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Deeply Disturbing, For Different Reasons

by John Rubino on June 16, 2010 · 20 comments

A couple of articles appeared today that couldn’t be more different in tone, content, or point of view, but dovetail in a really disturbing way. The first is from University of Texas economist James Galbraith on how we’re rich enough to afford pretty much whatever we want:

The national security shell game

Deficit hawks are using national security as an excuse to seek cuts in Social Security in Medicare, but they’re wrong.

…It’s true that nowadays China, Japan and other countries hold large piles of Treasury bonds. But why? Only because they run trade surpluses with the whole world and have chosen to stockpile those earnings in dollars. This is a sign of confidence in us. And reducing budget deficits wouldn’t change anything about that, unless those Asian trade surpluses were also reversed. But the folks at Brookings weren’t calling for a trade war with Asia, just about the only step (however unwise for other reasons) that might plausibly cut the surpluses.

Do China’s debt holdings give China leverage over us? Not at all. Realistically, China can do nothing with its Treasuries except roll them over. China is not going to dump U.S. bonds in order to buy those of Spain or Greece. And paying interest on them is not, for us, a burden, since the money is never spent and probably never will be.

Speaking of interest, it’s also obvious that the capital markets don’t take the deficit scare-talk seriously; otherwise, they wouldn’t be lending to Uncle Sam for 30 years at just over 4%. And the dollar wouldn’t be rising, as investors seek safety from the European crisis in Treasury bonds — a sure sign that the world’s wealthy don’t find U.S. deficits all that worrisome.

The National Security Strategy doesn’t mention either Medicare or Social Security by name. But the code words “medium-term deficit reduction” are there, and they are today’s stand-in for cuts in those programs. “Everything must be on the table,” we’re told, as the Simpson-Bowles commission prepares to explain why Social Security and Medicare must be cut.

But why? Social Security and Medicare are not broken. They are successful, popular programs that protect America’s elderly from poverty. Cutting them would be devastating. Today, at a time when people have lost jobs, investments and equity in their homes — the very things that an aging population counts on for economic stability — Social Security and Medicare are more important than ever. They are the most important bulwarks of middle-class life in America. And we can afford them. A rich nation can always afford modest retirement benefits and decent healthcare for its old. Cutting them would be, in fact, totally inconsistent with the spirit of the National Security Strategy, which correctly equates human security with national security around the world.

The real cause of our deficits and rising public debt is our broken banking system. The debts our economic leaders deplore were largely due to the collapse of private credit, and to the vast giveaways the federal government made to banks to prevent their failure when credit collapsed. Yet those rescues have failed to reanimate private credit markets and job creation, as the latest employment reports show. And so long as that failure persists, public deficits and rising public debt must remain facts of life.

Some thoughts:

It’s hard to know where to begin with something like this. Maybe here: “Do China’s debt holdings give China leverage over us? Not at all. Realistically, China can do nothing with its Treasuries except roll them over. China is not going to dump U.S. bonds in order to buy those of Spain or Greece.”

But of course China can and is using its dollars to modernize its own infrastructure and buy up natural resources around the world. It has to do this in a measured way so as not to spook the foreign exchange markets until it’s ready to dump its remaining dollars, but that day is obviously coming.

And there’s this: “Speaking of interest, it’s also obvious that the capital markets don’t take the deficit scare-talk seriously; otherwise, they wouldn’t be lending to Uncle Sam for 30 years at just over 4%. And the dollar wouldn’t be rising, as investors seek safety from the European crisis in Treasury bonds — a sure sign that the world’s wealthy don’t find U.S. deficits all that worrisome.”

Um, I don’t think a 4% Treasury yield is a vote of confidence…it’s more a result of the Fed buying most of what Treasury issues, with the rest going to foreign investors avoiding Europe’s implosion until they can talk the IMF into selling them another ton of gold.

To put the idea that low interest rates are a sign of fiscal health in historical context, think back to the assertion that rising home prices indicated a healthy financial sector in 2006. Or that rising .com stocks were proof of a bright future for the NASDAQ. This isn’t analysis, it’s just trend extrapolation.

Galbraith refers to Social Security and Medicare as “successful” and “modest”. I guess that’s true if you ask the beneficiaries, who do seem to appreciate all the free money and health care. But those programs cost around $1 trillion a year and their unfunded liabilities are $50 or so trillion. This means their true all-in cost is more like $4 trillion a year. Even today, that’s not a modest number, or a successful one.

But the main fallacy of both the left and right is this idea that “as the richest country in the world, we should be able to afford [fill in the name of your favorite war or social program]”. We were rich for a while there, but now we only look rich because we’ve accumulated a lot of flashy stuff. A quick glance at the other side of the ledger shows that since we’ve borrowed more than the value of the stuff we own, our real societal net worth is careening towards zero.Global military empires and cradle-to-grave social programs (and sound currencies) are luxuries available only to countries that control their borrowing, and that ain’t us.

The second article is drawn from Bob Chapman’s always-fun, occasionally offensive International Forecaster newsletter, in which he predicts the confiscation of IRAs and 401(K)s:

Government has been eying retirement plans as a source of funding. The arm-twisting has been going on for some six months to make managers of retirement funds purchase US Treasuries and Agency bonds. This is to provide a delaying action as the dollar begins to play second fiddle to gold as the only real currency. In addition, foreign central governments, which own well over $3 trillion of these debt instruments, hope that the US is serious about protecting the functioning of government. Accessing retirement plans will be an integral part of extending solvency to buy more time for Wall Street, banking and government.

Thus it has been decided behind the scenes to eventually confiscate the $15 trillion in private retirement funds. The only thing those who control government haven’t quite figured out yet is exactly how to confiscate what little wealth you have left. In 1991, plans were presented to create a mandatory pension system to be funded by a one-time 15% tax on retirement assets and a continuing tax of 15% on retirement income. Those plans had to be put on the shelf, because they were not politically acceptable at the time and passage was not possible. Today there are more aggressive plans in the works and if we do not unseat most of the incumbents in November’s election you will see passage of such legislation over the next two years.

In 2007 ideas were submitted to a congressional subcommittee by Thresa Ghilarducci who was director for the far, far, left at the New School for Social Research. Her idea, of course, was to make sure retirement would be available for millions who never bothered to save a cent and her solution was to confiscate the assets of those who did save. Her plan was to tax workers on 5% of their gross income. The eventual payout would be based on government’s bogus CPI, which has been screwing retirees under COLA for the past 30 years. As any intelligent person knows the government is already broke and can never pay off its debt, thus the funds would be used to pay down existing debt.

There could be legislation to end further tax deductions in effect ending all plans for the future in order to being in immediate tax revenues, or a voluntary plan where a percentage of your plan could be traded for a government annuity, which would not be worth the paper it is written on. It is coming no matter what form it takes. The people who control government know this has to be done to keep the economy afloat. It may be sold to Americans as bonds lose their AAA status, or an attack on the Fed or the Treasury, or another war, or a complete economic collapse. It could be a false flag event, or World War III. Take your pick, but it is coming. These events could spark a move to add taxes or penalties justified by such events. Those in plans they cannot exit are just plain screwed, unless they quit their jobs, take the funds and buy gold and silver related assets.

More thoughts:

  • These two articles dovetail in the sense that Chapman’s prediction of wealth confiscation is a natural outgrowth of Galbraith’s belief that any amount of borrowing is okay in the service of the welfare state.
  • As far as I know, no one is proposing actual confiscation right now (though the hearing in which the economist proposed a mandatory national savings plan did happen). But IRAs and 401(K)s are juicy targets and Washington is getting more and more desperate; that’s where the money is, so it’s reasonable to expect them to come after it.
  • This might be one of those rare occasions when Baby Boomer selfishness puts them on the right side of an issue. Because they (we) own the bulk of IRA/401(K) assets, maybe our big mouths and political clout will slow down the confiscation process.
  • The prospect of having an IRA full of gold/silver mining stocks forcibly replaced with government bonds is a pretty good incentive to get some money overseas. In this world, of course, that might be an “out of the frying pan…” move, but it’s getting harder to see the US as the safest place to invest.

 

  • Bruce C.

    I agree with J. R.’s comments.

    I don’t know Gailbraith, but the attitude that comes through in his article is that he is a classic academic who thinks that because HE thinks such programs are successful and modest and that the US is “rich” then that is justification for institutionalizing these things and forcing everyone to fund them. It’s an outrageous arrogance and is how/why collectivist/socialist doctrine is perpetuated.

    Chapman’s article is maddening and frustrating. Government confiscation of private retirement savings could happen, though I don’t think that it will. Not that the government wouldn’t be willing and able, but that I think things are going to implode uncontrollably before that happens. Even the government insiders will be surprised.

    That said, it gives new meaning to the words “full faith and credit of the US government”. The euphemism for that is usually “the power to tax”, but the more literal translation is “the power to confiscate.”

  • Brutlstrudl

    Bob’s been “over the top”, since I hit the gold sites back in ought 3. Seems like he and Faber were trying to out do each other. Now guys like Kaiser are everywhere but I keep going back to Bob

  • Scott

    he’s the son of John Kenneth Galbraith, what would you expect? JK Galbraith was an ‘economic bureaucrat’ on FDR’s staff…a more Keynesian economist you’ll never find. So, father teaches son all the wrong crap, along with Harvard [B.A.] and Yale [Ph.D.]. So none of his drivel surprises me. It’s pure ‘Socialist-Keynesian’ economic theory…..and as they’ll find out, it’s all wrong.

  • Jason

    With regard to China…. Even if they buy up natural resources, the dollars they pay with are now somebody else’s problem. The point is that once that dollar is created, it is not destroyed, it simply changes hands. Why do we care if China holds them or if Australia holds them having sold a mine to China?

  • Goober Confedrate Jones

    “Galbraith refers to Social Security and Medicare as “successful” and “modest”. I guess that’s true if you ask the beneficiaries, who do seem to appreciate all the free money and health care”.

    Successful and modest are subjective judgments and therefore arguable. The word free as in free money and health care, however, has the same meaning for me as it does for you. I paid into Social Security all my working life. Now I am collecting a return on my money. I have also paid into Medicare since its inception. My retirement and medical benefits are not free. I paid for them. Pretending that that they are free, as you have done, makes it easier for the government to default on its obligation to me. So stop it. Thank you.

  • rich t

    James Galbraith:2010 = David Lereah:2005

    Hold onto his article for future mocking.

  • Brad Thrasher

    We could halve our military budget and still spend more than twice the rest of the world combined devotes to military spending. Of what do we remain so afraid? Where is the threat that justifies such expense?

    We could also and probably should impose a VAT on all imported products equal to our military spending.

    At which point we easily afford our relatively modest social safety net.

    Think people, not bullets.

    All the best,
    Thrash

  • MarkyMark

    Scott,

    Whilst I’m as near certain as I can be about anything that these socialist-keynesian policies cannot possibly work I’m not so certain that when the crash does come that the proponents of such policies will accept that keynes was in any way at fault.

    It is impossible to disprove keynesian theory because the likes of Mr Gailbraith will simply conclude either that the monetary and fiscal stimulus was withdrawn too soon or that the authorities must not have printed and spent enough.

  • Brad Thrasher

    @MartyMark,

    John Maynard Keynes advocated government spending fill the void of private investment specifically targeted at job creation and maximum distribution of money throughout the economy.

    The idea that Keynes can be used to justify the Bernanke/Paulson/Geithner bank bailout is a complete bastardization of Keynesiasm.

    That my friend isn’t rhetoric, it’s fact. The Keynesians have always been focused on unemployment.

    http://www.econlib.org/library/Enc/KeynesianEconomics.html

    All the best,
    Thrash

  • tom brown

    re Soc. Sec. M. care: paid into. . .
    1. the trust fund was used, ss trust fund now has i.o.u.’s that
    must be redeemed by more/new taxes,
    2. M. care costs now more than 10x what in 1965 the cpa’s
    predicted it would cost now + usual fraud waste abuse.
    3. Some cpa’s say if you hade invested the same amount
    you would have more now. .
    4. ergo, means testing is on the table (only the poor will
    get s.sec.)

  • MikeJ

    I guess the fact that Treasury and Labor were taking comments in February on how to best implement GRA’s as outlined by Theresa Ghilarducci during Rep. George Miller’s Labor and Pension Subcommittee means that it will never happen. Fat chance. As the article claimed, it’s coming, it’s just a matter of when. When the Boomer’s lose the rest of their retirement savings in the bond market debacle that is shaping up, they will be willing to listen to anyone promising to give them a stipend. IRA’s, and most especially 401k’s are money traps, contribute to them at your peril.

  • http://needajet.com Rick

    First off I agree with Goober Confederate Jones, social security ain’t free…so stop talking about it like it is a welfare program…However if one of these nutty politicians wanted to take away social security, as long as they just pay me and everyone else back all of the money we put into the system at compound interest from say 1960 and we can call it even…I am sure that will more that up my standard of living for the rest of my life…I am thinking island life style would work better for me anyway..so go ahead you dumb ass politicians take a perfectly good system and screw it up for the here and now..Just pay us back what you owe us, our investment and interest (which by the way I amore than certain would more than bankrupt this already bankrupt country) and you will never hear from us again…

  • Frank

    Rick,

    Three things:

    First, there is something wrong with this “we already paid” idea.
    The problem is that the system was not adjusted for increases in life expectancy. Furthermore benefits were added into the program and made to pay out retroactively. By retroactively I mean that people recieved the additional benefit even though the amount they paid in didn’t take this benefit into account. Here is an example of this. Read about it.
    http://en.wikipedia.org/wiki/Medicare_Prescription_Drug,_Improvement,_and_Modernization_Act

    Second, there is no way for the government to deliver net present value of the funds you paid in, the bond markets won’t support it at this time. Note that by value here I mean inflation adjusted. The government can always print enough money to pay it back, but the real inflation adjusted value of that payout wouldn’t be the same.

    Third, the social security system is not a perfectly good system. If anyone but the government ran a retirement system like that they would share a cell with Bernie Madoff.

    Best

  • Dave Ziffer

    First with regards to Galbraith: anyone who would take anything that anyone of the lineage of J.K. Galbraith says seriously (this would include every instantion of Congress and all our presidential administrations) is clearly so confused as to be incapable of rational deduction at all. It seems pretty silly to publish such a thing and then comment on it, other than to remind us of how much our political leadership belongs in a kindergarten playroom rather than in the halls of Washington DC. You might as well publish the ramblings of Charles Manson and comment on them.

    With regards to confiscation of the population’s IRAs: there has never been any question in my mind that this must happen. All this money we’ve saved up supposedly represents assets that will some day be repaid to us Boomers. But the world’s real assets are not measured in dollars or even in gold or commodities or natural resources. To an aging Boomer the world’s real assets exist in one form only: namely the willingness of a younger, more able person to provide goods and services. With all these Boomers saving all this “money” and trying to cash it in at once, there will have to be some substantial devaluation. There is simply no question that the Boomers cannot possibly command all the consumption that they presume this money represents.

    The only question is, how will the devaluation occur? It could be in the form of hyperinflation, in which case you can escape by having your savings in the form of something that isn’t being inflated (direct ownership of gold or other commodities, or other currencies). And of course there is always the possibility of outright confiscation, which will be disguised as a forced tradeoff for something that the government claims is valuable.

    I might point out that a confiscation of retirement savings is already well underway. By setting the Federal Funds Rate at zero percent, the Federal Reserve has effectively declared the dollar worthless already. After all, if you can borrow some asset from someone without having to pay any interest on it at all, what does that say about the value of the asset? People who saved all their lives with the expectation of living off the interest are now being bankrupted, since they cannot possibly live off the interest rates banks are paying on CDs. They might survive in poverty by buying 30-year bonds, but there’s a good chance they’ll be wiped out by a likely-coming bond market collapse.

    So the savers who thought they were retired are already now being de-retired by our seemingly perpetual interest-rate collapse, as they eat through their principal just to survive. Even when interest rates rise again, they’ll never recover the lost principal and will certainly have to produce income somehow. Note that the government didn’t even have to do anything dramatic. Good heavens, you don’t even hear about this on the news.

  • Dave Ziffer

    I thought I’d point out that the very existence of IRAs, 401Ks and such is itself a harbinger of the confiscation that is to come.

    During the first 150 years or so of this country, it was possible to save money easily. Prudent savers did not need special tax breaks or specialized accounts forcibly divvying up their assets into little compartments. Note that if tax reduction were the true objective of the government, the government could have accomplished this by simply reducing spending and reducing overall taxation. It could have simply done the same things it did in the 1800s: tax little, and tie the value of the currency to gold. People in the 1800s managed to save money quite nicely and they retired off the interest. In fact they didn’t need all that much interest because their dollars were actually appreciating in a deflationary environment. And they didn’t need this enormous bureaucracy to track which of their assets were “retirement” assets. In fact, the government had no idea what or where most people’s assets were (keep this thought in mind).

    But instead tin the 20th century the government did precisely the opposite: it kept spending and taxes high, and it disconnected the dollar from the gold standard. And in return it gave us these “breaks”, which are far more complex than simply having a low overall tax rate and sound money. Now why do you suppose the government would do this complicated thing when it could have accomplished the same objective in a simpler fashion?

    Well it seems to me that the government gets something by doing things this new way that it didn’t get before: it gets to know where almost all your assets are. It has designated every financial institution that manages “retirement” assets as a “custodian” and requires that all custodians not only keep track of all your assets but also track the flow of your assets from one institution to another.

    But the government did not seemingly gain anything practical by doing this. It still forfeits all the taxes on all the money that you put in your IRAs and 401Ks. It could just as easily have forfeited the same taxes by declaring lower overall taxation rates, and it could have done so with out creating an enormously cumbersome bureaucracy and forcing this incredible tracking expense upon the whole population. The only thing that the government gets from doing things this way is an enormous headache, plus a knowledge of where your assets are.

    So now we have to ask ourselves, why would the government want to know where essentially all your assets are?

  • Scotty

    I would like to a breakdown of Galbraith’s asset value estimate. So we sell the White House and the Prez & Mickey take a flop in a rooming house? or we do a sale-leaseback… We sell the interstate highway system and then motorists pay for a monthly pass to get on the freeway… sell Air Force One and Barry flys coach and buys his tix on PCLN?

    First the income statement, then the balance sheet. Thousands and thousands read Galbraith’s essay and never question the foundation assumption on the “asset” value.

  • Brad Thrasher

    Yes David Ziffer, lets apply 18th century solutions to 21st century problems. Perhaps you’d return woman to the status of chattel and reinstate slavery among selected peoples as well.

    While we’re at it let’s toss out 200 years years of jurisprudence and the advancements of science. Much simpler to give the useless eaters Leviticus Law than to burden society with due process and the right to examine one’s accusers.

    Just because successive administrations have mismanaged Social Security doesn’t make Social Security a bad idea.

    So c’mon, were just venting or would really throw the baby out with the bathwater?

    All the best.
    Thrash

    The problem with all neocon solutions is that

  • Duane

    Gailbraith, at the end of his article, acknowledeges the “collapse of private credit” as the central issue, but stops there. Today I heard Larry Kudlow quote a University of Chicago economist who said the rising dollar will put a damper on the recovery, but again they stopped there. They always seem to stop at the brink, and on the other side of the brink is the deflationists’ argument. Minsky could explain it to them. And Minsky, by the way, is a Keynesian (he wrote a book about Keynes).

    Credit = Money. $52T in credit is easy to collapse, but hard to inflate.

  • Dave Ziffer

    Well Mr. Thrasher I didn’t say anything about throwing out true advancements that are actually working. You seem to be of the opinion that just because we are doing new economic things that aren’t working, we must hang onto them simply because they are newer.

    If you would stay on topic and give me some compelling reasons why our 20th century economic policies are superior to our 19th century ones, then perhaps I might consider them.

  • Rohnbo

    Such a shame that America still trusts government. We are about to have our heads handed to us, with failed government retirements of all kinds. Perhaps we will get lucky and continue to loose 7-10% of these retirements due to inflation, combined with understated inflation figures in following years. Got a nice stash in a C.D.? Hows it feel to have almost no return and then be taxed a second time on that huge 2% return? All so the govt. can enjoy low interest on the huge national debt that doesn’t matter? We borrow more and more plus interest on interest. How long can this last folks?


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