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Wednesday, February 09, 2005

Full Faith and Credit? 

A week or so ago I wrote about the Grand Bargain put in place by the Greenspan Commission in the 1980s that created the Social Security Trust fund. The point of that post was that SS reform could screw the middle class who have been most-burdened by the regressive payroll taxes.

The idea, of course, is that in 2018 or whenever, the Trust Fund will have to start selling the bonds back to the government, which payments will finance SS into the future (the future being 100% benefits until 2042, with adjustments needed after that date--some crises, huh?) However, if you just pretend the Trust Fund doesn't exist, then, well, 2042 becomes 2018. The idea that the Trust Fund is not real has been around for a while, and needs no substantive refutation. But now the President is explicitly telling us it's not real. Via Josh Marshall, the President today:
Some in our country think that Social Security is a trust fund -- in other words, there's a pile of money being accumulated. That's just simply not true. The money -- payroll taxes going into the Social Security are spent. They're spent on benefits and they're spent on government programs. There is no trust. We're on the ultimate pay-as-you-go system -- what goes in comes out. And so, starting in 2018, what's going in -- what's coming out is greater than what's going in. It says we've got a problem. And we'd better start dealing with it now. The longer we wait, the harder it is to fix the problem.
Good Lord. If any normal president said something this stupid, and this dangerous for the international capital markets, the markets would go INSANE. Think about it--this is the President of the United States saying that US Treasury Bonds are merely worthless pieces of paper, seemingly blind to the fact that the sale of same is keeping us afloat, current account-wise and budget deficit-wise. Luckily, markets seems to understand that this president knows nothing about economics, and discounts his pronouncements accordingly, as best exemplified by this.

However, if Bush really pushes this, and the markets start to believe that the government will default on those "mere IOUs" held by the Social Security Trust Fund, I think we may be in some serious trouble. I can't imagine the Chinese Central Bank liking that too much, and then it's Argentina-land for us.

UPDATES: Josh Marshall has some.
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