Economic Collapse Preparedness

If we add SS and Medicare, that is $3T in 'willing lenders' ('hidden lenders' is more apt; few Americans ever understood any of this)that the US Treasury is going to have to replace. It doesn't matter how 'willing' those trust funds once were to hold US Treasury debt, they can no longer subsidize the US Treasury because they've demographically and political benefit inverted.

SS and Medicare will not only be replaced as future lenders, bonds that SS and Medicare now hold will need to be purchased or replaced by other lenders.

Post 21

Thursday, June 21, 2012 - 10:38am

Merlin:

Exactly; double whammy.

It is balanced by the ease with which administrations(of both parties)were once painlessly subsidized by the generational surplus during the peak of their earnings and tax paying years:

Not only were SS and Medicare not requiring subsidy from the US Treasury back then(benefit 1), but the US Treasury itself was subsidized by the additional generational surplus...which was immediately spent, long ago.

There is no way, via accounting, to hide the fact that our government overtaxed an -already- surplus paying demographic generation(except for the fact of politically arrived at -accelerating- defined benefits!), spent the money long ago, and carried forward only -accelerating- obligation into future economies! Even if the government defaults on SS, that only eliminates 'whammy 1.' Whammy 2-- the hole left by the exit of the once subsidy of raiding SS -- remains no matter what we do or don't do. At most, we can eliminate Whammy 1...by defaulting on SS.

Those future economies are here, that piper is waiting to be paid.

Twice. But at the very least, once... if Treasury defaults on bonds held by SS.

Those 'SS is solvent until 2045...2042...2033...' dates are just the meaningless dates on which the next generation would have finished being overtaxed a second time to 'redeem' the 'assets' -- carried forward as debt! -- that represent the amount the Boomers were once overtaxed to 'create.' The fact that those dates are moving closer far faster than the rate of one year per year is just a sign of the accelerating out of control current spending(by way of politically arrived at defined benefits structure.)

A bigger example of gross financial mismanagement is hard to imagine.

There is a way to partially address this, and it means default not on those bonds, but on the hollow promises of politicos long dead; redefine the promised benefits structure of SS down to what is sustainable, which is not the current model. In the limit, convert SS to a defined contribution plan, which defines generational fairness.

Want more benefits as a generation? Then do what the Greatest Generation did, and have more kids. Raise them, feed them, bandage their skinned knees, and send them to school. They will be uniformly payroll taxed at the same(not endlessly accelerating) rate as earlier generations, and the inter-generational subsidy will be what it will be. We need to end the generational Ponzi nature (2%....6%...15%....)of SS/MEDI, where politically arrived at promises of benefits are fast outstripping the intergenerational ability to provide revenues.

There is a third whammy; by removing 15% of the nations earnings for an entire generation, the government has skimmed off the self-funded pension assets of the middle class and said "We'll handle your retirement."

And.. clearly hasn't. That is going to be whammy 3, and there will be heads on pikes because of it, guaranteed, and well deserved of anyone still advocating this tribal
insanity.

4th whammy? Where do pension assets end up? As investments in the future economies, placed under the discipline of risk. Where is the discipline of risk in the socialization of risk known as Solyndra, or Curt Schilling's (yes, the baseball hurler) Studio 38 fiasco in Rhode Island?

With private debt, somebody in the world wakes up tomorrow with incentive to go out in the world and create new value in the economies, to pay off debt and restore available credit.

With public debt, not a single human being anywhere wakes up tomorrow with any such incentive. What they wake up with is, governments at every level in chronic fiscal crisis begging for more public borrowing...

A part of what is killing circulation in our economies is the total amount of public debt; that amount of debt is evidencing itself as debt not backed by any human desire to run up hills and pay it off! Stalled economies, value not circulating, only running downhill, as it must with this model...

regards,
Fred
(Edited by Fred Bartlett on 6/21, 10:49am)

Post 22

Thursday, June 21, 2012 - 12:39pm

Regarding the debt held by the Social Security Trust Fund (notice how mis-named that is. It isn't secure anymore, there shouldn't be any trust involved... because there isn't a fund - just IOUs), someone tell me if I'm getting this right.

Once upon a time money actually went into the "lock boxes" but then LBJ wanted to fund both the Great Society AND the Vietnam war, so he decided to borrow from the SS Trust Fund.

The borrowing took the form of printing Treasury bonds, putting them in the "boxes" and pulling out the face value of the bond (or maybe the current market value of the bond).

This was working because there was a big surplus in there (money in from FICA + balance on hand from prior periods was greater than the money going out for coming SS payments + money out to buy the bonds).

But as people retired in greater numbers, and there are fewer workers at work plus greater costs in medicare/medicare/etc., the whole equation changes. Now the social security trust fund will need to sell the bonds they hold, and/or borrow from the general fund just to cover the money going out. If they are permitted to sell their bonds on the market it is just the same as the Fed having sold them earlier and put the money in the general fund for the social security trust fund to borrow. The only alternative is that the bonds are sold to the Fed/Treasury in exchange for freshly printed money (monetizing the debt) which is just direct inflation - just a convoluted method for paying for seniors by printing the money as needed.

So, I don't really see this as a debt - not in the usual sense. It is an unfunded liability until the money is borrowed from the private sector. When money is borrowed from a private sector that money retires some portion of the current unfunded liabilities (but until the programs are modified, they just keep on making new unfunded liabilities). If they monetize the debt is just a way to tax almost everyone, but mostly those who save or have fixed amount investments.

When the Treasuries were printed and given to the Soc Sec fund, they were not really anything except for a preparation for borrowing from a future generation.

So it really makes no difference if we were to totally cancel all of the Treasury bonds the soc sec department holds - just tear them up. (Debt numbers would go down, unfunded liabilities numbers would go up, and the money would still have to come from some combination of borrowing and taxation.

Am I getting this right?

Post 23

Thursday, June 21, 2012 - 1:12pm

Steve:

Pretty much, but you must add the following: the justification for overtaxing an already surplus paying demographic (the Boomers) -- by raising SS/MEDI from about 6% of payroll to about 15%% of payroll -- was precisely so this new taxing/borrowing in the future would not be necessary. The Boomers were already more than funding their intergenerational SS obligations; a common sense argument was made, as follows: "There are more of you, and there is going to be a problem funding SS in the future, so we must sucharge tax you now in order to pay for that easily predictable coming rainy day." And then, they did surcharge tax the Boomers, and then they did immediately spend the surcharge surplus, replacing it with certificates that might as well have been printed by a secretary every month using a laser printer and placed in a drawer marked "Look, here is documentation of how poorly we have planned for the coming easily predictable coming rainy day; we not only took away almost 10% of payroll from the middle class, so they could less ably plan for their own pension needs, but we immediately spent that 10% long ago, and all that is left is the heating value of these printed certificates in these drawers, documenting our tribal insanity."

1] The Boomers were surcharge taxed an almost extra 10% of payroll for their entire productive working lives, so that their children would not be burdened by an -additional- easily predictable demographic burden. That was the argument to 'save' SS.

2] That surcharge surplus was immediately spent, long ago.

3] The only -two- things that have been projected into the future was the original easily predictable burden, now as unfunded as it was when it was used as a slick excuse to overtax a generation, and the very real hole left in the existing federal budget that was once subsidized by raiding the no longer raidable SS Trust fund... That hole is filled either by new taxes or new borrowing...and we haven't begun to pay for the future obligation yet, we've just filled the hole in the budget...

The way the government does not default on SS is now to overtax the Boomers kids a second time, to pay not only for their normal intergenerational burden, but the once easily predictable overburden based on the Boomer demographic.

Clark accurately spelled this out in the '80 election, and got less than 1% of the vote as his reward. That was back when this mess could have easily been averted. Instead we got Reagan and his grand bargain(more guns and more butter). We loved Reagan, but he is long dead and not dealing with this mess he helped create just as much as the spend always Democrats he made his grand bargain with.

This implicit borrowing was hidden; there was no political drag, no wide understanding of what the government was doing, even though there were many in the government who understood exactly what they were doing to future economies.

Moynihan in the 70s on the floor of the Senate: "God help us when they realize what we've done to them."

regards,
Fred

(Edited by Fred Bartlett on 6/21, 1:14pm)

Post 24

Thursday, June 21, 2012 - 10:50pm

Excellent point, Fred.

I was watching a recorded episode of Stossel tonight and a guest pointed out that regulations were a form of hidden taxes. Taxes, regulations, public debt, inflation: these are all things that one group forces on others, all forms of force as opposed to voluntary association, and all having the effect of eating the everyone's seed corn (or as you have put it, carving up the beast).

Post 25

Friday, June 22, 2012 - 4:54am

Once upon a time money actually went into the "lock boxes" but then LBJ wanted to fund both the Great Society AND the Vietnam war, so he decided to borrow from the SS Trust Fund.

There has never been a "lock box" (link).

Post 26

Friday, June 22, 2012 - 9:24am

Merlin:

There has never been a lock box.

That is exactly right; for most of its history, SS was always a direct transfer of revenues to benefits(pay as you go), with taxes adjusted to suit the politically arrived at benefits. If there was a balance, it was inadvertent and a temporary fact.

What created the need for the lock box that never happened was the brand, new scheme of purposely over-taxing a demographic, the Boomers, that was -already- going to be paying an intergenerational subsidy surplus. This look ahead to the Boomer's retirement was started by Carter in the late 70s...and continued by the Congress under Reagan.

They said they needed to surplus tax the Boomers for their entire productive working lives, skimming an -additional- nearly 10% of earnings from payroll, in order to fund SS in the future. But they had no means of maintianing that deliberated surplus as an actual asset into that future-- they literally overtaxed the Boomers, raising payroll taxes from 6% to over 15% -- and then... immediately spent the surplus.

It was a complete and total scam.

To this day, folks don't understand this. You can still hear people refer to all the 'interest' that those bonds generate for the government...paid by the government to the government! As if 'interest' grew on the 'interest' tree...

We can all try this, to plan for our retirement.

1] Set aside an extra 10% of our paycheck every month.
2] Spend it immediately.
3] Write ourselves an IOU, with 'interest,' payable by us to us, and put the IOU in a drawer.
4] When we are 65, take out the drawer full of IOUs and hand them to our kids as evidence of how well we planned for our retirement.

Absurd, except when we let our own government do this on our own behalf. And by 'let', of course, I mean 'at the point of a gun.'

As Moynihan said in the 70s when Carter started this 'surplus' nonsense, creating the new need for a lock box that never happened, "God help us when they realize what we did to them."

This has not been hidden. Just...widely accepted by us all, with blank, barely comprehending stares. mainly because we can't believe our government would do something so monumentally stupid to multiple generations.

It has hosed the Boomer middle class, and it has also hosed their kids.

Carter might have started the ball rolling, but Reagan did nothing to stop it. They both screwed the future. Everytime the GOP even mentioned fixing the SS program, the Democrats screamed bloody murder; SS for decades was the 'third rail' of politics. Touch it and die. It still is; nobody is fixing anything. The GOP caved in to the reality that the electorate was never going to understand the issue until it crashed and burned. And so, no administration since has done anything but take advantage of it, not willing to make the now harder and harder adjustments.

That future is today.

By the time Bush and Obama came into office, the required corrections were far beyond doable by mere politicians, who are now 100% vested only in post-train wreck politics, jockeying for position in the smoking wreck to play the blame game and cling to their power gig.

And, the American electorate is largely so dense that the only thing that is going to matter is, who is sitting in the White House on whatever Tuesday it finally becomes clear that the pooch has been screwed. We will look up from our iPhones and Angry Birds long enough to scream 'fix it' and then back to sleep, and that is when we become far more like Germany in the 20s.

regards,
Fred

Post 27

Friday, June 22, 2012 - 11:39am