There Is No Trust Fund . . . Except This One Right Here That Depends On My Willingness To Obey the Law
George Bush, in an unbelievably irresponsible and dishonest act, has been doing everything he can to undermine public belief that the US government will honor its bond debt. Luckily, everyone who matters knows he’s lying – because if anyone took him seriously, the result would be the collapse of the US, and likely the world’s, economy.
Why would he take such a terrifyingly stupid risk? To destroy Social Security, of course.
Imagine this: On his next trip to Japan, President Bush visits the vault at the Bank of Japan, where that country’s $712 billion in United States government bonds is stored. There, as the cameras roll, he announces that the bonds, backed by the full faith and credit of the United States, are, in fact, worthless i.o.u.’s. He does the same thing when he visits China and so on around the world, until he has personally repudiated the entire $2 trillion of United States debt held by foreigners.
Mr. Bush rehearsed just that act on Tuesday, when he visited the office of the federal Bureau of Public Debt in Parkersburg, W.Va. He posed next to a file cabinet that holds the $1.7 trillion in Treasury securities that make up the Social Security trust fund. He tossed off a comment to the effect that the bonds were not “real assets.” Later, in a speech at a nearby university, he said: “There is no trust fund. Just i.o.u.’s that I saw firsthand.”
Those “i.o.u.’s” are government bonds – guarantees of payment with interest issued for money lent to the US government. They are widely regarded as the most secure investment instruments in the world – but only because they are “backed by the full faith and credit of the United States Government,” which is to say the willingness of the government to honor its legal debts and pay back the money. The bonds held by the Social Security program – which is to say the money paid into Social Security by generations of workers to build up a positive balance for when the long drawdown for the Boomer generation begins, and which was confiscated by the Bush Administration to counter its expenses from the Iraq war, military buildup, and tax breaks for the rich – are the very same bonds held by foreign governments (and millions of American citizens and investment firms) in return for money they also invested in our government. Claiming that those bonds are “worthless” – and implying that his administration, which incurred that debt by stealing the surplus that had been carefully built up under Bush Sr. and Clinton, will refuse to pay off the bonds that they themselves issued – is a declaration that an entire worldfull of investors and foreign governments, who hold trillions of dollars of US debt, have all lost their money. Wiping out the entire world’s investments in America would simply destroy those countries’ economies, bankrupt billions of people, send the dollar into the basement, and end forever foreign countries’ willingness to accept US monetary (or political) guarantees. But none of this will actually happen, because everyone involved in real finance knows that (a) Bush is lying outright, and (b) the real thinkers are not so stupid as to allow him to actually repudiate the US national debt and put this nation on a financial footing with the most corrupt, bankrupt Third World countries on the map.
In the hope of persuading people to privatize Social Security – a move that would only add to the growing debt burden for future generations – Mr. Bush wants Americans to believe that the trust fund is a joke. But if the trust fund is a joke, so is the full faith and credit of the United States.
Fortunately, the governments, institutions and individuals who hold United States debt can tell a publicity stunt from a policy statement. Still, casting aspersions on a basic obligation of the United States government is insulting and irresponsible.
It’s gotten to this point: the President is such a buffoon that he now bases his own major policies on the fact that everyone knows he’s lying; he openly expects that no one will take him seriously and on that ground deliberately says things that would be disastrous if they were said by anyone who could be believed or respected enough to imagine that his statements reflected his intended behavior.
I really, really want the adults back in charge.
UPDATE: Congressmember Peter Defazio (D-OR) is on the case:
Mr. DEFAZIO. Mr. Speaker, well, the President was on the road again today with yet another tightly controlled scripted, so-called town hall, before a carefully screened, invitation audience to tout to his plan to privatize Social Security.
Now, that is not unusual; in fact, the scripted town halls are all so similar that they can save the taxpayers a lot of money if he just stayed at Camp David or Crawford, Texas, and they just replayed the recordings of his earlier scripted, rehearsed town halls.
But the President did say today something extraordinary, in Parkersburg, West Virginia, and suggested something unconscionable. The President said, ‘‘There is no trust fund.’’ And then he went on to suggest that our Nation might not honor its debt to Social Security. This is what the President said does not exist
Let me read from this. This is a Social Security Trust Fund bond, considered the best investments in the world, U.S. Treasury Bond. This is the most privileged of Treasury bonds issued to Social Security, redeemable at any time at full face value, unlike any other bond that they issue. These are the most privileged of their bonds. The President says it is nothing but an IOU. Well, here is what it says: This bond is incontestable in the hands of the Federal Old Age and Survivors Insurance Trust Fund. The bond is supported by the full faith and credit of the United States. And the United States is pledged to the payment of the bond with respect to both principal and interest.The President questions that? He is questioning whether we are going to repay our most privileged debt to Social Security. We have $7.9 trillion of debt. He is adding to it at a record rate, borrowing $1.3 million a minute.
Who is he saying we are going to repay and not repay? Are we going to repay the Chinese but not the Social Security Trust Fund? Are we going to repay President Bush, he happens to have some U.S. Treasury Bonds in his personal portfolio, but not the Social Security Trust Fund? Are we going to repay other wealthy investors around the world and in the U.S., but not the Social Security Trust Fund? We are going to selectively default on our debt.
Suggesting something like that, if the bond markets believed the President, the dollar would drop to near zero tomorrow, and there would be an economic catastrophe, but they do not believe him. They know this is just politics and rhetoric on his part. There is no intention of the Government of the United States defaulting on its debt. . . .
This is an extraordinary and reckless statement for the elected President of the United States to make.
(Link via Atrios.)
Here’s a hypothetical for ya: A corporation has bonds that it will issue. It creates these bonds and says each bond is worth $1. They generate 1 million of them so they have for sale $1M in bonds. They sell 500,000 of them (and spend the money) and leave 500,000 of them in their safe.
How much money do they have in the safe?
Oh and one more: Who did the government buy these bonds from? Themselves, of course.
So, in our hypothetical say the company above turned around with their bond proceeds and used that monety to buy the other 500,000 bonds. How much money do they now have?
I’m no economist, but I think they have as much money as someone is willing to exchange for them.
SU:
You have the example reversed. The SS “trust fund” is the bond holder. It purchased the bonds, and now holds the bond certificates, which are the “IOUs” that Bush is so confused about. The question you are supposed to ask is not how much money the bond issuer has, but how much money the person (we’ll assume it’s just one) who bought those bonds has. And the answer, of course, is: “None – they gave their money to the bond issuer in return for a guarantee (a bond certificate) of payment in full plus interest.” You could go on to ask how much money the bondholder will have after the bonds mature, to which the answer is: “All that they started out with and then some – unless some dickhead in the issuer’s office decides to default on the bonds to save his friends – on whom he spent the money – the obligation of paying them back”.
You are right, also, that (one part of) the government issued the bonds to (a different part of) the government, but that is a bizarre response. No entity in the entire world other than George Bush’s administration imagines that that makes the money disappear. When a corporation transfers money from one division to another, they expect it to be accounted for – it doesn’t go missing (and if it does, the person responsible is held accountable – a lesson we might like to bear in mind). At any rate, for the purposes of bond transactions, the SS trust fund is simply like any other purchaser – they are a legal entity that entered into a legal arrangement with the Treasury (by buying bonds) and have a legal claim to be paid back (by cashing in the bonds). The Treasury has no legal right to refuse to cash those bonds, and if Bush keeps going around claiming that they can’t or won’t, or he simply won’t attempt to make good on the trust fund’s debt because he refuses to put back the money he borrowed, he’s going to get a lot of people worried.
But the point is that a company cannot loan money to itself, neither can I. I can’t go out and buy my own mortgage and be in a better cash position (assuming a dollar for dollar swap and the same interest rate). Neither can the .gov.
And the other point, of course, is that bonds are not cash. They are as good as cash to the extent that the guarantor is a viable financial entity.
SU, your arguing for precisely what was said in the article. The bonds will be worthless if nobody has any faith in them. Whether or not it is right to allow one wing of the gvt to lend to another is not directly relevant to the point of the article. It sounds like you have a problem with it, which is fine by me, but dont use that as an attack on the argument in the article.
Guthrie, pay attention. I am arguing that an entity cannot loan money to itself and make money. It’s not possible. In fact, that’s what a lot of Enron management went to jail for.
They’re just moving the buckets around.
SU:
Yes, why concede the larger point (that Bush’s rhetoric threatens to undermine the status of T-bonds, and that it’s unlikely that anybody is going to let him default on anything) when you can pick nits about the details? Here’s the most hilarious thing you’ve said in this thread:
First, precisely where in this thread has anyone argued that the government borrowing from itself puts it “in a better cash position?” Oh, wait, I see it now, posted by Johnny McStrawman at 08:42.
Second, borrowing virtually always puts you in a worse position, irrespective of whom you’re borrowing from.
Third, it seems that any time anyone brings up the subject of Social Security, you reflexively go into a Tourette’s-like rant about “Bonds are not Cash! You can’t borrow from yourself!” whether or not that has anything at all to do with the topic at hand (which, in this case, it really doesn’t).
The above in short form: it doesn’t matter who the SS Trust bonds were transferred from/to, and in fact nobody gives a shit about that. What matters is that if those bonds (or any other) are defaulted upon, it calls into question the full faith and credit backing any T-bonds, and that’s a recipe for economic disaster.
So if you could set aside your “bonds are not cash” talking point long enough to consider that, maybe you could actually contribute something useful to the conversation.
Bush say ‘bonds not assets.’ I say ‘bonds not assets if issuer of assets same as owner of assets.’ if owned by third party, bonds are assets to third party. Trust fund bonds are a loan from another agency. Peter pays paul.
bush’s statement undermines value because the value is questionable to begin with. Money loaned from a third party has value. Money loaned to self, not so much. I think Japanese investors would figure that out.
Hence, the article make a false assumption about value. My point is that bush’s statement is not entirely in accurate.
SU:
Peter does not pay Paul. One credits the other. It is that simple. They issue the bond, the other buy the bond banking on the full faith and credit of the issuer. Issuer takes purchase money and puts it in trust. When bond is redeemed purchaser gets a bit of interest. How hard is that? A company can issue bonds. I have owned many a bond (Intel comes to mind). What is your point other than dissembling?
SU:
In the same way that Clinton didn’t mislead concerning Ms. Lewinsky, I suppose.
Never mind for a moment who bought the bond and who sold it. A bond has been sold. Under current law, is there a requirement that the bond be repaid in full, and backed by the full faith and credit of the United States? If yes, then all of your other parsing is just dancing to avoid KTK’s point. If no, then I’d love to hear an explanation as to why legally some bonds are better than others.
‘In the same way that Clinton didn’t mislead concerning Ms. Lewinsky, I suppose.’
Johnny McStrawman back?
Not at all. You have to engage in some serious Clintonian parsing to make the argument that Bush’s statements are “not entirely inaccurate.”
SU, I was paying attention, but as the others have been saying, your missing the main point here in order to make some other point. Suffice to say it isnt the actual to[pic of the blog post to begin with.
Just a thought. I haven’t thought it through fully, but it seems to me that, contrary to SU’s point, the SS trust fund isn’t “the goverment borrowing from itself”, but rather one generation borrowing from the next?
I think that politic of Clinton in social security numbers issue was better than what do now Bush’s administration
not of this earth
There Is No Trust Fund…