The huge deficits of the federal government now and in the future have been and will be financed in large part by selling U.S. Treasury securities to the public. The present value of those securities is the national debt. It is useful for understanding the plans to limit the national debt being considered by the Congress to have approximate estimates of the size of the national debt and to avoid bad policies based on the Social Security lock box hoax.
Anyone who has examined the U.S. Treasury and the central bank (the Federal Reserve) records knows the national debt clocks on the internet and in New York City generally display one misleading number. The national debt, subject to a statutory limit that must be approved by Congress, was $14.014 trillion on January 4, 2011. (Daily Treasury Report). That number on the debt clocks is much larger than the debt the federal government owes the public, including foreign holders, who hold U.S. Treasury securities.
$4.629 trillion was recorded as "intergovernmental holdings", the money the government owes itself. This includes the Social Security trust funds that hold non-marketable Treasury securities. The estimate for "intergovernmental holdings "amount did not include $1.190 trillion Treasury securities held by the Federal Reserve, which is part of the government.(Federal Reserve Statistical Release, 2/17/11) The Federal Reserve actually sends back to the Treasury any interest it receives that it does not use for its operations. These intergovernmental transfers, taking money out of one government pocket and putting it in another government pocket, has no economic significance. It might help to inform dubious observers that the Federal Reserve is part of the government.
Subtracting all the money the government owes itself from the statutory limit that must be approved by Congress, the amount the federal government owes the public is approximately $8.195 trillion (plus other adjustments). That was 58 percent of the number usually displayed on the debt clocks and 55 percent of gross U.S. output (gross domestic product).
Part of the publicly held national debt are "Major Foreign Holders". They held approximately half the public debt, $4.4 trillion. The largest holder is mainland China ($1.16 trillion) and second place is Japan ($882 billion).
These estimates cannot be precisely made. The present value or market value of the Treasury securities is very difficult to estimate if the government decides to buy back some of its long term bonds, long before their final maturity. The price of the bonds could rise (with bids that are higher than current market values) or fall with (lower bids) to levels that are difficult to predict. This problem is crudely bypassed by using the final payment on Treasury bonds (their par value) as their value.
Not only do many people believe that the money the government owes itself is part of the national debt, some believe that the funds recorded in federal government trust funds are assets, items of wealth that will provide income in the future. For example, with all due respect for Vice President Al Gore, he campaigned for president in 2000 advocating the placement of Social Security taxes in the Social Security "lock box" to benefit future generations.
The Social Security lock box is an electronic record on a government computer. It represents no wealth from the Treasury assets it holds. The government can even pay itself more interest on that recorded number increasing its size. Why not double the interest payments and make people who believe in the lock box very happy. That would have some economic result until they tried to use it. Sending the Social Security recipient a printout from the computer that holds the lock box number without some money would not be well received.
When Social Security payments are made the government can print the money, use deposits from government accounts at private banks, borrow money (sell Treasury securities) or use current revenue sources such as tax collections.
Alan Greenspan helped fill the Social Security lock box, as I noted in my 2008 book, Deception and Abuse at the Fed. Greenspan was appointed by President Ronald Reagan to be chairman of a bipartisan commission to save Social Security, The National Commission on Social Security Reform, the Greenspan Commission, 1981-83.
Greenspan received praise for achieving a compromise solution in a crisis atmosphere. As the measure passed the Senate, it was reported that the changes would "assure the solvency of Social Security for the next 75 years."
A primary part of the Greenspan Commission's solution was an increase in the payroll tax rate over a phase-in period. The combined employee/employer payroll taxes (Social Security plus Medicare taxes) were raised 15 percent to 15.3 percent of wages for 1990 (still in effect in 2007). The tax fell only on lower incomes, $35,800 or less in 1984 ($97,500 in 2007).
The final plan actually collected more funds than were paid out to Social Security recipients for every year thus far so that on a pay-as-you-go basis it resulted in a larger than necessary tax increase on lower incomes. The tax collected helped to finance other government spending such as the Afghanistan/Iraq wars that began in 2003.
Taking the Greenspan Commission payroll tax increases and the Reagan tax cuts together, the result was a substantial shift in the tax burden to those on lower incomes.
In 2009, eight individuals, seven of whom "helped craft and secure" the recommendations of the 1983 Greenspan Commission reported the success of the Greenspan Commission to the Senate Budget Committee. (11/10/2009):
Social Security is currently in surplus. According to the 2009 Annual Report of the Board of Trustees, published May 12, 2009, Social Security ran a surplus of $180 billion last year and had accumulated a reserve of $2.4 trillion. (Even excluding the interest income, there was still a surplus of $64 billion.)
People advising the Greenspan Commission believed in the lock box: "Some have argued that Social Security's investment income should be ignored because it involves inter-fund transfers which are not shown when the federal budget is displayed on a unitary basis and are irrelevant for the limited exercise of macroeconomic analysis." What about naughty economists who don't want to be part of a "limited exercise of macroeconomic analysis" to support the Social Security lock box hoax?
Follow Robert Auerbach on Twitter: www.twitter.com/prof2718
The impending crisis of Social Security is a myth. Without it, however, Bush's initiative to slash benefits and partially privatize the program wouldn't have a prayer.
http://www.angrybearblog.com/2011/02/social-security-and-pie.html#more
Every dollar of the $2.6 trillion in surplus Social Security revenue has been spent by the government on wars and other government programs. The money is gone. It does not exist in the form of cash, bonds, or anything else. You can only spend money one time so, since it was all spent, there was nothing to invest. The money was replaced with government IOUs which serve as an accounting record of how much Social Security money was spent. But the IOUs are not marketable and cannot be converted into cash. So why is the government and the media continuing to say that Social Security has a $2.6 trillion surplus and can pay full Social Security benefits until 2037? All that Social Security really has at this time is the inflowing revenue stream from the payroll tax, and that stream is no longer large enough to pay full benefits. If the government had saved and invested the surplus money in pre-existing marketable Treasury bonds, as it was supposed to do, the trust fund would today contain $2.6 trillion in “good-as-gold” marketable Treasury bonds which could be resold in the open market to raise cash with which to pay benefits. But the government did not save any of the money. Why doesn't the government publicly acknowledge the awful truth about the trust fund?
The government has an obligation to make good on this. If they default on these bonds there would not only be political repercussions here at home but severe ramifications in the world financial markets. I can’t begin to imagine how bad this would be.
If China were to turn into a bond vigilante and raise our interest rates to 6% the entire years worth of income tax receipts would be needed to cover the annual interest payment on the debt. It would be the end of America as a financial power of the world.
If they were to fess up and be honest about how close we are to bankruptcy it would cause panic in the markets. I finished the post I started late this afternoon. Please check it out below.
There will be hard choices to be made if SS is to survive.
Therefore the hoax is not in the SS “lock box”. The hoax is that a dollar bill remain a stable medium of exchange.
The problem is that starting this year, the SSA has a negative cash flow and will have to start paying out more money than they take in. The SSA will start cashing in their Treasury bonds in order to make up the shortfall projected at $130B. In other words, the Congress is not going to be able to use this as a revolving line of credit and have to start paying the money back to the SSA or default on the bonds.
Go to part two
Another facet of this negative cash flow is that there are no new surplus FICA receipts in the SS system for the Congress to raid. But they have figured out a way to get around that and that is the recent FICA tax reduction of 2%. The 2% tax break is no longer paid into SS and becomes taxable income. Congress is withholding part of your income, once reserved for our old age insurance, and is giving it directly to the U.S. Treasury. I’d bet they’re using this “new” source of income tax receipts to pay off the SSA Treasury bills to make this change in fortune deficit neutral. In a sense they are borrowing from the fund in order to pay back the fund.
This is not a Social Security crisis as much as it is a budget crisis. $2.6T is enough to fund benefits into 2037 or so but now that Congress has reduced the FICA tax base I have no idea how far short of that year the fund will last. Congress has created this problem and with all of this talk about raising the benefit eligibility threshold, is just trying to weasel out of their obligation to the people that paid into this system over their entire working lives. The Lock-Box has been a hoax from the late 1930’s.
THAT'S IT IN A NUTSHELL! I have been trying to get this point out for a long time. If the government had saved and invested the money in marketable Treasury bonds, Social Security would not even be in the news today. What the government should be saying is, "We embezzled all the Social Security surplus money and spent it on wars and other programs. Therefore, we need to cut benefits so we won't have to repay the looted money." But that's not a very good sales pitch. So they look at Social Security's very fixable problems that begin in 2037 and say, "We have to cut benefits." The only reason that S.S. is in the news today is because the $2.6 trillion has all been spent. IT IS GONE! But the government does not want the people to know this "inconvenient truth!
To me, it seems as though the Democrats will compromise on anything just to move on. The GOP won't compromise on any Democratic bill unless something is inserted to benefit the wealthy. We have a no win situation which I can't see changing.
We need a Madison type protest x 1000 in every major city in every state by the middle-class .
If we don't help ourselves, we've learned no one in government will. We need to speak out while we have some momentum...just my two cents.
You don't see politicians putting campaign finance and election reform on their agenda from year to year as you do their continuing assaults on social safety net programs for the People.
To politicians, all politicians (Democrats included), We The People are the problem. If only they didn't have to deal with making us happy to get our votes that keep them employed. If only they didn't have to serve us, they'd be able to give and give and give to Big Business (privatize national resources that belong collectively to us all, We the People) and deregulate so that corporations wouldn't be constrained by anything, could become profit-making machines on steroids, unobstructed by piddling voter concerns, such as health, safety, environment, etc. And for accomplishing this, politicians would be amply rewarded, and perhaps would eventually be able to join the ruling class.
You can choose to believe what you will about Democratic politicians, but the fact is that the DLC controls the Democratic Party (the DLC is referred to as the Republican wing of the Democratic Party, the pro-corporate branch), and that Democrats in Congress and in the White House have signed on to privatize public resources and utilities and deregulate (Democrats in Congress, despite all their campaign promises, have refused to regulate or perform their Constitutionally-required role of oversight, both in the Bush and Obama administrations -- What little regulating they've put in legislation the last 2 years is ineffective for a whole array of very sneaky moves). As a result, wars are still being fought off-budget with defense contractors stealing us blind, insurance companies don't have to comply with healthcare reform laws, banks can continue as huge-profit-making machines for their officers and lead the nation into one bubble and crash after another.
You can choose to think of Obama and his intentions in whatever way makes you happy. What you can't do is explain how any of what Obama's done these past two years has been in the People's and not the Corporations' interests.
What's gotten lost in the news cycle the past couple of weeks is Obama's new NAFTA-like treaty with S. Korea that means more Americans' jobs will be outsourced overseas. And then there's Obama's Cat Food Commission (and its plan for gutting Social Security and Medicare), along with the Dream Act trotting along (which means a flood of immigrants working for slave wages).
We The People are being transformed, from sheep to sacrificial lamb
The surplus revenue, generated by the 1983 payroll tax hike, was supposed to be saved and invested in pre-esisting, marketable Treasury bonds, purchased in the open market. If this had been done, the money would have gone to the investors from whom the government purchased bonds instead of into the general fund. The Social Security trustees could have resold the marketable bonds as needed to raise cash with which to pay benefits. This is what was supposed to happen, and if it had happened, the trust fund would today hold $2.6 trillion in "good-as-gold" marketable Treasury bonds which would enable the payment of full Social Security benefits until 2037. The net effect would have been to have paid down the publicly-held national debt during the surplus years, and then reborrow the money during the deficit years. Instead, the government spent the money on wars and other programs and replaced it with non-marketable IOUs that have no real economic value. It may well turn out to have been the fraud of the century. Allen W. Smith, Ph.D. www.thebiglie.net
There are two flaws with your arguments:
1. "When Social Security payments are made the government can print the money, etc, borrow money (sell Treasury securities)" -- yes this is true, but it would appear that you are suggesting that the US inflate its way out of debt obligations or simply borrow more to pay.......homeowners found out in 2008 and Greece found out in 2010, there does come a point when you cannot borrow anymore and if the US goes down this road it will find out the same thing.
2. Using par value for assessing the value of the Federal debt is certainly not a conservative measure of the long-term portion of the debt and for the short-term portion (a majority of the debt these days), does not consider rollover risk!
National fiat currencies are all basically smoke and mirrors phenomena
that fundamentally depend on the credibility of the nation. (how could
it be otherwise in these days of fiat "currency", where the currency
is nothing more than electron configurations on a semiconductor).
A fascinating illustration of this was presented on NPR's
All Things Considered; that of how Brazil dug itself out of economic disaster
by what was known and admitted to be a pure fiction. It is a program
well worth the listen.
http://www.npr.org/blogs/money/2010/10/01/130267274/the-friday-podcast-how-four-drinking-buddies-saved-brazil.
This basic principles of money are echoed in a more scholarly manner by Niall Ferguson in his book
The Ascent of Money (also a PBS miniseries: http://www.pbs.org/wnet/ascentofmoney/category/video/)
Currently, with its rise to a leading World Plutocracy, the US is rapidly losing monetary credibility
as fast as virtually the entirety of its monetary "wealth" is being transferrred and restricted to the Plutocrats; thereby forcing the majority of its citizens to distrust its money and eventually revert to trading in shells and bright shiny objects (aka: tangible "commodities") as the only valid form of exchange. This will eventually lead to eventual hyperinflation followed by collapse of its fiat currency.
.
Allen W. Smith, Ph.D.
www.thebiglie.net
ironwoodas@aol.com
1-800-840-6812
Capitalism knows no bounds. Its all about the last man standing. My money's on Exxon.
I agree US will inflate its way out of the problem still leaving America's old timers high and dry. The answer is to stop spending. Rather than default on its people (stealing their money paid in), I vote to default on the military-industrial complex...
1) Immediately trim military spending to equal that of the next largest competitor rather than spending equal to all the rest of the world combined. Develop a defensive strategic posture replacing the empire posture which will allow further cuts later.
2) Shut down 700 overseas bases.
3) Return 400,000 garrison troops and offer voluntary separation followed by a buyout for half.
4) Audit the Fortune 1000 corporations to see how 50% of corporations pay no taxes.
Perp walks and fines for tax cheaters.
5) Eliminate tax subsidies for all corporations.
6) Resource companies using Federal lands pay 25% Royalty on the Gross Revenue from those lands.
7) Eliminate farm subsidies.
8) Eliminate ALL tax loopholes leaving three brackets, 5% for the poor ($0-$35,000), 15% for the middle class ($35,000-$200,000), 35% for the rich ($200,000+).
9) Capital gains taxed at ordinary income rates.
10) Eliminate caps on social security withholding.
11) Estate tax rates substantially increased so we don't end up with an American aristocracy.
12) Tax American corporations that offshore American jobs.
How we doin? Have we made a dent on spending yet?