Reprinted from: http://www.financialsense.com/fsu/editorials/gnazzo/2005/truth/part2.html
INTRODUCTORY SUMMARY
Let’s start out with a quick synopsis of our main points so far to date:
- Social Security is a social insurance system established in 1935.
- Its purpose is to provide benefits to workers and their families upon retirement, disability, or death.
- It is what is called an earned benefit insurance program.
- Only those who work and pay taxes are eligible for social security benefits.
- The promise of Social Security benefits is backed by the good faith of the U.S. government.
- The same way that the government backs the value of the dollar.
- There may be a fiscal crisis in the offing, but if so, it is a general problem of large-scale deficits and indebtedness [according to Krugman]
- The problem is that so many bonds are being sold. [according to Krugman and Jonathan]
- Meaningful comparison of current dollar values over long periods of time can be difficult because of the effect of inflation.
- All securities held by the trust funds are special issue securities. [a critical point]
- Under the other two sets [the "Intermediate" and "High Cost"], the trust funds become depleted within the next 40 years
- These options are being considered now, over 35 years in advance of the year the funds are likely to be exhausted
- The assets of the larger trust fund (OASI) were nearly depleted in 1982.
- Markets pay attention to a surge in good old-fashioned debt. [per Krugman]
- Privatization of social security is a bad idea.
- Political posturing by the administration regarding privatization has little meaning in regards to the soundness of the social security system.
Now let’s take a more detailed and closer look at these points of issue.
WHAT IS SOCIAL SECURITY?
Social Security is a social insurance system. It was established in 1935 with the intent and purpose of providing benefits to workers and their family members upon retirement, disability, or death. It is what is called an earned benefit insurance program.
What this means is that only those who work and pay taxes are eligible for social security benefits. By their labor—and by paying taxes on their earned income derived from their labor—workers are then eligible to receive benefits, i.e. payments in money upon retirement, disability, or death.
Remember the words, social insurance, as these will be revisited.
WHAT BACKS SOCIAL SECURITY?
As was taken from the Economic Policy Institute website, “The promise of Social Security benefits is instead backed by the good faith of the U.S. government, pretty much in the same way that the government backs the value of the dollar.”
The first issue to notice is the word “promise”, which means that social security benefits are a promise or obligation that as of yet has not been fulfilled or met. A promise that has not as of yet been fulfilled is a future promise and or a future good [for a detailed explanation of future goods versus present goods see Silver IS Money, Behold a White Horse - Part V and GOLD: Sovereign of Sovereigns.
The next point of importance in the above quote from the Economic Policy Institute is that “...Social Security benefits are backed by the good faith of the U.S. government, pretty much in the same way that the government backs the value of the dollar.” This entails two very crucial issues.
Social security benefits are backed by the good faith of the U.S. government. What this means is just what it says, that faith is what backs social security. Faith in the U.S. government. Faith in the U.S. government to do what? Faith that they will pay or make good on their promise to pay social security benefits.
Well, that kind of sounds O.K. – doesn’t it? If you can’t count of the U.S. government to make good on its obligations or promises, who can you count on? It's not like the U.S. government has any past history of doing or not doing anything that would cause one to doubt the viability of the government to keep its promises and obligations – is there? Kind of like a past credit history check of the U.S. government.
CREDIT REPORT
Let’s see. The earliest promise regarding money that we can find is in the Constitution, which states that nothing but gold and silver coin is to be accepted as legal tender. Has the government kept that promise, which is an actual constitutional mandate? No, they have not. Strike one on the credit report.
The second important promise regarding money can be found in the Original Coinage Act of 1792, which states that the definition of the United States Dollar, or unit of account, is a specific weight and fineness of silver. To be exact, section 9 of the The Coinage Act of 1792 states that:
“dollars or Units – each to be of the value of a Spanish milled dollar as the same is now current, and to contain three hundred and seventy-one grains and four sixteenths parts of a grain of pure silver, or four hundred and sixteen grains of standard silver.”
Now neither the Constitution nor the Original Coinage Act of 1792 mentions anything about paper money, only silver and gold coin. Our present money is paper Federal Reserve Notes. So here are more promises that have not been kept. Strike two.
Even after the government failed to follow the mandates of the Constitution and the Original Coinage Act of 1792, they did at least back the currency by ever-diminishing fractional reserve amounts of silver and gold. The paper currency was thus said to be redeemable – for silver or gold coin. And at times it was.
However, suddenly in 1932-1933, the government under the auspices of President Roosevelt, found it necessary to declare a national emergency, under the War Powers Act and the Trading With the Enemy Act, to confiscate all the people’s gold. Subsequently, the government also declared it was illegal to own gold. Interesting to say the least. This will eventually be gone into in great detail.
This took place only twenty short years after the creation of the Federal Reserve, whose raison d’être was to provide an elastic money supply and to thus stop any runs on the banks and the ensuing depressions and crises that followed such events. Yet a national emergency suddenly occurred regardless of the Fed.
And what was the national emergency? People had lost faith in the viability of the paper dollar. They were actually attempting to use their constitutional right to redeem their own hard earned money for specie.
Not only were they refused their constitutional right to redeem their paper money for gold and silver coin as promised and obligated – their gold coin was confiscated, called in. It now became a federal crime to own what had days before been the hard money as defined in the Constitution. Strike three – batter out.
And that’s not even the end of the bad credit report. In 1971 President Nixon closed the gold window. What this meant is that the United States government refused to honor its promises and obligations to foreign nations to settle its foreign trade accounts in gold. Another strike.
Some maintain that the confiscation of We The People’s gold in 1932-33 was tantamount to declaring bankruptcy. Others say the same about the closing of the gold window and refusing to honor our obligations and promises to pay as agreed upon. The reader is left to decide for themselves. Vote accordingly, so it doesn’t happen again.
It doesn’t appear that the United States government has a very good track record or credit history on keeping its promises to pay and in honoring its stated obligations.
If the government was a private company with this credit history and they came to you asking for a loan, would you lend your money to them—if they didn’t have the power, regardless of whether it is constitutional or not, to print their own money?
Think about it. Think about it real hard. Vote accordingly. Your children’s and your grandchildren’s future depend on it. Do not accept the unacceptable. Do not condemn them to a life of debt servitude.
So it does appear that the full faith of the government backing social security could be a wee bit questionable at least based on its past history of honoring its promises and obligations.
GOVERNMENTAL BACKING OF THE DOLLAR
So what backs the dollar? Promises. What kind of promises? Promises to pay. Pay how? By redeeming existing Federal Reserve Notes in for lawful money, per the U.S. Code at:
Federal Reserve Act
Section 16—Note Issues
1. Issuance of Federal Reserve Notes; Nature of Obligation; Where Redeemable
Federal reserve notes, to be issued at the discretion of the Board of Governors of the Federal Reserve System for the purpose of making advances to Federal reserve banks through the Federal reserve agents as hereinafter set forth and for no other purpose, are hereby authorized.
The said notes shall be obligations of the United States and shall be receivable by all national and member banks and Federal reserve banks and for all taxes, customs, and other public dues.
They shall be redeemed in lawful money on demand at the Treasury Department of the United States, in the city of Washington, District of Columbia, or at any Federal Reserve Bank.
[12 USC 411. As amended by act of Jan. 30, 1934 (48 Stat. 337). For redemption of Federal reserve notes whose bank of issue cannot be identified, see act of June 13, 1933.]
Cool. See, there’s no problem. We can redeem our Federal Reserve Notes for lawful money whenever we want. What is lawful money anyway?
If our present money—Federal Reserve Notes—can be redeemed for lawful money, are they themselves lawful money? If they were lawful money, why would there be a reason or need to redeem or exchange them for lawful money?
Man, I’m getting ready to hide under the covers with Krugman. Maybe he does have the correct procedure. Hope Alan doesn’t show up. Three’s a crowd. Would make for a lively conversation however.
STORYBOOK TIME
Now, once upon a time, long, long ago, our dollar was not only backed by silver and gold – our dollar was silver and gold coin. So what happened? The international banksters and central banking with fractional reserve lending of paper fiat is what happened.
The temple has been ransacked, the goods have been plundered. Wealth has been confiscated and transferred. Don’t bend over and touch your toes. You never know when Uncle Sammy might be lurking about.
For a detailed review of the subject see: the Honest Money series, the Whence & Pence series, the Silver Is Money series, and for a shorter discussion see, Gold: Sovereign of Sovereigns.
So what is backing the dollar? Promises and obligations. Has the government ever reneged on any such monetary promises? Yes, several times.
What backs social security? That which backs the dollar. I’m not concerned – are you?
WHAT TO DO?
You should be concerned. Write your Congressman about it. Ask him what the buzz is. If he doesn’t know, maybe he shouldn’t be your Congressman or supposed representative. You decide – and then use the power of your vote. Empower yourself. Do not accept the unacceptable.
See that all your rights are reserved, according to the Constitution, according to the Supreme Law of the Land. If you want to retain your freedom and liberty, you must stand up and be heard – be counted.
You do matter. You are important. Act like it. The easiest way to allow evil to prevail is for all good men to do nothing. Do something. Stop the madness. Now. Not tomorrow – today. Your children and your grandchildren will reap the benefits you sow today in the present. Preserve their future – now.
See that the United States remains the greatest country on earth. Help it to progress and become even better.
If our money is not the honest money of hard currency stated in the Constitution, not only is our monetary system unconstitutional, it is unsound as well. And if the monetary system is unsound, anything based or built upon it is unsound as well.
Nothing can truly be fixed until the monetary system is fixed.
MEANINGFUL COMPARISONS
From the government’s website on social security [Trust Fund Data] we read, “meaningful comparison of current dollar values over long periods of time can be difficult because of the effect of inflation.”
So apparently inflation can have an effect on social security. That makes sense as inflation has a huge effect on Federal Reserve Notes—our current currency in use—and since social security is backed with the same faith that the U.S. Dollar Bills (aka FRN’s) are. Both would be expected to be affected by the ravages of inflation. And they are.
We will not go into a long missive on inflation as that has been covered in the past series of Honest Money, Silver Is Money, and Gold: Sovereign of Sovereigns . A brief review is in order, however. We will quote from Ludwig Von Mises, as I couldn’t say it as eloquently, or as clearly; he was a true master of his craft:
“In theoretical investigation there is only one meaning that can rationally be attached to the expression inflation: an increase in the quantity of money (in the broader sense of the term, so as to include fiduciary media as well), that is not offset by a corresponding increase in the need for money (again in the broader sense of the term), so that a fall in the objective exchange value of money must occur.
Again, deflation (or restriction, or contraction) signifies a diminution of the quantity of money (in the broader sense), which is not offset by a corresponding diminution of the demand for money (in the broader sense), so that an increase in the objective exchange value of money must occur.
If we so define these concepts, it follows that either inflation or deflation is constantly going on, for a situation in which the objective exchange value of money did not alter could hardly ever exist for very long.” [Ludwig von Mises – The Theory of Money and Credit]
Notice the sentence that reads, “so that a fall in the objective exchange value of money must occur.” What Mises is talking about when he uses the terms “objective exchange value of money” is the quality aspect of money – its purchasing power.
Consequently, what Mises is saying is that if there is an increase in the quantity of money, greater than the demand for money, you have a loss of the purchasing power of money occurring, which also goes by the name of debasement of the currency.
This means that if our money is loosing purchasing power due to the ravages of inflation, social security can thereby be affected – to the point that “meaningful comparison of current dollar values over long periods of time can be difficult because of the effect of inflation.”
So, any long term prognostications on social security are pretty much meaningless because of inflation, the debasement and loss of purchasing power of our money. Yeah, but how bad can it be, this loss of purchasing power? Well, let’s take a look. A picture is worth a 1000 words, so let’s look at a picture:
PURCHASING POWER OF THE U.S. DOLLAR
[Chart courtesy from Sharefin at www.sharelynx.net]
It appears that the U.S. Dollar has lost 95% of its purchasing power since 1913, the same year the Fed took control of the monetary system. Imagine if it was out of control. Now you know why college tuition is so high. Now you know why the price of a house is so ridiculously high. Now you know why two parents have to work to provide what one parent used to be able to produce. Now you know.
It’s called inflation, the debasement of the currency. Loss of purchasing power, which makes it necessary to acquire more units (quantity) of the money to make up for the loss of the purchasing power (quality) of the money. Hence, stuff costs more.
It’s not so much that prices go up, which many perceive as price inflation – it’s that the value or purchasing power of your money is going down, therefore you need more of it (quantity of money) to purchase the same amount of goods. This entails comparing the supply of money and credit versus the demand for it.
This is the beast known as inflation, aka, debasement of the currency, aka loss of wealth. Inflation is a stealth tax, a silent but deadly scourge, an abomination. The creature that roams the face of the earth, in search of prey.
Perhaps the reason for the “special-issue securities” for the social security trust fund is an attempt to escape from the clutches of the creature lurking about in search of a meal – from the clutches of inflation. Or there may be other reasons as well. The discussion of which will come in short order.
FISCAL CRISIS IN THE OFFING
We will attempt to kill two birds with one stone by tackling the fiscal crisis issue and the thesis that the markets pay attention to a surge in good old-fashioned debt—both at the same time—as they go hand in hand, as do most twisted sisters of fate.
You can almost see them skipping along, hand in hand, on their way to visit the old folks in the poor house. It’s the least they could do.
So which sister should we take on first? Oh, I see the sister, Fiscal Crisis, is raising her hand and yelling, “Pick me, pick me!” You are chosen, my dear. You may go first.
The twisted sister stands and begins her sad story:
“I can’t really help the fact that I’m what I am – a fiscal mess. I’m sorry if I’ve caused anyone a problem. But I was born and raised to be this way. My parents never really watched over me and they never taught me any discipline. I was allowed to run about unchecked.
They were always off gallivanting around the world and would leave me home with my sister named Debt and a pile of paper money to spend on whatever we wanted. We had access to a checkbook and credit cards whenever we needed them.
Sometimes we would bounce checks, but it didn’t really matter to us. We already had the stuff they exchanged for. Mom and Dad can worry about straightening that mess out when they get home, if they ever come home. Same with the credit cards. They don’t care about me, so why should I care about anything?”
And what are the names of your parents?
“My mother goes by the name of Paper Fiat and my father is known as Fractional Reserves.”
Thank you. Can we now hear from your sister, Debt?
Slowly and reluctantly, the other sister rose from her chair. She stood up with the movement of one weighed down, as if a great weight were upon her shoulders, a weight far greater than she should have to bare.
“My name is Debt,” she meekly said. “Fiscal Crisis is my sister and we share the same parents: Paper Fiat is my mother and Fractional Reserves is my father. We’re a pretty large family. I have a number of cousins: Inflation, Debasement, Loss of Purchasing Power, Credit – why we’re even said to be related to Money in an odd sort of way—a distant cousin, three times removed.”
“I am like my sister. We are both twisted, but we can not help it. It is the way our parents raised us and taught us to be. Mom and Dad always preached – spend, spend, spend – buy now and worry how you’re going to pay for it later.”
“You only live once, so live it up. I remember my Dad used to tell my Mom to ignore the bills, toss them in the trash. If they want their money, they’ll call or send another bill.”
Do you know who your Dad worked for?
“Some guy he called Fed or Fred. Something like that.”
“Don’t forget those guys that used to come see Dad, driving that big black limo”, piped in Fiscal. “Dad called them international bankers.”
“Oh yeah, I remember them”, said Debt. “That guy they called Uncle Sammy used to follow them around like a little puppy dog.”
Thank you, girls. That was very enlightening. Do you know how to get home from here alright?
“Oh sure said the girls. We have the maps that Mom and Dad made for us.”
And with that the girls pulled out a series of maps they had. Heads turned, mouths opened, jaws dropped, and the onlookers stared with eyes wide open. Some had never imagined what they saw even in their worst nightmares.
One poor women fainted at the sight of what she saw. Even grown men were seen getting weak in the knees with a queasy feeling in the pit of their stomachs. Heads became light and the room started to spin.
Was this possibly true?
What was shown on the maps?
Could the maps possibly be correct?
Why hadn’t anyone been told about it?
And what is the probability that it was true?
The Facts
The U.S. net international investment position at year-end 2003 was a negative –$2,430.7 billion.
Currently the figure is approximately
negative –3 TRILLION dollars.
As Jonathan did state,
"There may be a fiscal crisis in the offing, but, if so,
it is a general problem of large-scale deficits and indebtedness.”
Well, unfortunately, he did get that one right. I wish he had not, but he did. [U.S. Department of Economic Analysis]
Too Much Debt
As Mr. Krugman was keen to observe:
“What markets will pay attention to, just as they did in Argentina, is the surge in good old-fashioned debt.”
[Paul Krugman].
And Jonathan echoed the same opinion when he said:
“Put another way, the problem is that so many bonds are being sold, not that Social Security happens to be buying some of them.” [Jonathan – Social Security
Part 3 at Past Peak, Jan. 2005].”
Evidently, if there was a problem with social security, it would be very important.
As both Mr. Krugman and Jonathan go out of their way trying to prove that social security isn’t a problem. [U.S. Department of Economic Analysis]
The problem, according to them, is deficits, indebtedness, good old-fashioned debt, and that too many bonds are being sold.
Unfortunately, again I think they are correct – in their assessment of the many fiscal problems that face our great country, but not on their views concerning the soundness of social security.
Debt is debt – especially in paper fiat land. The more debt there is, the less wealth there is for the average person, which is where the saying comes from: “The poor get poorer and the rich get richer."
Such would not be true under an honest money system,
where credit came from the savings pool.
As has been explained in Honest Money, Silver Is Money, and Gold: Sovereign of Sovereigns, paper fiat is a wealth transference system that allows and enables one half of one percent of the world’s population to own 95% of everything.
This is done by issuing debt and allowing it to circulate as the currency. Not a good idea.
Why isn’t such a system a good idea? Because the amount of debt that exists can never be paid off, especially in a paper fiat system where money and debt are synonymous.
HOW MUCH DEBT ARE WE TALKING ABOUT?
The debt problem does not only exist in the United States, it’s the same the world over as there only exists paper fiat systems. The International Monetary Fund took care of that with their by-law that states that no member can have a currency backed by gold, which is what did the Swiss in.
So how much debt are we talking about here?
The government website for the national debt U.S. Department of the Treasury, Bureau of the Public Debt says that the total national debt is $7.7 trillion dollars.
The estimated population of the United States is 296,197,627. This means that each person’s share of the debt is $26,279.47.
Since 2004, the national debt has increased by an average of $1.68 billion per day.
Does that concern you? It scares the hell out of me and there’s much more to come. And that’s just federal government debt. Is that all the debt out there in paper fiat land?
State and Local Government Finances shows state and local government debt to be around 1.6 billion and that Public Elementary-Secondary Education Finance Data debt is about .4 trillion. This gives a combined $2 trillion dollar price tag in these two categories.
Private debt, which is composed of household debt of 10.3 trillion Household Debt: What the Data Show, business sector debt, which is at $7.8 trillion, and finance sector debt at $12 trillion, adds up to total private debt of 30 trillion dollars.
So when you add them all up, we sadly come up with $40 trillion dollars of outstanding debt.
And the worst part is that there is another $44 trillion in un-funded debt obligations or liabilities.
According to Professor Larry Kotlikoff, who has written a special report on the U.S. Economy named, The $44 Trillion Abyss – he states that this huge amount of un-funded liabilities borders on a cover-up of massive proportions. As we shall eventually see, it steps over any sane semblance of boundaries.
The good professor is not alone in sending out such dire warning signals as former Treasury Secretary Paul O'Neill has stated that:
“...because the Social Security trust fund does not consist of real economic assets, we are left to rely on the federal government's future decisions to either raise taxes, reduce spending, or increase borrowing from the public to finance fully Social Security's promised benefits."
Maybe that’s why O’Neil is the “former” Treasury Secretary. He may have been a bit too honest for them.
Walter Williams, Professor of Economics at George Mason University, did not mince his words in an article published by the Washington Times April 17, 2002 as he surgically went right to the tumor:
“Congressmen tell us that our Social Security taxes go into a trust fund to pay for future retirement pensions.”
“That is a boldface lie. The Social Security trust fund has no money in it."
“Why Johnny”, Doc replied, “You look like somebody just stepped all over your grave.” Soon after, Johnny passed over to the other side. Doc could be heard whispering to Wyatt, “poor soul, he always was a little too high strung. Apparently, it was more than he could bare.” Doc is a very wise man.
So you don’t believe it. I know. It really is hard to believe – it’s unbelievable. Here’s what our own President had to say about social security.
Now, he either knows what he is talking about, which means there definitely are serious problems with social security, or he doesn’t have a clue as to what he is talking about. Which then begs the question – then why is he leading us and to where – debtor’s prison?
President Discusses Strengthening Social Security in Colorado
Wings Over The Rockies Air and Space Museum
Denver, Colorado
“Now, you probably think—some of you may think there's what they call a Social Security trust: the government collects the money for you, we hold it for you, and when you retire, we pay it to you.
“But that's not how it works.”
You pay your payroll tax; we pay for the people who have retired, and if there's any money left over, we spend it on government."
“That's how it works.”
“And what's left is an empty IOU, a piece of paper.”
Because it's a pay-as-you-go system, when more retirees start retiring—who are living longer, getting paid more—more money starts going out than coming in.” To view the entire Presidential report click on [http://www.whitehouse.gov/news/releases/2005/03/20050321-13.html]
I wonder if Krugman or Jonathan have read all of the above reports and articles? Seems like an awful lot of evidence is piling up that indicates there may not just be a fiscal and monetary debt problem, but a social security problem as well. As a matter of fact, they all appear to be intricately woven together as if the handiwork of the three Sisters of Fate.
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