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April 7, 2005

Intellectual default

The New York Times editorial page weighs in on President Bush's photo-op in West Virginia inspecting the non-existent assets of the Social Security trust fund. And what do you know -- it's practically verbatim from Democratic Party talking points. Here's the Times today:

Social Security takes in more money than it needs to pay current beneficiaries, and the excess is invested in the Treasury securities that Mr. Bush was discussing. They carry the same legal and political obligations as all other forms of Treasury debt, every penny of which has always been paid in full and on time...Mr. Bush wants Americans to believe that the trust fund is a joke. But if the trust fund is a joke, so is the full faith and credit of the United States.

And here's from a statement Tuesday by Democratic congressional leaders Harry Reid and Nancy Pelosi:

It is simply wrong to suggest that the Social Security Trust Fund does not exist, or that the securities held by the Trust Fund are merely pieces of paper. For a President to even suggest that the federal government might, for the first time, default on a security backed by the full faith and credit of the United States unnecessarily misleads American workers about the health of the Social Security program. Just as significantly, these statements could raise needless doubts among American and foreign investors about the United States’ willingness to meet its fiscal obligations.

The point that all this hand wringing is designed to distract you from is that it is both semantically and financially meaningless for anyone to owe a debt to himself. The US government can no more fund Social Security obligations by issuing Treasury bonds to itself than the New York Times Company can fund its pension obligations by issuing corporate bonds to itself. Debt one issues to one's self cannot represent savings or wealth, because the same entity that owns the debt as an asset owes the debt as a liability.

So what would it even mean for the Treasury to default on those bonds? To do so wouldn't leave the trust fund any worse off that it is right now -- an entity of government with a government obligation to pay funding itself with the obligation to pay of another unit of the same government.

Default? Don't make me laugh. Whatever default is possible in this crazy set-up has already happened -- it happened when the whole monumental fraud of the trust fund investing in Treasury bonds was thought up in the first place.

Posted by Don Luskin at April 7, 2005 1:38 AM | Print

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