part of the total government debt. Also note the interest on these IOU's is not paid. They are just book entries. Costless on every years numbers, only added to the total debt numbers. Cute, and this was by design. The whole thing was designed to help mask each fiscal years reported deficit.  One of Greenspans monumental achievements.

So when and if the default comes the Treasury will hold it's obligations to The Peoples Bank sacred but the ones to wage earners whose cash went into the Treasury will be abandoned. If SS had bought ordinary run Treasuries there would be none of this Ponzi scheme talk and yadda yadda yadda about SS. Well there would be anyway.

[seventree]

Well explained, but in my uneducated view the situation is simpler yet...

The two deductions on my pay stub marked Federal Income Tax and Social Security both go directly for federal expenditures, which among many other things includes payments current to SS recipients. When SS receipts exceeded payments, this did not mean that Social Security was getting healthier or preparing for the future; only that the excess payments were contributing to current year revenue (all of which is commited to current year expenditures). When receipts fall behind payments, nothing changes except that a growing part of SS payments come out of general tax revenues. In the first case the Social Security Trust Fund (which is not a fund but just a line item used to keep score) increases each year by the amount of "surplus" and after that it decreases each year. Eventually this number will pass through zero and head negative, a prospect described with alarm as "Social Security going broke." In fact this will be a mere technical milestone and the process of collection and disbursement will continue as before.

[rapier]

There is no analogous situation to the one with SS and its Treasury holdings. There was an overwrought post here a ZH a couple of days agos saying if the 'trust fund' was not growing then it was insolvent, or something.  I mean the degree of confusion on this stuff is funny. 

Let's say that the Peoples Bank stopped buying Treasuries next week, cold.  Zilch, nada, just like that. Would that mean the Treasury would stop paying the interest in principal on their trillion in hand already? No. It would mean it would be harder to pay.  So it is with SS.  When the principal and interest has to be paid on those IOU's it becomes harder to pay.  Yes, it is going to be hard to pay. For 25 years we have been told, in one way or another, that it won't be paid. 

The current 'reform' movement is centered on reducing outflows so that the IOU's don't have to be paid. Since the IOU's are open ended and no interest or principal has been paid the issue of default has been moot. That is why this is a crucial moment. Once the first IOU is made good by Treasury the case that the debt is not real is weakened. Far better to keep the outflows below inflows, forever. So that there isn't a defacto default. It is looking like it's too late for that.

And still, most here and everywhere in the political world the nature of this debt is being lied about. The Peoples Banks debt is sacred. That to workers is not.  There is no functional difference. Money was lent to the Treasury.

[Careless Whisper]

Don't worry about all the debt. This time it's different.

http://www.jaredwood.com/g/card_house.jpg

[Anonymous]

Ha ha, radio and television presenters. Clearly, one problem all pension plans have is that legislators dump their mistresses' bills on the pension plans.