BoatBanter.com - Old Folk(Cont)

On Mon, 21 Mar 2005 18:00:12 -0500, DSK said:

Dave wrote:

Doug, Nobody's holding any "excess funds."

Really?

... The money is collected from
workers and immediately goes out. Some pays benefits, and the rest is
"borrowed" by the outfit that's promising to pay future benefits in exchange
for its IOU, and is immediately spent.

And you're talking about accounting in another thread? Hoo boy.

Dave wrote:
While I'm not an accountant, I have not infrequently pointed out errors the
accountants make and have to correct in company filings for clients.

The term "excess funds" may apply to a different specific case, but here
it is not difficult to know what is meant.

You get things all backwards, and want to denigrate both the Treasury
(specifically) and the U.S. gov't (generally).

Nothing is "borrowed" from Social Security. Money collected from SS
taxes is either spent or invested in US treasury bonds... the most
secure investment possible. Maybe after I tell you this 15 times it will
begin to sink in.

A little basic finance here, Doug. In the corporate world, a "debenture" is
an unsecured promise to pay, and a "bond" is a promise to pay that's secured
by assets, often all the company's assets.

Never heard that before. And certainly not a company that issues stock,
either.

... In the US guvmint world (outside
revenue bonds and a few others, of course) a "bond" is an unsecured promise
to pay--the equivalent of a corporate debenture. No assets standing behind
the promise.

I hope you're not trying to claim that U.S. has no assets? In any event,
so far it hasn't issued stock, either ;)

... So when SS "buys" US treasuries, it's lending money

Yep, I said that. The excess from SS tax collections over benefits payouts.

.... (with its
SS trustee hat on) in exchange for an unsecured promise to pay back the
amount borrowed with interest, and the guvmint (without its SS trustee hat
on) is borrowing that money (and spending it).

Yep again. I guess it finally sunk in, and it didn't even take 15 reps!

That makes Social Security a lender, not a borrower.

Correct. See above.

One thing I meant is that this may be another item that President Bush
will shed some of his teflon coating.

The blame here goes, not to Bush, but to Sen. Javits and his cohorts who
decided the guvmint should underwrite the moral risk in unions and
managements' negotiating defined benefit pensions beyond the company's
ability to pay.

Agreed, with the added caveat that this is one of the things President
Bush promised during the campaign to straighten out.

... Of course they also take more market risk
in these accounts. Those kinds of plans are not covered by the guvmint
insurance.

You mean like individual 401Ks ;)

That's one type, though there are many others including pre-401K savings
plans, and straight money purchase pension plans. (I practiced in the
pension are for about 8 years, so have some familiarity with them.)

Yep.

With regard to Bush's SS plan, the simple & honest way to accomplish
what they claim is to increase the allowed deduction for retirement
contributions, be it IRA or 401K etc etc, and begin a schedule of
scaling back SS benefits to match projected income. If they start in 10
years it should be very easy & gradual. Might even be able to give the
average working stiff a tax break on his SS tax bite.

That fact that they want to bamboozle people and make false claims,
while making a number of misleading statements about Social Security
itself, makes me think there is something else under the table that they
really want to accomplish.

BTW as far as AARP goes, ever hear the saying "fool me once, shame on
you, fool me twice, shame on me"? President Bush fooled them badly on
the Medicare bill. And so of course that makes AARP the target of a Karl
Rove smear campaign... which you seem happy to parrot...

Whoever lent the Japanese government money, whether Japanese of not, would
suffer. In fact, just substitute the U.S. for Japan in the above and you see
just what I mean.

Yep. Except that Japan's economy is not as big as ours, and if Japan
defaulted it would not cause as much of a world wide crisis (more below).

Nor would it cause as much of a crisis for retirement arrangements holding
Japanese bonds, assuming reasonable geographic diversification.

How much is a crisis? Loss of ten percent? How many different countries
are you going to lend your retirement money to, and at what point does
the balancing act become a job in itself? Why not start your own mutual
fund?

Taxpayers are parting with money today in the form of SS taxes, and
expecting to get something back in the future. Labeling it as an investment
or something else doesn't advance the analysis.

It also can be misrepresented that the individual paying SS taxes is
making an investment... which is absolutely not the case. SS is more
like an insurance plan... and guess what, insurance companies invest in
all kinds of things, including US bonds...

If an insurance company's investments were limited to bonds of that
insurance company, how much faith would you have in its ability to pay on
policies and annuities in the event of a downturn in its fortunes?

That depends greatly on how it laddered it's bonds.

Fortunately, state insurance commissions don't let insurance companies do
anything so foolish.

So foolish as what, invest in bonds??? Maybe where you're from, that's
considered foolish. Here in NC insurance companies are darn well allowed
to invest in US treasury bonds (the most secure investment available...
is that sinking in yet?). Maybe you mean that insurance comapnies are
not allowed to invest *all* their funds in US bonds.

You keep harping on this as though it wasn't your team that's running
the deficit up like a rocket. If the US gov't defaults, which I (and
99.9% of the sane world) consider extremely unlikely, then it will be
largely because of Bush & Cheney's deficits.

Utterly extraneous to the discussion.

Really? You are the one harping about how the US is going to default,
omigawd the sky is falling, those bonds are just worthless IOUs! And
since the biggest risk of that default is due to actions taken by the
guy you've decided to trumpet, it's just completely beneath notice ain't it?

Funny, President Bush saying "you cain't trust the guv'mint" when he
*is* the guv'mint.

And (maybe after 15 times this will sink in too) if the US defaults,
then we will have a world crisis that will rival the Great Depression &
WW2 rolled into one.

Therefore we should hide our heads in the sand? I don't think so.

Instead you'd rather cry doom... a very very unlikely doom... so as to
promote a plan which does not fix the problem that is being cried about?

I don't think my attitude is "hiding head in sand" at all. If anything,
you began by claiming I was all wrong, now you've pretty much repeated
what I was saying from the start.

If you'd swapped for Euros about 6 months ago, you'd be doing great.
However, if you hold US bonds and we decide to print our way out of
debt, you get cash. If your holding somebody elses bonds and they decide
to, you probably get nothing since you have to return the bonds to the
central bank of the country that issued them.

Ah, but if we're printing money like crazy, and I hold the foreign bonds, I
get more cash when I collect and convert my Euros, yen etc.

But if the foreign gov't starts printing money like crazy, then you not
only have the risk of getting nothing (gotta cash youor bonds in person)
or getting a double whammy when you change your funny money at a US bank.

In any event, if you're now seriously suggesting that everybody must
become a full time arbitrager just to retire, then you need to start
over from scratch.

Bond history is interesting... at one point, a person I know acquired
some old Russian (by "old" I mean Tsarist) bonds... which he thought
were worthless. They were issued in face values of British pounds. But
the amount was large enough to be worth checking out, and glory be! He
got quite a nice payday because the Russian gov't at that time (just
after the Yeltsin takeover) was *very* interested in preserving it's
credit rating. Of course, not many years later, Russia played a con game
of forcing foreign holders of businesses in Russia to buy a new bond
issue, and then defaulted on them.

And do you think it would have been prudent of him to invest every penny had
in those Tsarist bonds when he first had the opportunity? That's the
equivalent of what SS is doing.

Not really. The US Treasury bond is *the* *most* *secure* and *safe*
investment possible. That means your foreign bonds carry a *higher* risk
of default. Besides, they have to do something with the money, and Uncle
Sam has to borrow from somebody.

This is a special case IMHO.

"Special case" is the term one uses when he can't accept the proposition
that the rules governing all other cases suggest a different answer.

Except that I'm not the one trying to misrepresent Social Security, US
Treasury bonds, and the likelihood of US default.

I don't think I've made any representations about the likelihood of a US
default.

Other than suggesting foreign bonds as a safer alternative? Other than
advocating a vague plan that does not get the majority out of US
treasuries anyway, but the biggest reason for it is that US Treasuries
are "empty promises" and "worthless IOUs"?

... As to my description of the
relationship between SS and treasury bonds, I hope the above discussion my
provide a bit of enlightenment from someone who's been doing corporate
finance type stuff for 30 years.

Yeah, you repeated what I said earlier... then went back to crying doom
again.

DSK