Saturday, April 30, 2005

What Are Treasury Bonds Worth?

During his sixty-day, taxpayer-financed, propaganda tour aiming to "fix" social security through privatization, Bush repeatedly stated that the social security trust fund doesn't really exist. Here is the latest example from his prime time press conference on Thursday night:
You pay into the system through your payroll taxes and the government spends it. It spends the money on the current retirees and with the money left over, it funds other government programs. And all that's left behind is file cabinets full of IOUs.
In that press conference, Bush also talked about the investment options that people might have:
I know some Americans have reservations about investing in the stock market, so I propose that one investment option consist entirely of treasury bonds, which are backed by the full faith and credit of the United States government.
But wait a minute... What are those "file cabinets full of IOUs" comprised of? Yes, those IOUs are U.S. treasury bonds! So if they are just worthless IOUs in the social security trust fund, what are they in my "personal account?" How can the bonds in my account be backed by the "full faith and credit of the United States government," whereas the bonds in the trust fund are not?

Bush's argument that the trust fund is just full of IOUs implies that when those funds are needed, the United States government will, for the first time in its history, go into default. Do you realize what that would mean to the U.S. economy? China and Japan have been buying piles of our bonds this century as our national debt grows unabated, exacerbated by Bush's tax cuts. Will they continue to buy our bonds if we default on the bonds held by the trust fund? I cannot understand why our President would publicly undermine our ability to pay our debts.

In order to privatize social security, Bush needs to borrow trillions of dollars to finance these "personal accounts." How will the U.S. get that money? We'll issue treasury bonds, of course! But if the bonds in the trust fund are just IOUs, what will the bonds issued to pay for the new scheme be?

If Bush wasn't so stubborn, this issue would have died months ago.

(If you aren't already sick of reading about this, Jim Hightower's "Neutering Social Security" is an excellent analysis and history.)

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