Believing Impossible Things

March 30, 2015

The other night, I talked with my new friend Jack about the Economy, Taxes, and eventually Social Security. I explained that the unfunded liability for Social Security was far beyond what was possible to meet, and that somewhere down the road, Social Security would default.

He had worked for Merrill Lynch, and seemed like a bright guy. Jack said, what is normal in business is that, when a retirement program gets out of whack with what it can pay, the rules are modified for people who haven’t reached retirement age yet.

When I said, “Then you agree Social Security would need to default on its promises?”, he said, “No. You just realign for the people not already getting benefits.”

Somehow he couldn’t see that that was a default.

If you or I go into a store and buy something for credit, then you have promised to pay at a certain date. If you hire somebody to fix your plumbing, then you have promised to pay at the end of the job. If you pay into Social Security, and these are the rules explaining what the benefits are, then you expect to get what you were promised when you retire.

If you don’t pay the agreed amount for what you’ve bought, or for the work you had done, that’s a default on your promise. If the rules for Social Security (or other Entitlement program) are changed to pay out less in benefits, that’s a default. But, Jack didn’t see it that way.

We talked also about how the US General Fund had “borrowed” the money in the Social Security Trust Fund, leaving IOUs (non-negotiable Treasuries) in place of the accumulated Trust assets.

When I said that the Trust Fund was empty, again Jack didn’t see it that way. He said that there were US Treasuries there. When the money was needed, the Trustees would simply use the funds from the maturing Treasuries.

“Where will the money come from to pay off those notes?” I asked. He said that the government would borrow in the General Fund to pay off the Trust Fund.

I explained that, since the government would have to borrow money to pay off the Trust’s Treasuries, the Trust effectively was empty today. Still he wasn’t convinced. He believed that somehow the government has different pockets – separate pockets – to fund all activities.

Suppose that, when you get paid, you put the rent money in your left pocket, and the money for everything else in your right pocket. As the month wears on, your right pocket empties, but you still want to buy things. So, you take the rent money out of your left pocket, and leave an IOU.

At the end of the month, when it’s time to pay the rent, you say, “Have no fear. The right pocket will borrow money to put into the left, so that it can pay the rent.” Jack must believe that this is possible, and that it makes sense.

Jack thinks that the US always will be able to borrow more and more money. “We’re talking about the Full Faith and Credit of the United States,” he said.

Full Faith and Credit only means something when the prospective lender has enough Faith in your ability and willingness to repay the Credit he is extending. But the truth is that the US has not repaid the principle on previous Treasuries for several generations. Our government just rolls over – it borrows more money – to make it look like the debt is being repaid. For the last decade, the US has not even paid the interest on its debt – the Budget Deficit is more than the interest payments.

As more and more Americans retire, drawing Social Security and Medicare benefits, and as ObamaCare and other program expenses balloon, the Budget Deficits are scheduled to get much worse. The whole structure of the US Government’s finances is not sustainable, which means that at some point the US will default on its promises.

There is no amount of money – no level of taxation – which can prevent this event. We can’t stop it. It’s going to happen, although it likely will be years before the collapse.

There will be much pain and gnashing of teeth. Tens of Millions of Americans have been trained to be dependent on government benefits, such as Social Security, Medicare, Medicaid, Welfare, Food Stamps, Farm Subsidies. These are not bad people, but when things turn bad, many (most?) will become destitute.

The intensity of the pain is the only thing we can affect – maybe. If we begin phasing out these programs, then maybe we can delay the day when the turmoil begins. The phaseout itself will cause pain, but at a much reduced level and spread over more people (there are no good choices). If we delay the collapse, suffering the bearable pain of withdrawal along the way, we may escape much of the intense pain.

I already have talked about how to phase out some of the programs. For Social Security and Medicare, we could stepwise raise the retirement age, so that younger workers would have time to prepare for their own “Golden Years.”

For Welfare, Food Stamps, etc, we would stop adding new people to the rolls, and reduce benefits over perhaps a 2 year period, with no taxes or reduced payments required as they obtain jobs during the phase out period. Eventually, these people would need to take responsibility for themselves.

It’s interesting that even intelligent people, like my friend Jack, can believe impossible things. He thinks that a default by another name is not a default, that the government has different, distinct pockets, and that the Full Faith and Credit of the US always will be worth something. I too may be believing the impossible in that I want to believe that there still is time left to prevent mass destitution of millions of Americans. 

Robert (Bob)  Shapiro is self-taught in Austrian Economics and has consulted briefly for the governments of Mexico, Greece, Portugal and Spain. He has traded Gold & Silver and their stocks since 1970. Bob Shapiro’s blog is

During 1500s the Spaniards had taken 16,000,000 kilograms of silver from Peru.