BREAKING:AP: S&P Downgrades U.S. Debt From AAA part 2

There is nothing civil about tolerating ignorance. Would you rather I merely extend to you my sympathy for being so far behind the curve, or would you rather I try to help bring you up to speed? There are many on the right-wing who plainly prefer to remain ignorant about things, so I'm just checking.

Yes, a wash on some very simple books...

............SSTF........................Treasury
...------------------------.....-----------------------
....Assets....|.Liabilities.......Assets...|.Liabilities
..............|............................|
..Cash...-100.|.................Cash..+100.|
..Notes..+100 |............................|.Notes..-100

Simple enough for you? It's an exchange of assets. Nothing else happens.

Spending goes on down the hall and it goes on regardless of whether Social Secuirty even exists. Congress decides to authorize spending and appropriate the funds for it. As this spending then proceeds, the only question is how it will ultimately be financed. If Treasury has cash on hand when bills arrive, it uses that to pay them. If it does not, it looks to borrow the funds necessary. It could rely exclusively on domestic and international capital markets, but here is SSTF (and a variety of other government trust funds) holding large amounts of dollars that they don't need right now and would very much like to invest. So Treasury borrows from them first. Kills two birds with one stone.

Social Security was off-budget between 1935 and 1968, on-budget between 1969 and 1982, and has been off-budget since 1983.

There are currently two programs that receive no annual appropriations to fund their general operations, but instead have continuing authority to expend against revenues dedicated to their purposes. These are the US Postal Service and Social Security. Each is off-budget.

No, it isn't. The bulk of payroll taxes is used immediately to pay current old age, survivor, and disability benefits. The surplus -- built into the system in 1983 in order to build up a reserve to help pay baby-boomer retirement benefits -- is then invested by the SSTF until needed for that purpose.

Well, let's see...most of your experience of Washington is likely to have been from a Tourmobile, and I've worked here for forty years. Advantage me.

I'm sure you think many things that are completely wrong. This is just one of them. The non-marketable government account series securities are just one aspect of the public debt, all of which is backed by the same guaranty. The quality of a note does not vary with the quality of the purchaser.

It's a valid point, depending on the perspective of analysis. If you borrow ten bucks from your spouse, does that create an actual debt? What about firms who borrow from a subsidiary, affiliate, or parent? Should that count? And is money that America borrows from America the same as what it might borrow from China or the UK?

Above and beyond an inability to reconcile simple assets and liabilities, your belief that SS supluses are not invested in Treasury securities and that things would be oh so much better if only SS were moved off-budget are much more revealing. And what they reveal rather plainly is that you have very little actual understanding of what you are talking about.

So that's the end of class for today. Your assignment is to read the second page of Chapter 1 of Intro to Basic Public Finance, and we'll continue to discuss and dispel the class's apparently many misunderstandings and misconceptions of the topic next time.

 

Not quite so simple. The Treasury has to raise the funds, either via taxation or defict spending, to to pay social security. So the 2.5 Trillion "assets" of Social Security are really a claim on general revenue. For the Treasury, it's not an asset.

You had better notify OMB. They count SS as part of the federal budget.

 

Apparently the ratings agencies rumored that France may follow the U.S. in being downgraded. Given that the agencies answer to the largest investment firms on Wall Street, it's difficult to view the movement in the markets as a "reaction". Indeed, the last source I cite contends the volatility is by design. For myself, the content refutes all the more the pretense of a nation-state world.

Some would quip, News @ 10, it's a global economy. Yes, but if rating agencies on Wall Street can create chaos for a country the size of France with rumors, then why pretend that any state possesses a relevant degree of autonomy with respect to its own sovereignty? Another key here is France's sovereign debt, which is their debt issued in US currency. A downgrade of course would make it more costly to borrow those dollars. The shorts are simply recognition that much of the underlying assets in these banks portfolios are toxic! The unregulated OTC derivatives market is traded by what's commonly referred to as the "shadow banking" sector, which is simply the off-balance sheet behavior of Wall Street titans. Here below it's dubbed as private markets.

Unreal! A private derivatives market, administered in complete secrecy that is equal to a decade of global economic output! To think how many go on about the markets & industry being overburdened with undue regulation. This next source just corroborates that the derivatives the market is chasing are the CDSs. These are of course the credit default swaps, a hedge toward default.

This is interesting, here is Max Keiser's take on what it means:

They're "too big" to contend with, yet the almighty solution is austerity for the rest of us...ha-ha

 

What if it was a corporate giant instead of two different branches of the government? Let's say that one division of the company with a separate corporate status has been making money hand over fist but the company as a whole is losing money (the head corporation). The head corporation takes that part of the profit not handed out to the shareholders of the subsidiary corporation and 'compensates' the subsidiary corporation by issuing them junk bonds and/or last claim shares on the head corporation. The nominal value is meaningless in real terms because the head corporation is losing money and if it ever declares bankruptcy the bonds and shares will have no value because they will rank behind other creditors.

This is the situation with Social Security. If the government was serious about funding SS they would not be 'paying' for the cash of the Social Security Fund with what are effectively open-ended IOUs.; instead, they would issue real T-bills that they would have to redeem at regular intervals and which would be on a par with all other T-bills issued by the U.S. Treasury. As it stands anyone who buys a regular T-bill has a much better chance of getting their money back than SS does.

 

skeptic-f wrote: "This is the situation with Social Security. If the government was serious about funding SS they would not be 'paying' for the cash of the Social Security Fund with what are effectively open-ended IOUs.; instead, they would issue real T-bills that they would have to redeem at regular intervals and which would be on a par with all other T-bills issued by the U.S. Treasury. As it stands anyone who buys a regular T-bill has a much better chance of getting their money back than SS does."

I'd very much like to see the information that is influencing your view. I'm only aware that interest payments to creditors is priority one. No more than a week ago I want to say it was a republican who said that by 2020, just the interest on the debt would be more than $1 trillion annually. It's likely I missed it, but I'd swear 17thANDK was adamant that the debt held by these trust funds was as secure and prudent an investment as any other. Didn't he? You're contending something altogether different, isn't that right? I'd be interested to see you expand on your point.

 

I don't think it's possible to really calculate a good number on the interest on the debt since we don't know what interest rates will be in 2020, however since our current interest rates are at historical lows, I don't see our current low interest rate situation lasting. That's the time bomb with the debt. A few percentage points here and there could make our budget situation totally unmanageable.

Interesting factoid I picked up from Morning Joe a couple of months ago: Our interest on the debt was actually higher during the Clinton era than now because interest rates were higher then. Now that our debt is so much bigger, in a few years we easily could be sending most of the federal budget on interest.

 

It doesn't get any simpler than the T-accounts for a simple note sale. This already IS the rookie/novice/beginner-level explanation. The accounts of course add to zero, indicating that the transaction is in fact an asset swap, i.e., a wash for the government as a whole.

Treasury was going to sell notes in any case in order to finance the deficits. There is no net change in total public debt outstanding or in total debt servicing obligations simply because Treasury sold notes to SSTF rather than to China.

Duh! That's why they were listed in the Liabilities column for Treasury. It is SSTF that holds the asset. How can people be so confused over such an elementary transaction?

OMB along with everyone else treats SS as off-budget. You apparently don't understand the terminology. Off-budget plus on-budget equals unified budget. Been that way for quite a while...get with the program.

 

Completely ridiculous. SSTF holds Treasury bonds in a laddered series of maturities that extends from now to 2026. Billions of dollars worth of 10-year securities purchased a decade ago are in fact maturing this month. Nearly $800 billion worth matured and were repaid in FY2010.

The special-issue securities issued to SSTF (and to the rest of about 150 federal trust funds) are AT LEAST "on a par" with the securities that you or any non-government investor might purchase. They have stated maturities and stated interest rates, all of it backed by the full faith and credit of the US Government. The principal difference between special-issue and public-issue securities is that the former can be redeemed on demand for face value plus accrued interest. In other words, there is zero interest-rate risk associated with special-issue securities. Which of the bonds you hold has zero interest-rate risk?

 

You're still waving that million dollar check around huh?

You seem fairly immune to the idea that even calling that 2.5 Trillion an asset by SS doesn't change that it's a liability to the Treasury. Sigh, I wish the Social Security administration really did have 2.5 Trillion in assets!

 

I wish more people were familar enough with the facts to be able to discuss them intelligently. Alas, all we find find here are financial rubes and chowderheads...

 

Yes, I've found myself talking to a brick wall in this thread.

 

Men of straw and sticks are always taken aback by a wall constructed entirely from the solid brick of fact and reason. Perhaps if you had bothered to invest first in attaining some actual grasp of either one or both of those things, you would have fared a little better.

 

Calling a magical idea (that a 2.5 Trillion debt to SS is an asset rather than a liability) based on fact and reason is ridiculous, however I love the utter seriousness of the way you present it. Bravo!

 

Financial Accounting 101, Chapter 1, Page 1: A note is an asset to the holder and a liability to the issuer. Let us know when you become serious enough to have dragged yourself past that point.

 

In this case, they are the same entity, the federal government. That's the point you are purposefully ignoring.

Over and over and over.

Going back to that million dollar check again. You write yourself a check for a million dollars, even though you only have $200 in your account.

How much money do you have?

Me: $200.00

You: A cool million! (it's an asset!)

 

They are individual entities. Otherwise, Social Security's money would already be Treasury's money, and they wouldn't need to engage in the investment transaction at all. The fact that each entity is also an agency of the federal government merely means that when you look at the position of that government as a whole, the assets of SSTF and the related liabilities of Treasury offset each other, something you should have realized by now.

Going back to reality again. You take in $700 billion in payroll taxes. You pay out $600 billion in OASDI benefits. What are your assets? $100 billion. All in cash. You don't actually need the cash right now, so you decide to invest it in Treasury securities. What are your assets? Unchanged at $100 billion, but now all in Treasury securities. How about Treasury? It's position is also unchanged. It has a new cash asset of $100 billion plus a new note liability of $100 billion. Overall, it's a wash -- a simple exchange of assets of equal value.

So simple, a caveman could do it.

 

17thAndK wrote: "They are individual entities. Otherwise, Social Security's money would already be Treasury's money, and they wouldn't need to engage in the investment transaction at all. ... You don't actually need the cash right now, so you decide to invest it in Treasury securities."

The parts I've highlighted are false! My understanding is that by law, the surplus goes to Treasury. There's no deciding to invest, no investment transaction as it would be for say, a foreign investor. A foreign investor can choose, say, a capital project to build a new terminal at one of the larger U.S. seaports because he has a vested interest in trade at that location. The reality you keep ignoring is what was the $2.5 trillion used for? Fact is, you don't even know, isn't that right? Yeah, and given the current state of affairs it's reasonable to assume it was flushed down the $h!tter! Your so-called asset isn't going to actually produce any revenue. The "full faith" of the central government in itself, produces nothing! Dude, the money has been pissed away and all there is to show for it is an obligation to repay it with an additional yield. I'm curious, where do you suppose the central government will get the revenue to honor those notes held by the S.S. Trust Fund?

 

17thAndK,

You're missing an opportunity here. Mike is acknowledging that the S.S. Trust Fund holds a considerable amount of intra-governmental debt. From this point forward, at the very least, his position should reflect that fact. He may still reject the value of social programs, but if the discussion is the seriousness of the national debt, he knows that S.S. benefits hasn't had anything to do with it. Further, cutting these same entitlements isn't going to help address it! Do you know how people in this forum actually believe there's a link between that $14.5 trillion and entitlements like Medicare & Social Security? Every so-called conservative and many so-called liberals! The very party you contend is trying to save social programs, has contributed to that disinformation campaign. Here is one such source:

So, according to factcheck.org $37 billion had to be borrowed from the general fund to finance S.S. in 2010, which is complete BS! The source deliberately misrepresents the data from the CBO. The chart that factcheck links to confirms that total revenue exceeded total outlays. What factcheck.org wants the reader to consider is "Primary Surplus", which simply excludes interest that the trust fund earns. When interest revenue is excluded, then it appears the fund has run a $37 billion deficit. However, the following is from that very same CBO report!

The myth that the debt and entitlements are related in some way, or that cutting entitlements is part of the solution, is officially OBLITERATED! These next sources expose the democrats for their role in misrepresenting the truth:

So, if the problem is the republicans, why aren't the democrats exposing them for the radical fringe they are? Why haven't they repeatedly told the American people that these entitlement programs haven't had anything to do with creating this massive debt, nor will cutting them help resolve the issue? The reason of course, is because the democrats are no different, they amount to loyal opposition, that is all!

 

The distinction between agencies of the federal government is as meaningless in this circumstance as the distinction between funds I make in my own personal finance. I have a spreadsheet that I track savings, funds for Christmas and birthday presents, for the car payment and so on.

But its all the same money. If I loan my car loan fund the Presents money so I can pay off my car loan, my Presents fund by your thinking would have an "asset" of the IOUs that I borrowed from that fund. In fact, I don't have any money in that account. To "repay" that money, I have to dip into the same source that all my money comes from, my salary.

In the same way, those SS IOU's have to come from the same sources that every other agency dollar comes from; raising taxes, or deficit spending by the Treasury.

I do admire though the way that you satisfy your ideological need that nothing is wrong and everything is fine with Social Security. You've been quite a revealing case study!

 

No, they are not. In the first case, if Treasury and SSTF were a single entity, there would simply be no need for the evidencing of any debt between them. In the real world, Treasury is in the business of selling debt. SSTF is one of its many customers. End of story. In the second case, the wording you highlighted is from a hypothetical involving Lil Mike that was designed to illustrate the (extraordinarily simple) accounting that is involved.

All payroll taxes go -- along with other tax payments -- to the IRS. IRS credits the payroll tax portion of what it receives to accounts belonging to the Social Secuirty Administration. From those, SSA pays currently due OASDI benefits. After assuring that there are adequate remaining working cash balances, SSA forwards the remainder to the SS Trust Fund. The SSTF trustees are required to invest any surplus so as to earn a competitive, market-based return while using conservation of principal as the primary investment criterion. At present, US Treasury securities are the only qualified vehicle, though there have been others in the past. The Clinton administartion looked into diversifying SSTF's investments but quickly backed away from such plans due chiefly to the inability of other markets to efficiently absorb the trillions of dollars that SSTF would ultimately need first to deposit, and then to withdraw, on easily derived schedules.

Where does investment in a passbook savings account or in a bank CD fit into your definition of investment? Your rather vulgarly stated view seems oddly restricted to one very small slice of the investment world. Where would you counsel a client seeking a market-based return while maximizing conservation of principal to put his or her money?

US Treasury securities are the standard for zero credit-risk. With as absolute a certainty as is available anywhere, investment in US Treasury securities will return the stated rate of interest on the stated dates of payment. The average interest rate on SSTF holdings of Treasury securities is currently just over 4.25%.

You could have just admitted to being a complete hack to start out with. Meanwhile, a total of more than $52 trillion (yes, trillion) worth of debt securities has been redeemed so far in FY2011. Where do you suppose the central government got the funds to do that? Any clue at all?

 

Big deal. Anyone should know that much. It's a given.

That's correct...it is complete BS. Factcheck's report is a garbled mess of misunderstanding.

A little history may help to clarify. Prior to the adjustments of 1983, SS was essentially a pay-as-you-go insurance operation and there were no significant balances in the SS Trust Fund. As the demographics of OASDI beneficiaries tend to change only quite slowly, minor tweaks in payroll tax rates or other variables were sufficient to keep the system in both current and future balance on that basis. The baby boomers changed all that. When birth rates entered a long-term decline in the 1970's, it created a situation in which a smaller than usual number of people would have to pay for a much larger than usual number of beneficiaries beginning sometime in the 21st century. In order to avoid that burden, payroll tax rates were raised dramatically in order to generate a surplus that could be built up during the working years of the baby boomers, then drawn down again to help then-current taxpayers afford to pay all those pensions during their retirement years. As designed, that fund would have had a primary surplus (receipts exceeding outlays) through about 2020, a total surplus (receipts plus interest exceeding outlays) through about 2030, and a total life expectancy reaching at least to 2050, when the few remaining boomers would be at least 86 years old.

The Great Bush Recession has adversely affected just about everything, and Social Security is not an exception. That calamity produced a sharp drop in payrolls, and hence in receipts of payroll taxes. It also forced some who were eligible for a pension to take one, even though they would have prefered not to. Being laid off and unable to find another job at age 62 can do that to you. In any case, over brief and perhaps recurring periods, such events may cause receipts to fall below outlays, meaning that SSTF will take one of several possible actions. It may not roll over 100% of the securities it holds that are maturing that month. It may not take 100% of the interest owed it in that month as new securities. It may simply pay benefits as scheduled and return to Treasury an amount of securities equal to the excess of those benefits over receipts. Plus or minus timing factors, however, the balance held in the SSTF will continue to grow until such time as benefits exceed the total of receipts plus interest.

Obviously, there is a connection between SS and the public debt in that every dollar's worth of SS surpluses ends up generating an increase the the public debt as it is invested. People are accustomed to a belief that only deficits can generate an increase in debt. They are wrong.

I can speak TO politicians, but not in most cases FOR them.

Per the above, there IS a connection between SS and the debt, and it is quite clear that cutting future SS benefits without reducing payroll taxes would improve unified budget projections. Lower benefit payments would also extend the time frame over which SS could pay 100% of scheduled benefits, though in that case, it would be accomplished simply by taking benefits away from the baby boomers and giving them to the generations that follow instead, and nothing at all that drastic is actually required in order to gain such an extension.

Note as many people do not that the debate over switching to a chained-CPI does not affect initial benefit levels. The CPI is not used in calculating those. A wage-index rather than a price-index is used for that purpose. Past, present, or any future proposals to change that would be very harmful to retirees. C-CPI has meanwhile been calculated and published by BLS for 11 years. Through 2010, C-CPI had grown by 23.2% while CPI-U had grown by 26.6%. That's a difference of about one-fourth of one percent per annum. If adopted, the change would affect any annual COLA increase in benefits only. If adopted, it would no doubt be because of expectations that it would reduce future benefit payments rather than because those voting for it actually understood the measure they were voting for.

While some complain that the CPI-U is not adequately weighted for the higher share of medical costs that seniors incur, others complain that it unfairly rewards seniors by not reflecting the reduced housing costs that most pay in comparison to other demographics. A more appropriate solution would be to develop a separate CPI that is age-specific to those perhaps 60 and older for use in determining COLA's for the likes of SS and military retirees.

 

Childish. Treasury sells debt. I hold some, China holds some, and SSTF holds some. All of the debt is the same. What happens if a county pension fund invests in county school bonds? Is that some sort of phony transaction? Are my Treasury securities less valid because from a national perspective, they are a wash while those held by China are not? Meanwhile and as noted above, Treasury has somehow managed to redeem in excess of $52 trillion worth of debt securities in FY2011. Where did they get the funds to pull that off? Maybe you should stop parroting the soporific soundtrack you heard while riding around in circles on some right-wing merry-go-round.

You clearly spend very little time in the actual study of much at all, else you would have a much better grasp of the things you weakly attempt to discuss. If the SS Trustees in their famously pessimistic assumptions have slightly underestimated average GDP growth over the next 75 years, or have slightly underestimated the rate of net immigration over that time period, or have slightly overestimated in assuming that increases in life expectancy will continue at the same rate that they did in the 20th century, then the SS Trust Fund will in fact NEVER be exhausted, and SS can continue to pay 100% of all scheduled benefits even if we do absolutely nothing to shore it up. That's how bad off Social Security is. You don't know any of this because all you have to go by is some bunch of manufactured disinformation-media propaganda sheets.

 

17thAndK wrote: "Meanwhile and as noted above, Treasury has somehow managed to redeem in excess of $52 trillion worth of debt securities in FY2011. Where did they get the funds to pull that off?"

I have no idea. For the most part we're just going 'round n round over what's an asset. I assume the motive for the above comment is to establish the creditworthiness of the central government, which again, is not the argument. That said, I searched around a bit and can't find anything. My understanding is that the vast majority of revenue comes from taxes and it certainly isn't anything near that figure. My guess would be that Treasury issued more securities to honor those that made up the $52 trillion. Show me the information and tell me what you believe it means. Thanks

Edit: I meant to ask, is this related to derivatives?

 

I'm sure that's the case. But the same shortcoming needs to be recognized in wondering how the Treasury will repay its debts to SSTF.

For the most part, people have put forward fundamental misconceptions that I have tried to correct. Some don't listen.

HINT: The data are reported monthly in one of the basic tables posted to the TreasuryDirect website.

I have already showed you the data. The piece of the puzzle that you are missing is that by a margin of about 8-to-1, transactions in short- to very short-term (e.g. overnight) government account series securities dwarf the volumes of those that occur in the longer-term marketable/commercial issues that people tend to think of. Your guess would meanwhile be correct -- nearly all actual redemptions of the securities under discussion here are funded through the issuance of new securities, a process that, with minor exceptions here and there, has been going on since 1836. What it all means is that the Treasury does not have any difficulty at all in funding its scheduled debt repayments, even when maturities are all but constant and are at volumes far in excess of the amount of the cumulative debt outstanding.

No. Derivatives seem much larger in volume than what they actually are because they are commonly quoted at their notional value, a value that will never be transacted. Public debt data are comprised only of actual transactional values.

 

17thAndK wrote: "... the same shortcoming needs to be recognized in wondering how the Treasury will repay its debts to SSTF. ... The data are reported monthly in one of the basic tables posted to the TreasuryDirect website. ... by a margin of about 8-to-1, transactions in short- to very short-term (e.g. overnight) government account series securities dwarf the volumes of those that occur in the longer-term marketable/commercial issues... nearly all actual redemptions of the securities under discussion here are funded through the issuance of new securities, a process that, with minor exceptions here and there, has been going on since 1836. What it all means is that the Treasury does not have any difficulty at all in funding its scheduled debt repayments, even when maturities are all but constant and are at volumes far in excess of the amount of the cumulative debt outstanding."

I dare say the wheels are off your wagon my friend. I'd really like to see what information you have so I can break it down for myself. This shouldn't be a problem, unless of course, there isn't any... Yet again, the issue isn't about how or whether the trust fund could be repaid. In fact, I've repeatedly stated that Medicare & SS haven't had anything to do with the $14.5 trillion national debt. What I have said is that the surplus from these trust funds have been raided, the funds dumped into the general fund and wasted! I went to Treasury and I couldn't find the data. What I did find is that the general account of the U.S. Treasury is held and maintained by the Federal Reserve in New York. For some of us, it's inconceivable that in the narrow confines of redeeming securities, the process would literally dwarf the GDP of the entire country. $52 trillion in less than nine months time, how could this possibly be? Transactions that involve capital on a global scale, I suppose. Apart from the machinations of the Federal Reserve and financial power barons they collude with, where else could $52 trillion even come from?

If I understand your latest point, there's no need to be concerned about the funding of the SSTF because Treasury issues securities in amounts that dwarf that which is required to meet the obligations of the fund. Thus, Treasury meets its obligation to the SSTF by issuing new securities. The following is from the SSTF website:

The initial part of the quote supports your argument, but it's the latter part that creates the problem. As I see it, you can't have it both ways. You can't say there isn't a debt issue and then ignore the conflicting premise propagated all throughout government, the rating agencies, the mainstream media and even according to the SSTF. Do I have that wrong, because you're implying that it's been going on forever. Did you indicate a ceiling of sorts, an exempting circumstance? Um, no. You're also assuming a very static nature to the never-ending war of the interests of the many against that of the few. You suggest that the motive of issuing debt is done with as constructive a purpose today as it was in 1836. That the government isn't subject to any greater influence now than it was then. I wish that were true.