The Bishop and the Butterfly: Murder, Politics, and the End of the Jazz Age

    Fie on the FT

    By Flavius on Sun, 05/15/2011 - 12:05pm |

     

    Here's my about to  be unpublished letter to the  FT
    .....................................................................................................................
    Your May 14th article on the entitlement plans  will serve to perpetuate a misunderstanding of the problem, if any, when their " trust funds" reach zero. There will be no practical consequence. The payments for Medicare and Social Security will not necessarily become any  greater requirement on the Treasury/the Government and therefore  the taxpayers.
     
    Just consider Social Security. Each year through withholding taxes the Government obtains cash. And it pays some  out for benefits. For many years the cash in from withholdings was more than the cash out . The difference was noted on an index card and the total of all those cards  was called the Social Security Trust Fund.( A TV program showed the small file cabinet containing them).  A misnomer because no funds were set aside. Say withholdings were $ 250 Bn and the amount paid for benefits were $225 Bn,  the government spent  thatextra $25 Bn .The general population  benefited by avoiding  the need to pay $25 Bn in taxes.
     
    I leave to constitutional experts the practical significance of calling the amount on those index  cards, aka the  Trust Fund, an "obligation" of the Government.
     
    Recently however, payments have exceeded  withholdings.  Say withholdings are still $250 Bn but the benefits are $280.The extra $30 is supplied by the government which means by the tax payers. The media describes that $30 as being drawn from the Trust Fund but in fact the way the Government obtains it is by taxes sufficiently higher to obtain that $30 . In parallel it makes an entry decreasing by $30Bn the amount showing on those index cards  called the Social Security Trust Fund. 
     
    What happens in 2036 when this process results in the Trust Fund reaching Zero? Say that then there's still the same $30Bn difference between payments and withholdings still requiring the taxpayers to pay $30 more in higher taxes. But in 2036 the entry subtracting  $30  from that account called the Social Security Trust Fund reduces it to Zero. Now comes 2037. What happens? There's the same $30 difference between payments and withholdings. And the taxpayers have exactly the same requirement to pay $30 in higher taxes. There's no difference. Nothing changes because in 2036 the "Trust Fund" became "insolvent".
     
    ................................................end.........................................................
     
    Republican pols of course get this wrong possibly out of ignorance, more likely in line with their mission of comforting the comfortable, if possible  by afflicting the afflicted.
    The FT knows better but every now and then  succumbs to the termptation to  become a pink version of the Wall Street Journal. At least so far it hasn't  carried a posthumous attack on Vince Foster. 

    Comments

    Flav, can you include a link to the FT article?


    by Michael Wolraich on Sun, 05/15/2011 - 1:30pm

     Trying to respect what I believe is the FT's policy allowing redistribution,here is a limited extract. which contains  a link.All the content to which I responded in my letter is included below and to that extent it will not be necessary to use the  link..

       BEGINNING OF EXTRACT 

    Please respect FT.com's ts&cs and copyright policy which allow you to: share links; copy content for personal use; & redistribute limited extracts. Email [email protected] to buy additional rights or use this link to reference the article - http://www.ft.com/cms/s/0/11ebfdfc-7da3-11e0-b418-00144feabdc0.html#ixzz1MRnV6f8E

    New fears over US entitlement plans

    Concern on Medicare and Social Security

    .............................................

    Revised forecast on how long funds will last

    By James Politi in Washington

    Published: May 13 2011 22:21 | Last updated: May 13 2011 22:21

    The financial health of Medicare and Social Security is deteriorating faster than expected, according to a report that will fuel the political battle over fiscal policy and the debt limit.

    The trustees of the two government health and pensions schemes for elderly Americans forecast on Friday that Medicare will exhaust its funds in 2024, five years earlier than predicted, while Social Security will be insolvent in 2036, one year sooner than thought.

    The new projections – largely the result of the slow economic recovery – came three days before the US was set to reach its debt ceiling of $14,300bn.

     

    ……………………………………………………………………...

    At a briefing on the Medicare and Social Security reports ,Tim Geithner, Treasury secretary,.(SAID)….....“I want to again encourage Congress to move ............ so that all Americans will remain confident that the US will meet ............not just our interest payments but also our commitments to our seniors,”..........

    END OF EXTRACT


    by Flavius on Sun, 05/15/2011 - 3:05pm

    Maybe throw in some T accounts for visual effect. :)

    One of the few good things to come from the recent crises is that explanations of accounting and finance terms are becoming easier to find and read/understand.   This can be helpful in calming fears caused by the careless though technically correct use of words like 'insolvent' 

    http://en.wikipedia.org/wiki/Insolvency

    While the trust funds could technically become cash-flow insolvent sooner rather than later they are much further from becoming balance-sheet insolvent.  Which is just another way of saying what you said.  Plus the government can never be insolvent in its own currency.

     


    by EmmaZahn on Sun, 05/15/2011 - 9:49pm

    Plus the government can never be insolvent in its own currency

    I think you're saying the same thing as Martin Wolf in last weeks column

    Overindebted countries with their own currencies inflate

    I'm over my head. If Congress refuses to raise the debt limit can't Obama temporarily just print dollas to make any necessary payments . Then  when Congress comes to its senses  offset the resulting devaluation somehow.

    Just guessing, by buying dollars held overseas to offset the ones issued during Congress's  interdiction on new debt. I'm not proposing that. Just asking why it wouldn't work.


    by Flavius on Mon, 05/16/2011 - 9:38am

    Part of me wishes the Republicans would refuse to raise the debt ceiling and that all the dire consequences predicted would (temporarily) come to pass.  And it would be only temporary because politicians do not piss than many people off and get reelected -- not if there is a functioning opposition party which is open to question at the moment.

    Outside of Republican congress critters, the only people making a really big deal over the debt ceiling are bond and currency traders.  It is in their interest (pun intended) to churn up some volatility from time to time.  Word is that PIMCO's Bill Gross has been talking US Treasuries down and that one of his funds is net short Treasuries.  Then less than an hour after debt ceiling was breached this morning,  Seeking Alpha reports:

     "Very underweight," sure, but Pimco never actually went short Treasurys, Bill Gross says - calling it a "misconception" that the firm bet against the government debt. Of course, it was Pimco's own report that the Total Return Fund was -3% on Treasurys that set off stories about Gross' bearishness.

    The chicken games traders play with each other and the Fed.  I really have no idea which way this is going to play out.   There is no rational reason to panic over the breach of an arbitrary and self-imposed limit but then there never really is a rational reason to panic, is there?

    This quote fseems pertinent:

    At the beginning of the Clinton administration in the early 1990s, adviser James Carville was stunned at the power the bond market had over the government. If he came back, Carville said: I used to think if there was reincarnation, I wanted to come back as the president or the pope or a .400 baseball hitter. But now I want to come back as the bond market. You can intimidate everybody. 

     


    by EmmaZahn on Mon, 05/16/2011 - 11:58am

    Right now I don't understand why a failure to raise the debt ceiling is discussed by the commenteriat as being the same as, or as leading automatically to,  default. But it's also true that I haven't read in something written by a heavy hitter.  I'm sure that one of them will soon orate on the subject and I'll probably excerpt plus link it here.

    Meanwhile it's pointless for me to comment since I'm clueless.


    by Flavius on Mon, 05/16/2011 - 1:57pm

    Because the commentariat are convinced that what is good for Wall Street is good for the overall economy and vice versa.  That has often been true but as you will see in the small print disclaimer on practically anything you ever get from an investment firm: "Past performance is no guarantee of future results."  

    You are hardly clueless.  You are reading and thinking about this stuff.  That is a good thing.   Tons better than just accepting what someone else says as a final answer.  

    Me?  I am way too jaded about the whole thing.   Probably should comment less myself.

     


    by EmmaZahn on Mon, 05/16/2011 - 3:29pm

    Something informative from WSJ via Yglesias.  

    DEBTQA

    Seven (7) looks especially interesting to me because that is one of the things I thought Treasury should have done Fall 2008 instead of TARP.   Something very appealing to cash heavy investors looking for a safe place to park.  Treasury Direct repos.  Notice there is no guesstimate on how much money that might bring in.  Now that is something to keep a watch on.  It could be a real game changer.

     


    by EmmaZahn on Mon, 05/16/2011 - 10:52pm

    Interesting. 


    by Flavius on Tue, 05/17/2011 - 9:17am