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Sunday, July 14, 2013

Trillions of Paper and a $1,000 Wager

 

Social Security is sitting on a $2.8Tn portfolio of T Bills and Notes. Take a guess on how much of that was ‘turned over’ (redeemed/acquired/matured) in June of 2013?

$600 Billion! 22% of the nut went back in forth in a single day. That blows my mind.  A pic of the “transactions” that took place:

 

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It gets worse. Each of the transactions results in flurry of printing activity at the the Bureau of Public Debt’s offices in Parkersburg, West Virginia.  New debt certificates are created; the old ones are stamped “Redeemed”.  The whole pile of paper is stored in endless filing cabinets. The building where all of this printing takes place:

 

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George Bush went to Parkersburg to visit all that paper in 2005. This pic is GB studying one of the certificates.  (Note those high tech locks that keep this paper “safe”.)

 

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This printing/storing of paper and all that turnover is insane. The history of this goes back to the 30′s when there were no computers, and everything was done in a ledger. But that was 75 years ago. The calculations for the annual re-balancing of the SS portfolio could be done with a computer no bigger than a cell phone. And all that paper shuffling in Parkersburg is just a waste of money.

SS’s holdings of all that paper is part of part of the “debt we owe ourselves”. Actually it is just debt that is owed, it’s no different than the IOUs out to China. There are a total of 230 Trust Funds (SS is the largest), the total of this debt is now $4.8Tn. The other Trust Funds were also redeeming old and creating new paper in June. Total turnover of this paper was in the range of $1Tn for all of the Funds. It must have been a record month down in Parkersville; they were probably drinking Champagne when the month was over.

You would think that somebody in D.C. would look at the way SS keeps its books down in West Virginia. I would defy any of those Pols to look at all of the paper that is created and conclude that it’s being done in an efficient and intelligent way. It would take an act of Congress to modernize what is now being done. There is not one chance in a 1,000 that it will happen.

I would love to hear one of those Senators or Congressmen successfully defend the status quo of the Parkersville boondoggle.  I would be willing to contribute $1,000 to the campaign coffers of the first Politician who stands up and tries to defend what is going on. I think my $1,000 is safe, no fool would try to defend this, not even a fool from Washington.

 

 

SSA “bought” $178 BILLION of bonds due in 2028 at measly 1.75%. This return is going to be less than inflation. The market yield for 15-year Treasury paper is 3%. SSA is underwater on this bond by 1.25%, that comes to a revenue loss of $2.3Bn every year. Blame this result on a 50-year old formula and Bernanke’s endless squeeze on interest rates.

SSADOG

 The SSA saw some of its best assets mature during June. A total of $94Bn high yielding paper (Average yield = 5.25%) went off the board. It was replaced with 1.75% paper. The loss of income from the redemptions comes to a cool $3.3Bn a year. That is chump change at SSA – but it will happen again next June when another chunk of high coupon paper rolls off the books. If you listened to Bernanke last week, you would have to assume that short rates are pegged at Zero for at least another two years, and good old Ben is not going to let the long end get above 3%. Before the monetary madness ends, most of SSAs decent bonds will be gone.

$400Bn with a current average yield of 5.4% will mature in the next two years, the resulting drop in income will be $14Bn a year. Given that this is a permanent (15 years) impairment of income, the run off in assets is going to add up. A view of the portfolio and what is rolling off:

 

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The pollution of interest income for savers like SS is well understood by Bernanke and his cohorts at the Fed. But they never talk about this ‘cost’ to the country’s future. They just harp on all of the benefits that low interest rates deliver, like renewed housing bubbles in places like Vegas and ever higher stock prices. I estimate that the cost to just SS of the Fed’s actions will add up to over $300Bn before the Fed folds its cards and ends QE and ZIRP. $300Bn ain’t chump change. I wish it was not just me singing in the wind over the true cost of what the Fed is doing.

 

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Comments

  1. “The pollution of interest income for savers like SS is well understood by Bernanke”

    Keynes called it “euthanize the rentier”

  2. Bruce:
    As you know, the trust fund is an accounting mechanism which details how much can be withdrawn from the Treasury, without an appropriation. When cash outgo exceeds cash income, the Treasuries have to be redeemed. This occurs by the use of general revenues from the Treasury, which has occurred since 2008, the same way we pay for battleships.
    Less trust income simply means less authorizations from the Treasury, lower deficits, and lower increases in debt held by the public, until the trust fund is “exhausted.” So, you see, the negative is offset by the positive!
    Don Levit

    • Jimmy Jack Jingo says:

      Actually, Don, the Social Security Trust Fund doesn’t work that way at all. ALL payroll taxes are converted into special treasury notes as the taxes are paid, 100% of them. There are no payroll taxes held by the Trust Fund that are used to pay benefits. Benefits are paid 100% by liquidations of the special treasuries. The transactions above clearly show this. So, Congress ‘borrows’ (steals) our payroll taxes, then forces future generations of taxpayers to pay the theft back, at interest. But the money is gone….spent.

      By the way, they are called ‘special treasuries’ because they can be liquidated at any time without penalty.

      Furthermore, the treasuries held by the Trust Fund are NOT assets to the US taxpayer, they are, in fact, debt instruments upon which the taxpayer is paying interest. As such, they comprise a component of the national debt. A quick gander at the GAO’s Components of National Debt chart shows the Trust Fund as a component of the debt.

      Thus, there is NO MONEY in the Trust Fund, only debt…debt that must be paid back, at interest. In point of fact, our benefits are paid-for at least twice: once when we pay our payroll taxes (stolen and spent by Congress), and the second time by the future generation of taxpayers that has to actually pay to repay the treasury from which the benefits are paid. If one calculates the interest paid over a working lifetime, it could very well be three times over. Keep in mind, this is interest the taxpayer is paying on his/her own money…

      The system has functioned this way since it started collecting taxes in 1936. No one started ‘raiding’ the fund after the fact, It was designed this way from the beginning. Why? Because the Social Security system is a mechanism for taxation whose basic mechanics operate more like those of a Ponzi Scheme, than a retirement program. How many retirement programs take the investors’ money and convert it into a debt instrument upon which the investor pays interest? None, that I’ve ever heard of…but that is precisely how the Trust Fund works.

      There is nothing hidden or mysterious about this, either. The lies are in plain sight on the Social Security website:

      (Social Security Administration-Trust Fund FAQ)
      http://www.ssa.gov/OACT/ProgData/fundFAQ.html

      Jimmy Jack Jingo

      • Jimmy Jack:
        I agree with everything you said. Technically, all taxes go into the the Treasury’s general fund, where they become indistinguishable from other monies. When discussing the trust fund with more “liberal” viewpoints, I let them have the taxes on a pay-as-you-go basis as being available to pay benefits.
        It is the excess taxes which are a newfangled way, not only of providing retirement benefits as you stated, but also a newfangled way of paying for government expenses without specific appropriations being made. This was a concern at the very beginning of Social Security: that the trust fund would be used to pay for other expenses, instead of being kept as a “true” reserve fund.
        Yes, the interest really mounts up.
        I read somewhere the interest owed on the loans to the Treasury to pay for general expenses is higher than the principal owed.
        And, thanks for providing the link to the FAQs. It puts to rest (or should do so) any people who think the trust fund is flush with cash – from the very official web site of the Social Security Administration. No, the IOUs are not worthless. It just takes general revenues (just like paying for battleships) to make them whole upon redemption.
        Don Levit

  3. Hi!, Patrons Of Bruce Krasting Et Al:

    Nobody I’ve ever met yet agrees with the Constitution of these United States; that is Article 1; Section 10 that we are to have nothing but gold and silver coins in lieu of paying our debts. I’m on Social Security disability and have yet to receive any gold or silver coins. The notes discussed here aare disgusting, because they have developed out of unconstitutional accounting methodologies that far surpass even Lord Keynes’ figments of imagination. Truly, the relentless self hypnosis of the masses of the American people who have abrogated their loyalty to their Constitution via amnesia etc. is especially disheartening but, as long as the people inherit enough fiat paper daily to live better than other world inhabitants, they American masses remain content to send troops throughout the workd, in order to straighten out the rest of this world while their own messes at home remain in tact. You can’t resolve one form of rottenness with other forms of rottenness can you? Daniel Webster one quipped: “Of all the contrivances for cheating the laboring classes of mankind, none has proved more successful than that which deludes them with issues of fiat, irredeemable, I Owe You Nothing, paper money!” I think that Karl Marx would totally agree with Mr. Webster but while the American people sleep on it!

    RUSS SMITH, CA (One Of Our Broke Fiat Money States)
    resmith@wcisp.com

  4. ManAboutDallas says:

    *DO* something about this G/d “Russ Smith” spamming jackass who spams its G/d CRAP all over every blog it can find, such as THIS one.

  5. Russ, your points are well taken, except for “I’m on Social Security disability and have yet to receive any gold or silver coins.”- to which the government reponse might be “well, you were happy to pay your debt to the IRS in fiat.” The greatest defender of the gold standard, and the last effective opponent of central banking, Andrew Jackson, considered the idea of passing a national debt to his successors and to future generations evil (he also said “There are no necessary evils”); he kept his promise to leave office debt-free and a huge crowd appeared to cheer him when he left the White house.

  6. Jimmy Jack Jingo says:

    Bruce,

    The Social Security Trust Fund is not obligated to keep any of the special issue treasuries for any particular period of time. That is why they are called ‘Special Issue’ treasuries, because they can be liquidated at any time. As such, the Treasury Dept can manipulate the bonds and interest rate any way they please.

    Remember, these note are NOT investments to the US taxpayer…they are debt instruments. The taxpayer does NOT benefit by paying interest on these bonds…the interest is simply another hidden tax. In fact, if you analyze the Trustees Reports from 2002-2011, you’ll see that taxpayers paid over $925-billion in just interest on these treasuries. That is, they were taxed an extra $925-billion they didn’t know about.

    Treasury Fund interest in deducted from the total interest on the national debt, which is how the govt arrives at “net interest,” which, like all US Govt accounting, is based on the deceit of the taxpayer, not informing the taxpayer. From 2002-2011, the US taxpayer paid over $4.2-trillion in JUST INTEREST on the national debt, and almost a quarter of that was interest paid on the Social Security Trust Fund.

    Jimmy Jack Jingo

  7. Only a “two handed solution” can fix the debt-money problem but the good news is that the stage was set in 1971 when the FIXED peg on gold was severed, setting it free to float. The dollar assumed a “role” of currency but this is only a stop-gap measure for its ultimate role of real-time measure to gold-as-money (floating) in real-time. The only viable long term solution to a sound money system was to combine the classical characteristics of bullion’s debt-free store of value qualities with instant global liquidity. That’s now happened but the biggest issue , in the very practical sense, may be the public’s “blind spot” on mass participation. This process (marketing) cannot be top-down. It must be organic, market driven and bottom-up because of the real-time component that would suddenly crash dollar holders if gold was again proclaimed as a currency by the elite. They cannot do this on the basis of rate-of-change. Gold-as-money must be a market evolution …. but the table is definitely set. You cannot pour new wine into old wineskins.

  8. With Big Ben’s Theory we may be completely broke by 2015. Broke is when you can not borrow, or steal, or plunder other people’s money (purchasing power).

  9. Something is Afoot says:

    I grew up in Parkersburg….a.k.a. P-burg.

    Bruce, you changed the city name mid-stream in the article to ParkersVILLE. Did you not realize or were you goofing around?

  10. in order for ssa to redeem, the Treasury has to reissue and the Fed has to print because who is buying any treasuries–simple step but missed.

    This step does lower the cost of the US General Fund but does create a spot of a problem at SSA as its earnings assumptions from last years was 3% over inflation–the Trust Report did not specify earnings assumptions for this year from what I could tell.

    worse yet, the actuarial assumption is for shorter than realistic lives.

  11. Mad-Man Marte' - bond bear extraordinaire says:

    We are getting close, and perhaps we have the ‘vig’ for one last ‘Big Ben’ goose- rally in treasury securities – BUT the day is coming that we will embark upon a massive mega-trend bear market in treasury securities. Why is SS reaching out for 15 yr. tenor? What a bunch of little-league umpires at the control of SS…

  12. There is no trust fund. All it is is a political ploy to give the boomers a claim on their kids and grandkids income. Try this thought experiment:
    Case A: SS comes up short $100 Billion. It redeems $100 Billion in “trust fund” paper to itself (the government). The same government then sells $100 Billion in regular treasuries in the market.

    Case B: SS comes up short $100 Billion. The government sells $100 Billion in regular treasuries in the market.
    No difference.

  13. real men still use ledger paper and the HP 12C calculator!

  14. Darn it Bruce. Interest is only a name they gave to some transfers from the Treasury. You can’t owe yourself interest on debt you can’t owe yourself. You could call interest by any name. How about “Other”.

    On the Treasury financial statements there is a big net transfer to social security and there has been for several years. For some reason SSA doesn’t redeem enough special bonds but the Treasury transfers what the SSA needs.

    It isn’t debt like to China. Debt to China is marketable. It is used as foreign reserves. SSA special bonds are useless. They are only an accounting of the amount of money congress stole from payroll taxes.

    This whole bonds thing is a waste of money. It is a sham and it is taken seriously. This country is sick. Thank you for pointing out the insanity of maintaining the sham with printing and canceling bonds.

  15. Wow that seems like a giant waste of paper!