Deeply Disturbing, For Different Reasons
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:
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.
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.
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.