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Michael Hudson: Mr. Obama’s Scare Tactics to Get Democrats to Vote for His Republican Wall Street Plan

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By Michael Hudson, a research professor of Economics at University of Missouri, Kansas City and a research associate at the Levy Economics Institute of Bard College

You know that the debt kerfuffle is as staged as melodramatically as a World Wrestling Federation exhibition when Mr. Obama makes the blatantly empty threat that if Congress does not “tackle the tough challenges of entitlement and tax reform,” there won’t be money to pay Social Security checks next month. In his debt speech last night (July 25), he threatened that if “we default, we would not have enough money to pay all of our bills – bills that include monthly Social Security checks, veterans’ benefits, and the government contracts we’ve signed with thousands of businesses.”

This is not remotely true. But it has become the scare theme for over a week now, ever since the President used almost the same words in his interview with CBS Evening News anchor Scott Pelley.

Of course the government will have enough money to pay the monthly Social Security checks. The Social Security administration has its own savings – in Treasury bills. I realize that lawyers (such as Mr. Obama and indeed most American presidents) rarely understand economics. But this is a legal issue. Mr. Obama certainly must know that Social Security is solvent, with liquid securities to pay for many decades to come. Yet Mr. Obama has put Social Security at the very top of his hit list!

The most reasonable explanation for his empty threat is that he is trying to panic the elderly into hoping that somehow the budget deal he seems to have up his sleeve can save them. The reality, of course, is that they are being led to economic slaughter. (And not a word of correction reminding the President of financial reality from Rubinomics Treasury Secretary Geithner, neoliberal Fed Chairman Bernanke or anyone else in the Wall Street Democrat administration, formerly known as the Democratic Leadership Council.)

It is a con. Mr. Obama has come to bury Social Security, Medicare and Medicaid, not to save them. This was clear from the outset of his administration when he appointed his Deficit Reduction Commission, headed by avowed enemies of Social Security Republican Senator Alan Simpson of Wyoming, and President Clinton’s Rubinomics chief of staff Erskine Bowles. Mr. Obama’s more recent choice of Republicans and Blue Dog Democrats be delegated by Congress to rewrite the tax code on a bipartisan manner – so that it cannot be challenged – is a ploy to pass a tax “reform” that democratically elected representatives never could be expected to do.

The devil is always in the details. And Wall Street lobbyists always have such details tucked away in their briefcases to put in the hands of their favored congressmen and dedicated senators. And in this case they have the President, who has taken their advice as to whom to appoint as his cabinet to act as factotums to capture the government on their behalf and create “socialism for the rich.”

There is no such thing, of course. When governments are run by the rich, it is called oligarchy. Plato’s dialogues made clear that rather than viewing societies as democracies or oligarchies, it was best to view them in motion. Democracies tended to polarize economically (mainly between creditors and debtors) into oligarchies. These in turn tended to make themselves into hereditary aristocracies. In time, leading families would fight among themselves, and one group (such as Kleisthenes in Athens in 507 BC) would “take the people into his party” and create a democracy. And so the eternal political triangle would go on.

This is what is happening today. Instead of enjoying what the Progressive Era anticipated – an evolution into “socialism,” with government providing basic infrastructure and other needs on a subsidized basis – we are seeing a lapse back into neo-feudalism. The difference, of course, is that this time around society is not controlled by military grabbers of the land. Finance today achieves what military force did in times past. Instead of being tied to the land as under feudalism, families today may live wherever they want – as long as they take on a lifetime of debt to pay the mortgage on whatever home they buy.

And instead of society paying land rent and tribute to conquerors, we pay the bankers. Just as access to the land was a precondition for families to feed themselves under feudalism, one needs access to credit, to water, medical care, pensions or Social Security and other basic needs today – and must pay interest, fees and monopoly rent to the neo-feudal oligarchy that is now making its deft move from the United States to Ireland and Greece.

The U.S. Government has spent $13 trillion in financial bailouts since Lehman Bros. failed in September 2008. But Mr. Obama warns that thirty years from now, the Social Security fund may run a $1 trillion deficit. It is to ward it off that he urges dismantling the plans for such payments now.

It seems that the $13 trillion used up all the money the government really has. The banks and Wall Street firms have taken the money and run. There is not enough to pay for Social Security, Medicare or other social spending that the Blue Dog Democrats and Republicans now plan to cut.

Not right away. The plan will be to “paper over” the current crisis by delegating the plans to a “Deficit Reduction Commission #2,” appointed from Congressional members.

Finally, we have “Change we can believe in.” Real change is always surprising, after all.

The faux crisis

Usually a crisis is needed to create a vacuum into which these toxic details are fed. Wall Street does not like real crises, of course – except to make quick computer-driven speculative gains on the usual fibrillation of today’s zigzagging markets. But when it comes to serious money, the illusion of a crisis is preferred, staged melodramatically to wring the greatest degree of emotion out of the audience much like a good film editor edits a montage sequence. Will the speeding train run over the girl strapped to the tracks? Will she escape in time?

The train is debt; the girl is supposed to be the American economy. But she turns out to be Wall Street in disguise. The exercise turns out to be a not-so-divine comedy. Mr. Obama offers a plan that looks very Republican. But the Republicans say no. There is an illusion of a real fight. They say Obama is socialist.

Democrats express shock at the giveaway being threatened. Many say, “Where is the real Obama?” But it seems that the real Obama turns out to be a Republican Wall Street imposter in Democratic clothing. That is what the Democratic Leadership Committee basically is: Wall Street Democrats.

This is not as much of an oxymoron as it may sound. There is a reason why today’s post-Clinton Democrats are the natural party to undo what FDR and earlier Democrats stood for. A Democratic Senate never would stand for such giveaways to Wall Street and double-cross of their urban constituency if a Republican president would propose what Mr. Obama is putting before them.

Here’s what the next Republican presidential candidate can say: “You know that whatever we Republicans want, Mr. Obama will support us. If you don’t want a Republican policy, they you should vote for me for president. Because a Democratic Congress will oppose a Republican policy if we propose it. But if Mr. Obama proposes it, congress will be de-toothed, and cannot resist.”

It’s the same story in Britain, where the Labour Party is called upon to finish up the job that the Conservatives start but need New Labour to subdue popular opposition to privatizing the railroads and a Public/Private Partnership financial giveaway for the London tube line. And it’s the same story in France, where a Socialist government is supporting the privatization program dictated by the European Central Bank.

Round up the usual fallacies

Whenever one finds government officials and the media repeating an economic error as an incessant mantra, there always is a special interest at work. The financial sector in particular seeks to wrong-foot voters into believing that the economy will be plunged into crisis of Wall Street does not get its way – usually by freeing it from taxes and deregulating it.

Mr. Obama’s first fallacy is that the government budget is like a family budget. But families can’t write IOUs and have the rest of the world treat it as money. Only governments can do that. It is a privilege that the banks would now like to obtain – the ability to create credit freely on their computer keyboards, and charge interest for what is almost free, and what governments can indeed create for free. (That is the State Theory of Money. See the UMKC Economics Blog.)

“Now, every family knows that a little credit card debt is manageable. But if we stay on the current path, our growing debt could cost us jobs and do serious damage to the economy.” But economies need government money to grow – and this money is provided by running federal budget deficits. This has been the essence of Keynesian counter-cyclical spending for more than half a century. Until the present, it was Democratic Party policy.

It’s true that Pres. Clinton ran a budget surplus. The economy survived by the commercial banking system supplying the credit needed to grow – at interest. To force the economy back into this reliance on Wall Street rather than on government, the government needs to stop running budget deficits. The economy will then have a choice: to shrink sharply, or to turn almost all the economic surplus over to banks as economic rent on their credit-creation privilege.

Mr. Obama also pretends that credit ratings agencies are able to act as mascots for their clients, the large financial underwriters, by making the entire economy pay even higher interest rates on its credit cards and banks. “For the first time in history,” Mr. Obama dissembled, “our country’s Triple A credit rating would be downgraded, leaving investors around the world to wonder whether the United States is still a good bet. Interest rates would skyrocket on credit cards, mortgages, and car loans, which amounts to a huge tax hike on the American people.”

The reality is that running a budget surplus would increase interest rates, by forcing the economy into captivity to the banking system. The Obama administration is now deep into its Orwellian rhetorical phase.

Why Wall Street needs Obama Democrats to shepherd Rubinomics #2 through Congress

During Mr. Obama’s speech I could not help feeling that I had heard it all before. And then I remembered. Back in 2008, Treasury Secretary Henry Paulson sought to counter Sheila Bair’s argument that all FDIC-insured depositors would be able to ride out the September crisis, with only the reckless gamblers losing the gains they hoped to make on their free credit. “If the financial system were allowed to collapse,” he warned in his Reagan Library speech, “it is the American people who would pay the price. This never has been just about the banks; it has always been about continued prosperity and opportunity for all Americans.”

But of course, it is all about the banks! Wall Street knows that to get sufficient Congressional votes to roll back the New Deal, Social Security, Medicare and Medicaid, a Democratic president needs to be in office. A Democratic Congress would block any Republican president trying to make the kind of cuts that Mr. Obama is sponsoring. But Congressional Democratic opposition is paralyzed when President Obama himself – the liberal president par excellence, America’s Tony Blair – acts as cheerleader for cutting back entitlements and other social spending.

So just as the City of London backed Britain’s Labour Party in taking over when the Conservative Party could not take such radical steps as privatizing the railroads and London tube system, and just as Iceland’s Social Democrats sought to plunge the economy into debt peonage to Britain and Holland, and the Greek Socialist Party is leading the fight for privatization and bank bailouts, so in the United States the Democratic Party is to deliver its constituency – urban labor, especially the racial minorities and the poor who are most injured by Pres. Obama’s austerity plan – to Wall Street.

So Mr. Obama is doing what any good demagogue does: delivering his constituency to his campaign contributors on Wall Street. Yves Smith has aptly called it Obama’s “Nixon goes to China moment in reverse.”

The Republicans help by refraining from putting forth a credible alternative presidential candidate. The effect is to give Mr. Obama room to move far to the right wing of the political spectrum. Far enough so that it is his own Democrats who are most intent on scaling back Social Security, not the Republicans.

This is done most easily under pressure of near panic. This worked after September 1008 with TARP, after all. The Wall Street bailout melodrama should be viewed as a dress rehearsal for today’s debt-ceiling non-crisis.

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153 comments

  1. ντολμάδες στο φούρνο

    Relevant descriptions:

    ‘ The “war on terror” has created a culture of fear in America. The Bush administration’s elevation of these three words into a national mantra has had a pernicious impact on American democracy, on America’s psyche and on U.S. standing in the world ‘ – Zbigniew Brzezinski

    “Culture of fear is a term used by certain scholars, writers, journalists and politicians who believe that some in society incite fear in the general public to achieve political goals” -wikipedia

  2. Carlomagno

    “Of course the government will have enough money to pay the monthly Social Security checks. The Social Security administration has its own savings – in Treasury bills. ”

    That’s not how I understand it The “Social Security Trust Fund” (I use quotes because there isn’t a single fund with such a name; it’s a little more complicated but that’s another story) doesn’t hold marketable securities, but non-negotiable securities that represent claims on the US Treasury, i.e. they can only be sold back to the Treasury – which wouldn’t have the funds necessary to redeem them if it is up against the debt limit.

    1. F. Beard

      The “Social Security Trust Fund” (I use quotes because there isn’t a single fund with such a name; it’s a little more complicated but that’s another story) doesn’t hold marketable securities, but non-negotiable securities that represent claims on the US Treasury, i.e. they can only be sold back to the Treasury – which wouldn’t have the funds necessary to redeem them if it is up against the debt limit.
      Carlomagno

      Politically that is meaningless. If you think that technically will stand in the way of the public’s indignation you are sadly mistaken.

      It’s really amusing. When the banks are in trouble there is no such thing as rules and law but their victims have to cross every “t” and dot every “i” for justice.

      1. Jim A

        Well yes. And that’s what many don’t seem to realize. As we go deeper and deeper into debt, solvency starts to become an issue. Raising taxes and cutting down on future expenses (entitlement or otherwise) is a way of dealing with that problem. The Debt ceiling vote has been used as an excuse to actually try and deal with this.

        Nobody knows exactly when market sentiment will make others less willing to lend to the US government. We’re certainly not there yet. But when that sentiment changes, you can’t simply take one step back, because even the refinancing of existing debt costs so much that it is nearly unpayable.

        But the debt ceiling has ALMOST NOTHING to do with this really. It is simply a cash on hand problem. To return to the overused household finance analogy, the debt ceiling is like homeowners who have frozen their credit card in a block of ice. There’s still plenty of “available balance,” on it but the bills are due and theirs no money in the checking account. The problem is that only paying half of the mortgage will do far worse things to the interest rates that they pay on their existing CC balance than adding to that balance would.

        1. John

          There’s no genuine solvency crisis for the US government. They can’t run out of dollars to credit an account, any more than a football stadium can run out of points to award for touchdowns and field goals. The danger of (metaphorically) printing too much money is inflation, not insolvency — and we are incredibly far from that situation. (Although I do wonder if the sheer number of dollars held in treasuries or the Fed account could be suddenly dumped in some manner.)

          Default is a matter of choice, not solvency. And choosing to default may be harder than we think. It may require reprogramming of numerous computers that automatically mail out checks or credit accounts.

          http://moslereconomics.com/2011/07/26/treasury-default-requires-reprogramming/

          1. Jim A.

            The federal government certainly CAN simply print dollars. It can also raise taxes, or spend less money. What the federal government can do is NOT the issue. What the president can do unilaterally as head of the executive branch without, or expressly contrary to, the laws already passed by the Congress and signed by him is the issue. The amount of spending* and taxes are already enshrined in law.

            *actually for entitlement programs, the eligibility is enshrined in law, rather than the dollar amount. But the president has no unilateral authority to change the rules for eligibility on his own, except in a limited, regulatory sense.

          2. Jim A

            “Default is a matter of choice, not solvency.”
            True. But until Obama vetoes a debt limit bill, that choice lies entirely with Congress.

          3. Nathanael

            The President has already been authorized by Congress to *coin* arbitrary amounts of money — “jumbo coin seignorage”.

            If Obama were not a Republican, he would do it. Because Obama is a Republican, he is staging a fake crisis for the benefit of his Republican corporate looter buddies.

    2. steelhead23

      Amendment 14, Section 4 U.S. Constitution:
      “4. The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned. …”

      If Mr. Obama chose not to redeem the special Treasury bonds he would be in stark violation of the U.S. Constitution. Given that there are tools available for the U.S. to create the money necessary to meet its obligations, there should be no doubt that it would. Mr. Obama’s comments are fear-mongering, pure and simple.

      1. darms

        Likely a dumb question, but couldn’t that 14th amendment language be interpreted to mean it would be unconstitutional & therefore illegal for a domestic rating agency to downgrade federal bonds?

        1. John

          Possibly. The 14th Amendment was passed after the 1st Amendment, so this could be interpreted as a prohibition against speech against the debt.

      2. Ira Dernotsei

        “he will take all steps needed to prevent SS checks going out. I wouldn’t put it past him.”

        Then he is a tyrant and dictator operating outside of the law, and when you stick your neck out in such a fashion, there’s eventually a noose that ensnares it. Just ask Sadam Hussein, Nicolae and Elena Ceausescu, or a number of others who thought human and natural laws did not apply to them.

        There’s only a limited degree to which the useless idiots in Washington can flagrantly abuse codified law and equitable doctrines before the figurative torches and pitchforks materialize. I hope the first pension benefits to be touched are the military so that we can count on the Military to be on the side of the people, free from manipulation by an oversized federal government.

        1. Nathanael

          Well, exactly.

          The banksters and looters trying to establish neofeudalism, and their political stooges (practically all of the Republican Party elected officials, and far too many of the Democratic Party elected officials including the President) are playing a very dangerous game. Once you dismantle the rule of law, there is no law to protect you.

          Even if the people do not rise up, some aspiring warlord will figure out that he can just kill these useless sponges and take power. And if he provides a more functional system of government and banking… which would be easy… the people will back him.

  3. SRC

    It’s not clear to me that the Social Security Administration would be able to liquidate the special Treasury bonds it holds in the trust fund

    http://www.ssa.gov/oact/progdata/specialissues.html

    Also, is it even legal to sell the special issue bonds in the trust fund to anyone other than the issuer?

    Granting the supposition that it is legal, who would be the buyers? If the USG doesn’t have revenue sufficient to pay all the periodic interest and maturing principal on the Treasury bonds in the trust fund, it might be quite difficult to sell these bonds to investors.

    But I do agree that the President seems to be serving the Republican agenda.

    1. LJR

      What an inane comment! Social Security ran a surplus for years that the Feds immediately spent by taking the cash and issuing IOU’s. If those IOU’s aren’t redeemable then that’s the Federal Government welching on its obligation and not the Social Security Fund running out of cash.

      I’m reminded of the story about a man on his deathbed. He summons his three best friends: his lawyer, his doctor and his priest. He says, “Now I know the common wisdom is that you can’t take it with you but I’m not convinced. Therefore I am going to give each of you a third of my wealth in cash and I’d like you to see to it that it’s buried with me.” His friends agree and some days later the man dies.

      After the funeral the three gather together for a drink and after having a couple their tongues loosened.

      The doctor says, “You know what? I only put two thirds of that money in his grave. He’s not been paying his medical bills for years and took advantage of our friendship.”

      The priest says, “I have to confess that I too held back about half the money. It just seems a waste when there’s so many needy in the world. I can use it to build a hospital for the poor.”

      The lawyer looks at the two and snorts, “Fine bunch of friends you are who won’t honor your friend’s last wishes.” The two eyed him suspiciously and asked, “Well, how about you?”

      He replied, “I wrote him a check for the full amount!”

      1. LJR

        Oops – this was meant to be a reply to CarloMango below. The damn reply button is in the wrong place.

    2. PaulJ

      “If the USG doesn’t have revenue sufficient to pay all the periodic interest and maturing principal on the Treasury bonds in the trust fund, it might be quite difficult to sell these bonds to investors

      Where did the “revenue” the government is supposedly borrowing come from in the first place – Immaculate transfer?

      Where did the money the bond traders buy bonds with come from?

  4. Carlomagno

    Yves, why do you post stuff by people who don’t understand the basic facts relevant to the issues they discuss?

    1. JamesW

      Prof. Hudson, the most brilliant economist in the Western Hemisphere, has been both predicting and explaining this stuff correctly for over forty years now.

      Inance ObamaBots keep repeating, “Why is Obama doing that……?”

      Erskine Bowles, Clinton’s chief of staff, reappointed by Obama to the Bowles-Simpson “Deficit” Commission, immediately and falsely claims social security is the cause of the deficit.

      One would laugh at this fraudster, were it not so pathetic.

      This would be the same Bowles who is on the board of directors of Morgan Stanley, number two American beneficiary of the Federal Reserve’s $16.1 trillion bailout, according to the GAO audit released last week.

      Bowles wife is on the board of directors of JPMorgan Chase — no shocker there!

      Bowles, longtime private bankster, was brought on board at Forstmann Little & Co., by Henry Kissinger.

      Geez, everything that neocon Obama has done since he’s been in the Oval Office, is in keeping with the Wall Street lackey neocons who preceded him: Bush #2, Clinton, Bush #1, and Reagan.

      Whay does Obama keep doing these things?

      Why indeed!

    2. Cahal

      Hudson has worked on Wall Street and for the government, and is a respected professor of economics. He knows his stuff.

      Please qualify your point.

    3. Jason Rines

      What do you mean Carlo? Michael Hudson is off? I don’t think so.

      Let me ask you something. Do you know the total amount of CDS in America and what swap arrangements exist between the multiple counter parties? Do you know how much they would be settled for and whom picks up the swap fee tab?

      My 2008 estimates show $9T in FEES of counterparties to unwind the swaps. Bear Sterns bore out the unwind percentages for me to quantify estimates.

      These fees are in addition to getting paid the commissions on issuing and trading near empty boxes of shit in the first place. The other $5T looks like consumer debt. Sure I am pissed my neighbor had fun while I paid for it. But I am willing to accept this is part of society and my responsibility to fix that. After all, we as Americans signed for it, we should pay it.

      But this is NOT THE CASE with the deravitives. The details on the swaps will come into the open soon enough! A few that did this are criminals of the highest order and they will feel in a few years that it is shame they don’t have moon-bases to escape to. Sadly, to protect their loot and try to get away with it WW3 will happen. A shame 1/3 of us will have to die to get justice and restore balance. Evolution is a real bitch…

        1. Jason Rines

          Well Kraken I am a realist. Doing all I can to mitigate losses and convince the Kingmakers that they have individual choices to make now in how they are viewed by society as the losses come to fruition. No worries though, I am only pessimistic for the short term. I am long mankind :)

      1. Ira Dernotsei

        “Sadly, to protect their loot and try to get away with it WW3 will happen. A shame 1/3 of us will have to die to get justice and restore balance.”

        A nice world war would solve several problems, first it would re-distribute income much more efficiently than any bureaucracy (arguably, soldiers loot with much less paperwork than revenue collectors), second, it would solve the problem of military pensions, and finally, it will abate inflation because prices will drop with the demand of fewer living souls. Of course, the downsides to this far outweigh any benefits, but I’m trying to stay positive. Ah, the rub!

    4. Tao Jonesing

      Michael Hudson is the single most informed voice on the economic realities of neoliberal “reform,” including the tactics the FIRE sector employs to implement neofeudalism.

      He’s also the bravest of those raising their voices. He goes much farther than fellow critics like Steve Keen and Jamie Galbraith.

      1. Glenn Condell

        Agree. Hudson, thoroughly familiar with the trees, sees the woods, the entire forest, with more acuity than most.

        It is no criticism of Keen to observe that his focus on how mainstream economics ignores debt, real credit creation and the system dynamics of finance tends to leave persons and what drives them out of the picture. MH manages, while covering all the theoretical bases, to point the bone at guilty parties. He gets bolshy, but has the chops to back it.

        There must be something in the water at UKMC because several other similarly no-nonsense vendors of financial truth are on the faculty, and all write here on occasion – Mssrs Wray, Kelton and the redoubtable Bill Black.

        I’m not normally in favour of coups but I would be happy to see that Gang of Four installed at the WH in place of the dead air that currently wafts through it.

  5. hermanas

    Yves, thanks for posting Dr. Hudson’s essay.
    Thank you Mr. Hudson for verbalizing what’s going on in my head, I hope this essay goes viral! Talk about being snookered.
    The fed gave the banks umpteen trillions, this is chump change.

  6. b

    “The Social Security administration has its own savings – in Treasury bills. ”

    This is incredibly annoying.

    If the SSA had actual T-Bills at their disposal, we would not have this discussion.

    The key problem is that they do not – that money borrowed by the Treasury is accounted for in a way that the money can only be repaid by the Treasury.

    Hence, there is a sustained attempt to claim that the debt obligations the Treasury has with respect to the SSA are somehow legally (constitutionally – 14th amendment) different from those implied by privately owned T-Bills. That is the linchpin of the whole debate – is there a difference? FAPP, there is not.

    Does that mean that a selective default on these debt obligations is going to happen? Of course not. In all the endless prayer-mill like repetitions of Social Security “defenders”, what never happens is to ask how the elite intends to benefit from Social Security? After all, the money borrowed from the trust fund has indeed been spent – by the Treasury. What is the endgame here?

    Put simply, the payroll tax has been a subsidy for government spending for decades. Now that the cash flow is turning negative, general revenue would have to be used to repay the trust fund – revenue that would have to come from borrowing, tax increases, or spending cuts. But a “default” on payments owed to the trust fund would only reduce, not revert the cash flow.

    There is a reason why Social Security has been “paid ahead” for decades beyond any reasonable planning horizon, and that is because it was such a steady, regressive tax subsidy to the Treasury. In consequence, any “reform” of Social Security will also “ensure” that it remains “solvent” for ” all eternity”, to get it “off the table”. In short, the cash flow has to be reversed (by payroll tax increase, and/or benefit payout reductions) until the surplus is, once again, a steady subsidy and fraudulent tax.

    There is a trust fund, but there is no money. The fight is about who has to provide the money – and in the end, the objective is to increases taxes and cut spending for those that will also see their benefit payouts reduced. The end game is not “default”, but “solvency in perpetuity”. But as long as “defenders” are stuck in “trustfundtrustfundtrustfund”, the defense will lead nowhere. This is not about the money we paid over the past decades, it is about the money that the wealthy will have to pay now and in the coming decades if the “reform” is prevented.

    Then again, the same hapless “defenders” are often also supporting – like Reich – “payroll tax holidays”, which amount to nothing less than the conversion of a tax-funded insurance into a welfare program subject to political whims. You cannot push for a sovereign trust fund and a payroll tax holiday at the same time.

    1. F. Beard

      The end game is not “default”, but “solvency in perpetuity”. b

      Excellent point! However, the game is up as Dr Hudson points out. If $13 trillion can be created for the banks then money can be created for any purpose.

      It’s strange that the very rich would push for regressive taxes. Longing for the good ole days of France circa 1793?

    2. Cedric Regula

      Important public service message sponsored by the The Peter G. Peterson Foundation:

      Peter Peterson picked a peck of pickled peppers;
      A peck of pickled peppers Peter Peterson picked;
      If Peter Peterson picked a peck of pickled peppers,
      Where’s the peck of pickled peppers Peter Peterson picked?

      This message audited and approved by Peter R. Orszag.

      1. Glenn Condell

        ‘Where’s the peck of pickled peppers Peter Peterson picked?’

        My guess is the Caymans.

    3. citizendave

      “…Put simply, the payroll tax has been a subsidy for government spending for decades. Now that the cash flow is turning negative, general revenue would have to be used to repay the trust fund – revenue that would have to come from borrowing, tax increases, or spending cuts…” b

      This meme keeps coming up, but I believe it is a gloss, and I wish we could dispatch it. My understanding is that the money from the SSTF does indeed go into the general fund. But it is not earmarked, so it gets mixed into the pool along with revenue from taxes, fees, tariffs, etc. The SSTF Treasury obligations are treated exactly the same as any other bond presented to Treasury for redemption. To do otherwise is to violate the same “full faith and credit” backing marketable bonds. Writer “b” said the SSTF bonds would need to be redeemed with “…revenue that would have to come from borrowing, tax increases, or spending cuts…” I say that’s incorrect. My belief is that any Treasury bond presented for redemption would be prioritized above other obligations, such as payments to government contractors, and so would be redeemed using revenue in the general fund. If the amount of Treasury bonds presented for redemption on a given day exceeds the amount in the general fund, only then would Treasury need to decide how to prioritize payments. (I saw a suggestion that perhaps the Fed would pick up any open market bonds to relieve the pressure on the Treasury if borrowing is not allowed). Here’s where the coin seigniorage idea from beowulf and letsgetitdone et al would be useful.

      If I’m wrong about this, I would like very much to know.

      1. citizendave

        I found several articles that assert the only way Treasury can raise money to redeem SSTF bonds is by raising taxes; issuing new debt; or by monetizing the obligations by transferring SSTF treasuries onto the Fed’s balance sheet. I was assured, repeatedly over the past year, by a knowledgeable actuary that the SSTF bonds are redeemed out of the Treasury’s general fund. But the Wikipedia article on the SSTF echoes the idea that it’s either raise taxes, issue new debt, or monetize the debt with the Fed. At this point I don’t know. http://en.wikipedia.org/wiki/Social_Security_Trust_Fund

        Re-reading the Wikipedia article, I was reminded that Social Security by law cannot contribute to a budget deficit. “…EXCLUSION OF SOCIAL SECURITY FROM ALL BUDGETS Pub. L. 101-508, title XIII, Sec. 13301(a), Nov. 5, 1990, 104Stat. 1388-623, provided that: Notwithstanding any other provision of law, the receipts and disbursements of the Federal Old-Age and Survivors Insurance Trust Fund and the Federal Disability Insurance Trust Fund shall not be counted as new budget authority, outlays, receipts, or deficit or surplus for purposes of – (1) the budget of the United States Government as submitted by the President, (2) the congressional budget, or (3) the Balanced Budget and Emergency Deficit Control Act of 1985.” http://www.dailykos.com/story/2011/01/17/936969/-Republicans-want-to-default-on-25-Trillion-in-US-Treasury-Bonds . If Social Security cannot contribute to a budget deficit, then it should not be mentioned in the context of debt ceiling negotiations.

        The obvious alternative to defaulting on the Social Security Trust Fund bonds is to raise the cap on the payroll tax. But the House doesn’t want to do that. They would rather ruin the “full faith and credit”.

        1. Cedric Regula

          You are getting into some complex bugetary issues.

          Take a look at this again:

          “Notwithstanding any other provision of law, the receipts and disbursements of the Federal Old-Age and Survivors Insurance Trust Fund and the Federal Disability Insurance Trust Fund shall not be counted as new budget authority, outlays, receipts, or deficit or surplus for purposes of – (1) the budget of the United States Government as submitted by the President, (2) the congressional budget, or (3) the Balanced Budget and Emergency Deficit Control Act of 1985.”

          It’s saying they can’t spend the surplus we’ve had for 30 years either. But they did.

          But note the “Notwithstanding any other provision of law”.

          So something happened that let them spend it. I do have some vague recollection of discussions of this issue by the Illuminati of SS. I think it has something to do with a changeover to what the USG calls the Unified Budget, but my memory and understanding of that part of the discussion is very lacking.

          But the bottom line is they borrowed it and have to pay it back.

        2. pebird

          All that would have to happen is the SSA to present its Treasury bill to the Treasury for redemption. The Treasury would go to the Fed and have the Treasury bill redeemed for cash and the Treasury would issue a new regular Treasury to cover the cash (issue new debt).

          It’s just an asset swap (Treasury for currency), from the SSA’s perspective.

          The net debt of the US would not change, the new Treasuries would be offset by the return of the old SS Treasuries.

          Another example of Obama’s ignorance and/or perfidy.

          1. Cedric Regula

            Personally, I think the treasury shouldn’t run their accounting reports any more often than they have auctions. That way we wouldn’t even know there was an extra treasury bond floating around for a week or so until it got officially redeemed.

            That way it wouldn’t matter if the treasury went to the Fed first for money to redeem and roll over the bond, or just get it from Lloyd Blankfein’s underpants as always.

          2. Cedric Regula

            I got an idea that might work (we’ll have to run it by Warren Mosler to be sure – but right know he’s trying to figure out how to keep government computers from working).

            If Timmy gets a shoebox and labels it “pending”, then he can keep the special treasuries there until he gets some money from another treasury auction to pay it off with. If the “pending” is sort of like purgatory, then maybe we are under the debt limit, and Timmy wouldn’t have to bother Ben all the time for money. Ben’s got enough people doing that.

    4. and i

      “Putting” quotes around “concepts” really “isn’t” enough to “de”bunk them, or “put” their validity in “doubt”.

      You could have just said, “Greenspan and Reagan cooked up a scam to rook every American, middle and lower income especially, in order to give tax cuts to rich and corporations. Now Obama and Congress (Boner Peolsi Reid) are trying to complete that scam, by welshing on the deal, and trying to deny Americans what was promised to them.”

      It’s shorter, with fewer quotes.

    5. and i

      “Putting” quotes around “concepts” really isn’t enough to de”bunk” them, or “put” their validity in “doubt”.

      You could have just said, “Greenspan and Reagan cooked up a scam to rook every American, middle and lower income in particular, in order to give tax cuts to rich and corporations. Now Obama and Congress (Boner Cantor Pelolsi Reid) are trying to complete that scam, by welshing on the deal, and trying to deny Americans what was promised to them.”

      It’s shorter, with fewer quotes.

      1. psychohistorian

        I am glad you said it twice because mosts folks don’t know how Greenspan and Reagan arranged to gut the SS fund.

  7. Yearning to Learn

    quibbles about the liquidity of the SS trust’s holdings, an excellent article.
    it would seem that perhaps finally more and more people are starting to see the game as it is actually being played (Big Money with their puppet Dems/Repubs vs the rest of the American population) as opposed to how it is being spun (Boehner vs Geithner).

    The WWF analogy is apt, and I have used it myself. why anybody believes that Obama and Boehner are anything except for colleagues working together is beyond me.

    as for the liquidity of SS holdings: only an idiot would conclude that there is no way for SS to send out checks based on the type of bond it holds at this point.

    our leaders found a way to give massive bailouts to AIG-FP and also for the Fed to illegally monetize everything except for Lady Gaga’s meat dress… and now you honestly think that they can’t figure out a way to send a Social Security Check when there are HORDES of valuable assets in its “trust”?

    this isn’t to say they won’t try to pretend that a check can’t be sent. But that game will last until exactly ONE senior citizen is found who went hungry for a day because the check didn’t arrive. That will play really well…

    Reporter: “KMSP news reporting on Mrs. White, an elderly 87 year old widow who was found passed out in her apartment dehydrated from lack of food or water…”

    1. Jason Rines

      Great point at the end Yearning to Learn but allow me to speculate that this is exactly what will happen but in 2013.

      All the arm waving on raising the deficit is to kick the can to the Tea Party types in 2013 who are more than happy to tell Granny they will be getting a reduced check. They will tell Granny how the previous generations of politicians did this to them but they will get the blame anyway.

      The Federal Reserves charter expires in 2013. I doubt it is going to be renewed. Let’s face it, the production went East and with it the wealth. The political insiders of America are financeers and bankers and they will protect their investment into their baby China at all costs between now and then. To them, Granny doesn’t matter but Chinese bondholders do.

      Since we’re going all draconian and all in 2013 it will be time to say “get out and stay out” to a few thousand bankers, politicans and corporate heads.

      Enjoy your new Commie overlords there! Fascists and Communists get along just fine (sarc off).

  8. Everyone is conflicted

    In Cantor, hedge funds and private equity firms have voice at debt ceiling negotiations

    Among the White House’s top demands for new revenue are changes in the tax code affecting hedge funds, private equity firms and real estate partnerships, which would raise an estimated $20 billion over 10 years.

    For the past four years, Cantor has taken the lead in the House on fighting the same changes. He also has been one of the top recipients of contributions from those industries — last year, his two fundraising committees took in nearly $2 million from securities and investment firms and real estate companies, more than double the figure for Boehner (R-Ohio).

    The hedge fund and private equity proposals were at the center of Cantor’s decision to exit talks with Vice President Biden this month. Since then, the prospect for any immediate tax increases has declined, with the focus turning to spending cuts and broader tax reform postponed.

    http://www.washingtonpost.com/politics/in-cantor-hedge-funds-and-private-equity-firms-have-voice-at-debt-ceiling-negotiations/2011/07/22/gIQAZYNVYI_singlePage.html

  9. Hugh

    I agree with Michael Hudson that Obama is a Republican in Democratic clothing. This could be said of Democrats generally. I mean look at what Pelosi just said:

    It is clear we must enter an era of austerity; to reduce the deficit through shared sacrifice

    Anyone want to guess how much the rich and corporations are going to shoulder of this “shared” sacrifice, especially considering their wealth relative to the rest of us? It’s tax cuts for them and benefit cuts for us.

    I also agree with the previous commenters. Everytime this subject comes up about the SSA holding Treasuries I go to the site and find the explanation somewhere else.

    By law, income to the trust funds must be invested, on a daily basis, in securities guaranteed as to both principal and interest by the Federal government. All securities held by the trust funds are “special issues” of the United States Treasury. Such securities are available only to the trust funds.
    In the past, the trust funds have held marketable Treasury securities, which are available to the general public. Unlike marketable securities, special issues can be redeemed at any time at face value. Marketable securities are subject to the forces of the open market and may suffer a loss, or enjoy a gain, if sold before maturity. Investment in special issues gives the trust funds the same flexibility as holding cash.

    The rate of interest on special issues is determined by a formula enacted in 1960. The rate is determined at the end of each month and applies to new investments in the following month.
    The numeric average of the 12 monthly interest rates for 2010 was 2.760 percent. The annual effective interest rate (the average rate of return on all investments over a one-year period) for the OASI and DI Trust Funds, combined, was 4.642 percent in 2010. This higher effective rate resulted because the funds hold special-issue bonds acquired in past years when interest rates were higher.

    Tax income is deposited on a daily basis and is invested in “special-issue” securities. The cash exchanged for the securities goes into the general fund of the Treasury and is indistinguishable from other cash in the general fund.

    http://www.ssa.gov/OACT/ProgData/fundFAQ.html

  10. kgasmart

    Not getting how the government running a budget surplus “forces the economy into captivity to the banking system.”

    1. PaulJ

      Surplus’ remove net financial assets from the economy, effectively forcing people to borrow to maintain their lifestyle.

    2. F. Beard

      Not getting how the government running a budget surplus “forces the economy into captivity to the banking system.” kgasmart

      There are two sources of money into the economy, US Government deficit spending and bank credit. If the government runs a surplus then not only is there no new government money injected into the economy but some is removed! Then the only source for new money is the bankers. And they have us over a barrel because without new borrowing from them then the money supply will shrink even further as existing debt + interest (which does not even exist in aggregate) is repaid to the bankers.

      1. F. Beard

        Come to think of it, even the principal for bank loans may not exist in aggregate if the US Government runs a surplus!

        US Government surpluses are literally evil, it seems.

        1. Nathanael

          (1) The only purpose of running a government surplus (as long as the government prints its own money) is to suck money out of the economy.
          (2) The only part of the economy you *ever* want to suck money out of is the hands of the rich and super-rich. Anything else just hurts people. However, the super-rich need their money removed before they buy politicians.
          (3) Therefore, the only legitimate way to run a government surplus is to have very high taxes on the super-rich. Anything else is destructive, offensive, and obscene.

      2. PaulJ

        This source of money from the bankers is Credit – it comes with an offsetting liability so the change in net financial assets in the economy =0.

        Deficits are the only way to expand real wealth (net worth, increase net financial assets).

        1. F. Beard

          This source of money from the bankers is Credit – it comes with an offsetting liability so the change in net financial assets in the economy =0. PaulJ

          I don’t consider banks as part of the real economy. As far as the real economy is concerned, new, temporary money is created as so-called “credit” is extended.

          1. PaulJ

            Like I said – credit is extended – base money or however you define it remains unchanged.

            Today, the economy (private sector balance sheets) in aggregate contain $X.

            A year from now the economy has grown 5%, so you would expect that a net increase of 5% would show up on balance sheets in the aggregate.

            Where does this new money come from? Without money expansion to equal growth. prices would have to deflate.

          2. F. Beard

            Where does this new money come from? PaulJ

            It is lent into existence. That lending causes asset prices to rise which justifies even more lending. George Soros calls it “”reflexivity”.

            Without money expansion to equal growth. prices would have to deflate. PaulJ

            Eventually they do, during the bust unless government steps in with deficit spending.

          3. PaulJ

            “It is lent into existence”

            This is where we disagree – I say it is “spent” into existence.

            All borrowed funds must be repaid – deficits don’t (although we believe otherwise).

            Look at it this way – if we paid back the National Debt in full using taxes or by running surplus’, there would be no cash left in the economy.

            Analogy…

            To fill a swimming pool you must get water from an outside source, say a hose. Using that source is like deficit spending.

            To fill your pool from a bankers pool you may borrow water but you must return it at some time in the future with interest (extra water). This is credit.
            To keep your pool filled you must constantly borrow.

            If a lot of people want to fill their pool from the bankers pool, the bankers pool will be kept full by the government – as long as people want to borrow water the banker will never run out and neither will they.

            If you stop borrowing your pool will eventually be empty. What happened to your water (wealth)?

            Deficit spending is the only way you can accumulate water (wealth).

          4. F. Beard

            I agree that deficit spending is the only possible source of permanent money into the economy.

            But what you call the “government”, I call the Fed, an endless source of new temporary money – so-called “credit” – for the banks to lend out.

            But anyway, I enjoy your comments and your view point.

          5. PaulJ

            “But what you call the “government”, I call the Fed…”

            We are in complete agreement here, I’m not advocating that the peoples money be distributed through private banks in this manner – quite the opposite.

            Just trying to find common ground on definitional terms.

            And thanks, I’ve enjoyed this also.

      3. kgasmart

        Well now wait a minute, isn’t government spending period a source of money in an economy, not just deficit spending? And given that deficit spending entails interest payments, it seems the banksters have the country over the barrel one way or another

        1. F. Beard

          Well now wait a minute, isn’t government spending period a source of money in an economy, not just deficit spending? kgasmart

          Yes, but taxation drains money from the economy so spending must exceed revenues for net money creation. That is the definition of a “deficit”.

          And given that deficit spending entails interest payments, it seems the banksters have the country over the barrel one way or another kgasmart

          Only because we tolerate it. Deficit spending could be done purely with siegniorage (money “printing” if you like). There is absolutely no need for the US Government to ever borrow money. US Government debt is a gift to the rich and banks.

          1. kgasmart

            OK, and forgive me because I’m not trying to obtuse or argumentative here, but I’m having a hard time accepting the virtue of deficits, or of siegniorage as anything but a high-wire act that runs the risk of unleashing major inflation.

            I certainly understand the short-term rationale, but the idea that government should run deficits in perpetuity begs the question, CAN government run deficits in perpetuity.

          2. F. Beard

            I certainly understand the short-term rationale, but the idea that government should run deficits in perpetuity begs the question, CAN government run deficits in perpetuity. kgasmart

            Not only CAN government run perpetual deficits but it SHOULD run perpetual deficits. Imagine we were on a gold-standard. A balanced budget would be akin to shutting down all gold mining. A government surplus would be akin to dumping existing gold down mine-shafts.

            Price inflation is a valid concern just as excessive gold mining can and has caused price inflation in the past.

          3. Nathanael

            There are two reasons for government “debt”:
            (1) If the government can repay the debt at any time, the government can cut the flow of money into the economy quickly (by replacing interest-bearing notes with non-interest-bearing notes), and can specifically cut the flow to the rich. This is not a sufficiently good reason to have government debt, though, because there are other ways to do this.
            (2) It can provide a system for secure savings for the poor, if implemented “Post Office Bank” style. (Bank deposits are “debts” from the bank’s point of view, so if the government runs a bank, deposits in that are “government debt”.) Unfortunately this is not how government debt is currently implemented, thanks to the efforts of the banksters.

            Government debt only makes sense in the context of a government which can’t print its own money. A government which can print its own money should, on the whole, do so.

            Why is taxation needed, if you can print money? For redistribution.

            If you don’t tax the rich, eventually they end up with all the money. If you try to print enough money (and hand it to the poor) to compensate for the accumulations of the rich, *then* you may well get inflation, so the only good way to do the redistribution is by taxing the rich. (You also want to tax pollution.)

            As long as redistribution is being handled through taxation, the rate of money-printing needed to keep the economy going and government functions running will be low enough that excess inflation will not be a problem. Even for a very large government.

          1. PaulJ

            “And given that deficit spending entails interest payments, it seems the banksters have the country over the barrel one way or another kgasmart”

            Deficit spending entails interest payments only because by law the Treasury must issue debt instruments (Treasuries) dollar-for-dollar to match deficit spending.

            This is a voluntary/arbitrary constraint adopted by Congress. Wonder why?

            Hint: who gets the money?

            It has no real bearing on our monetary system.

            Apparently the powers-that-be do not think it prudent that citizens know that money comes from the ether.

            (Not disagreeing with what F. Beard said, just a different take)

          2. F. Beard

            Hint: who gets the money? PaulJ

            British Royalty and such? Hamilton’s descendent’s?

          3. F. Beard

            Dang! What I meant to say was replace “[" and "]” with the “less than” and “greater than” signs respectively. On my keyboard they are above the “,” and “.” respectively.

          4. Nathanael

            “Hint: who gets the money?”

            In the first instance, the Federal Reserve.

            In the second instance, its owners: the private banks. The Federal Reserve system was actually set up so as to give the private banks the economic income from the seignorage (money printing); it was a deal cut back in 1913, where the government got the power to control the money supply (a win for the good guys) but the private banks got the income from it (a loss). (The fact that the government has now been taken over by the bankers’ cartel means that we are now losing both ways, of course.)

            In the third instance, the rich people who are sold the Treasury bonds with the interest rates set by the Federal Reserve. But this is secondary to the first two points.

  11. BondsOfSteel

    Um… so, this is the opposite of what I’ve been saying for 3 years:

    It’s not a problem with Solvency… it’s a problem with Liquidity.

    The treasury has enough assets to pay all the bills, and the ablity to create new assets (in dollars). It doesn’t have the cash on hand.

    1. Hugh

      The banksters are insolvent. It has always been the goal of the Obama-Bush-Paulson-Rubin-Summers-Geithner-Bernanke-Congressional cabal to allow them to loot the government and us back to solvency on our backs.

      We have been off the gold standard since the 1970s. We have a fiat currency with our debt denominated in that currency. The only way we could have a default is if a criminally-minded political class chose voluntarily to do it. Again for them to create a default, they would have to violate the 14th Amendment.

      1. F. Beard

        Again for them to create a default, they would have to violate the 14th Amendment. Hugh

        How ironic. An Amendment that was supposed to protect creditors when money was hard works against them when money is soft.

        Is God mocked? Apparently not.

  12. b.

    Maybe somebody can clarify this for me: the Treasury reports outstanding debt (e.g. T-Bills) in its reports, such as this:
    http://www.treasurydirect.gov/govt/reports/pd/mspd/2011/opds062011.pdf

    Am I correct in assuming that the intragovernmental “Government Account Series” holdings of 4.6 trillion include the SSA trust fund of 2.6 trillion? In other words, borrowing from the trust fund counts towards the debt and debt ceiling, and there are at least 2 trillion more of Treasury obligations to government agencies that count as much – or as little – as the debt owed to trust fund.

    The SSA FAQ has this:
    “Far from being “worthless IOUs,” the investments held by the trust funds are backed by the full faith and credit of the U. S. Government. The government has always repaid Social Security, with interest. The special-issue securities are, therefore, just as safe as U.S. Savings Bonds or other financial instruments of the Federal government.
    “Many options are being considered to restore long-range trust fund solvency. These options are being considered now, over 20 years in advance of the year the funds are likely to be exhausted. It is thus likely that legislation will be enacted to restore long-term solvency, making it unlikely that the trust funds’ securities will need to be redeemed on a large scale prior to maturity.”

    In other words: legislation will be enacted to ensure that payroll tax will add to the trust fund. The expectation that trust fund debt can effectively be rolled over at will is expressed through the maturity dates, and it would be really interesting to see how fast the trust fund would have to be depleted to require the Treasury to redeem “the trust fund’s securities on a large scale” and or “prior to maturity”. It would also be interesting to see whether early redemption of these special securities is actually impossible under the applicable regulations and laws – given that they cannot be traded or securitized in any way, the maturity dates will reflect how the “payback” has been engineered.

    1. Hugh

      This is the nature of the national debt as of 07/22/2011:

      Debt held by the public: $9,748,189,073,389.64

      Intragovernmental holdings: $4,594,684,906,653.27

      Total debt outstanding: $14,342,873,980,042.91

      The intragovernmental holdings includes the money owed to the SS Trust Funds.

      In my comment above, I cited the SSA where it said that these special issue instruments may be redeemed at anytime at full value.

      I also cited the section where it says that incoming tax revenues from the FICA must be used to buy these instruments by law. This means that the SSA can’t use incoming revenues to make up most or all of its daily outflow and so keep the checks coming. In the event of a default I also think that the SSA would be unable to exchange its special issue instruments for Treasuries. The Treasury would refuse to make the exchange.

      Again all of this beside the point in the sense that Obama has the power and duty under the 14th Amendment Section 4 to pay the nation’s bills. I would note that if we had a functioning democracy, and not a kleptocracy, it would be an impeachable offense for him not to.

      1. PaulJ

        “This is the nature of the national debt as of 07/22/2011:”


        National Debt also equals the total (over all history) savings of the private sector economy including foreign holdings of dollars.

    2. Cedric Regula

      I asked about the “other” 2 trillion in intergovernmental debt too and was told much of it is Federal pension plans.

      As far as the SS Trust Fund goes, it is expected to deplete around the 2036 timeframe. So that gives some idea of the annual demand from SS recipients. Or you could just think of the baby boomer age demographic.

      But you’ve nailed the big problem. They are trying to turn this into a problem by demanding that we can project social security solvency over 75 years. Then in year one they want to essentially default on the Trust Fund. Add in a payroll tax holiday too. That Rube Goldberg will never fly of course.

  13. Anonymous Jones

    I always like Hudson’s pieces, but I especially liked the nod to Plato in here and also the idea that societies are in motion, not equilibrium.

    Of course, the notion that the Left is in the pocket of the moneyed interests should not be very surprising. This is what concentration of wealth does. It corrupts everything around it. I just cannot imagine how you could live in a society of concentrated wealth and not have this type of corruption persist. People like money. Money gets them to do all sorts of things. I have friends who started up outsider entertainment blogs with all the best intentions. The studios fought them at first but then eventually co-opted them by bringing them inside the tent through the “carrot” of being given special treatment on set visits and the “stick” of excluding them from premieres and other access if they stepped out of line, all of which carrots and sticks affected their readership and revenue. This is how it works. You can manipulate people if you have a lot of money. Shocking, I know!!!

    Most everyone would like to be richer than their peers. This (generally innocuous goal) becomes a society-wide sickness if you live in Extremistan and some can command more than others because of productivity (or monopoly-like entertainment talents) and then use their small advantages to make them even bigger advantages through the machinations of governance.

    But yes, let’s eliminate the estate tax, let’s reduce the capital gains tax, let’s lower the top marginal rates. What could possibly go wrong?

    As the historical cycle of oligarchy and democracy shows, this turn toward oligarchy was probably inevitable, but the tax cuts last decade almost certainly accelerated the process. Thanks, guys!

    I’m not a communist. I believe in fair markets. I believe people use the incentives that come from jealousy of their peers to achieve more than they would otherwise. I believe in the power of competition. But this does not mean I cannot see that a point can be reached at which the incentives for ever-increasing wealth turn a general positive into a general negative. These are not mutually exclusive positions to hold. Little league has a mercy rule for when one team has thoroughly clobbered the other team, generally because the benefits of competition are lost at that point (and there are no TV sponsors that need to get paid). For all the reasons set forth above, using tax policy to engineer caps on the concentration of wealth seem like a pretty good mercy rule to me. Feel free to disagree.

    1. Jason Rines

      I disagree Jones. How about this? Term limits, forbid lobbying and last, politicians and their family should be forbidden in investing in market while in office and four years afterward under threat of jail.

      Neither of our ideas will work now in any event but something to consider for America 2.0 . This governmnent is beyond cure at this stage. For awhile it was a good run despite the imperfections.

      1. Glenn Condell

        ‘forbid lobbying’

        Seems a tad harsh. Could Mr Smith still Go To Washington?

        Fund elections publicly, but first, return to a trustworthy paper trail election process.

        Trim the branches by all means, but don’t forget the roots.

        1. attempter

          Forbid lobbying? Seems a tad harsh.

          Funny, I was just thinking it was ticky-tack. Even if reformists could ban lobbying today, if you leave the rackets in place the it’ll be back tomorrow. Lobbying is a symptom, not the ailment. To cure the disease is to abolish the rackets completely.

          That’s what this means:

          Trim the branches by all means, but don’t forget the roots.

          Things like banning lobbying, publicly funded elections, etc. are just trimming the branches.

  14. Marital Martial Law

    Who wouldn’t enjoy seeing the Banksters completely wiped out? Let’s listen and believe the fear inflected spittle of the capital hill circus featuring Timmy Geithner and Butch Boner. Burn your credit cards, withdraw funds and never do biz with the Banksters again. Enjoy the prapoganda circus, and find motivation in Black-Nixon’s sneering proto-facism. Imagine a better world – TBTF Banksters. Gone! Poof!

  15. b.

    “It’s not a problem with Solvency… it’s a problem with Liquidity.”

    I would rephrase this a bit.

    The Trust Fund is solvent, but not liquid. Its liquidity is controlled by the special issue securities’ maturity dates and the payroll tax cash flow. The latter is reduced by unemployment, wage deflation and payroll tax holidays, I do not know who gets to set the former.

    The Treasury is liquid – debt ceiling aside, it can borrow or print money as needed, and might be constitutionally required to – but (if you accept a debt ceiling) the USA are “insolvent”.

    A government with a debt ceiling is not a sovereign government.

    Now, any money the Treasury prints or borrows represents a claim to future tax revenue, which is exactly what the Treasury already sold to the SSA Trust Fund over the past 30 years – a claim to future tax revenue. The problem is the revenue – the more you defer taking it in, the more of it you will need. Through the SSA, retirees are simply the biggest domestic creditor to the US government, and the debt ceiling is what could prevent debt service there in very publicly visible manner – through the absence of Social Security checks.

    Obama’s scare scenario is internally consistent, it is his response to the problem that is untethered from reality. Unless sufficient tax revenue is generated by bringing back the progressive taxes of post-WW2 era, there will be no post-WW2 prosperity. Even if the US government – Congress and administration – succeed in the biggest underfunded pension fund fraud in history, reducing Social Security benefits in a recession will adversely impact domestic demand, health care costs, and ultimately keep the entire economy in sustained collapse. Furthermore, any spending cuts are bound to shuffle the anti-stimulus from one sector to another, as are payroll tax increases and other regressive taxation. If you want to balance the budget, you will have to get the money from those that have it.

    1. Out o' Werk

      Close down military bases and stop 2 or 3 wars. THEN you’d have to be honest about who has money

    2. BondsOfSteel

      But it _is_ the debt ceiling that is causing the liquidity problem. Without the politics around the debt ceiling votes, the treasury (and SSA) would be solvent.

      While treasury bonds are a promise for repayment from future taxes, since they are priced in the fiat currency they could also be paid back through monetary expansion.

      Of course, monetary expansion is inflationary… but at this point with T-bonds trading an all time low, large non-structural unemployment, and wage deflation, I could easly argue that a bit more quanative easing isn’t such a bad thing.

  16. Krugger

    I’m so confused. Is Obama a socialist or is he trying to kill SS and Medicare? Because he can’t be both… but there are tons of people that vehemently claim one or the other…

    1. John

      It’s simple. People are perfectly capable of believing the most absurd things. In fact, there is inherently a disconnect between belief and reality. False beliefs tend to get refuted only if the falsity hurts the believer in some way. (Not always true, but very often.) When the falsity only hurts someone else, the believer may remain oblivious.

  17. b.

    “In my comment above, I cited the SSA where it said that these special issue instruments may be redeemed at anytime at full value.”

    We are both quoting from the same FAQ:
    http://www.ssa.gov/oact/progdata/fundFAQ.html

    However, “at any time at face value” is quite different from “redeemed on a large scale prior to maturity.”

    I think the composition of the trust fund holdings is more complicated, and the actual distribution would be interesting to see:
    “The certificates of indebtedness are issued on a daily basis for the investment of receipts not required to meet current expenditures, and they mature on the next June 30 following the date of issue.
    “Special-issue bonds are normally acquired only when special issues of either type mature on June 30. The bonds have maturities ranging from one to fifteen years.”
    http://www.ssa.gov/oact/progdata/specialissues.html

    If the entire trust fund, or even a sufficiently large portion of it, could be redeemed at any time, then – interest loss aside – the SSA can set the pace. However, the moment the payroll tax cash flow turned negative, all receipts are “required to meet current expenditures”, and June 30 becomes a key date, because whatever bonds mature on that day are all the surplus SSA has to work with for an entire year?

    1. Hugh

      I stand corrected. The SSA could use its daily cashflow from FICA receipts to fund its operations. Any surplus would be used to buy certificates of indebtedness which mature on June 30 of each year. They are then bundled together each June 30 and used to buy bonds, that is the special issue Treasuries. It’s been a while but the last time I read through their financial report the SSA cycles through its portfolio about every 6-7 years.

      If the SSA has a negative cashflow going into a default, it would still have money to send checks out just not fully. It might say be able to send a recipient 90% of their accustomed amount.

      1. Steve Roberts

        CNN handles this last night. After FICA contributions, the shortfall isn’t massive and can easily be made up by other government revenue that is still rolling into the government. For example on my next paycheck I’ll still be making my FEDERAL tax payments regardless of whether or not the government is operating.

        The government can pay 100% of SS, 100% Medicare and all of it’s military expenses and not default. It’s pretty much everything else that can’t be paid until there is a solution. That’s also how Clinton handled things.

  18. b.

    Never mind:

    “Special issue redemption rules
    When special issues need to be redeemed prior to maturity…”

    So the loss of interest income is the only constraint here – SSA has the authority, and is expected and obliged, to redeem as necessary, with the least possible impact on future revenue.

    In short, if and when the SSA took special issues to the Treasury and the Treasury refused to redeem them, the 14th amendment would be violated rather unambiguously.

    I’d still like to see the payout schedule assumptions baked into the current maturity dates.

    1. Cedric Regula

      I’ve heard from knowledgeable people on the subject (Bruce Webb at Angry bear and his inside contacts that actually have jobs analyzing SS) that the treasury does try and match up maturities on special treasuries with projected cash flow needs. It’s all projections of course, so subject to some error.

      It does appear that so far the treasury has been reasonably fair when deciding on what maturities and interest rates go into the fund (longer maturity pays more). The Treasury is the administrator in the end, so conflict of interest is possible.

      The other thing is since these treasuries don’t trade in the secondary market, the treasury can always agree to pay them early at face value, which you can’t always count on out in market land.

      1. Cedric Regula

        To clarify a bit more…the way I understand it, the SSA is a department of the Treasury, which makes Timmy their ultimate boss at the moment.

  19. solo

    Hudson presents a concise expose of the bipartisan offensive of the oligopolistic capitalist Few against the economic well being of the Many, all under the false pretext that the debt limit and deficit issues are inseparable. His analysis could be improved by (1) broadening his criticism of the Democratic Party to include bourgeois reformism generically–the pretense of the “loyal opposition” that “we” can have our capitalist cake and eat it (with reforms) too–which “somehow” always ends up perpetuating the systemic status quo; (2) including the ecosphere (environmental protection) among the designated victims of capital’s offensive; (3) speaking accurately about the genus of the beast consuming us–not “neo-feudalism” but decadent capitalism on the offensive; (4) linking the latter with the petty-bourgeois Tea Party protofascist ferment that feeds the political insanity while facilitating the bipartisan divide-and-rule side of the fear-mongering; (5) dropping his cyclical metaphor (Plato) and recognizing that the dominant theme is that of imperial decline. (The “pendulum” will not swing back to the good ol’ reformist days.) –If there is any “cycle” to be discerned, it will show up only after the system has rotted into its own detritus, as expressed in the various dystopian novels/films of our era. (My favorite is Miller’s novel, “A Canticle For Liebowitz.”) In a word, the patient is not going to get better–not in our lifetimes, nor our children’s, nor our grandchildren’s. Welcome to the future!

  20. steelhead23

    “The reality is that running a budget surplus would increase interest rates, by forcing the economy into captivity to the banking system. The Obama administration is now deep into its Orwellian rhetorical phase.” M. Hudson

    Dr. Hudson, I find this hard to believe. I agree that reducing government spending in the face of a slumping economy risks further contraction resulting in further reducing government revenues and if unchecked, a kind of death spiral. However, my econ 101 understanding suggests that as the issuance of debt instruments would become fewer in a government surplus, the tendency would be for prices on such instruments to rise, causing rates to fall. Is your contrary assertion explained on your school’s website?

  21. gordon

    Obama is a tool for Wall St. They are planning on an annuity “parallel option” which “might” be mandatory, to soc sec deductions, PRIMARY OBAMA! REMOVE HIM! He is the most DECEITFUL Pres in US history.

    Anyone who took this long to realize, I mean, Krugman FINALLY said it’s “alarming he is governing to the right of Nixon…”

    any brainwashed still left out there? Oh, they’re over on HuffPost. Morons. Blind idiots.

  22. Matthew Flanagan

    Always enjoy your articles, Mr. Hudson.

    Quick correction here: the Tories did manage to privatise the railroads in the UK, in the face of widespread public opposition. The process was a mess (increasingly, subsidies are more expensive for the government, fares higher, services less efficient), and it was one of the factors that resulted in them being kicked out of office by New Labour soon afterwards…

  23. Steve Roberts

    “The Republicans help by refraining from putting forth a credible alternative presidential candidate. ”

    I’m not sure they are helping on purpose. :)

    Lot of conspiracy theory stuff in the op-ed but some of it I sadly find myself agreeing with.

    The problem I disagree with is his part about us intentionally running a long term deficit growth and implying there are no ramifications. There are. We can run deficits forever as long as GDP grows equal to debt growth but if debt grows faster than GDP for a long period, eventually there are ramifications.

    1. F. Beard

      . We can run deficits forever as long as GDP grows equal to debt growth but if debt grows faster than GDP for a long period, eventually there are ramifications. Steve Roberts

      You forget that no US Government debt is needed in the first place.

      1. Steve Roberts

        When was the last US President to NOT run a deficit for their full term? Ike? It’s a given with our federal government regardless of party.

        1. F. Beard

          When was the last US President to NOT run a deficit for their full term? Steve Roberts

          A deficit does not require debt. The government can simply spend more than it taxes. No debt is needed. It is called siegniorage.

          1. doggett

            “A deficit does not require debt. The government can simply spend more than it taxes. No debt is needed. It is called seigniorage.”

            This would bear repeating ad nauseum, by which time it might have sunk in.

    2. Doug Terpstra

      As Mark Twain wrote, “A conspiracy is nothing but a secret agreement of a number of men for the pursuance of policies which they dare not admit in public.” – Mark Twain

      It need not be some grand conspiracy with intricate scheming at all for insiders to ‘guide’ the candidate selection process, through a grapevine understanding of the reptilian old boys’ network and an general consensus that they like their plantation waterboy just fine, and won’t brook any serious competition. Those at the very tippy-top have a lot of levers, supremely visible and not, to move (unwitting) players around, nudge editorial opinion, and quietly torpedo unwanted competition. You don’t need a foil-lined hat to know that.

      “It’s harmless theater to let that Mormon guy run ahead for a bit; the religious loonies won’t let him even place on the primary scoreboard. And Bachman . . . ’nuff said, she’ll follow Palin down the drain after 15 minutes in a real campaign.—etc.”

      It’s really obvious, the GOP field has so far been a cartoon cast indeed, so far lacking only St. Rudy of 911. Between POTUS candidates and militants on the faux debt debate, it’s just a little too transparent. They’ve got Snidely Whiplash Boner tying granny to the railroad tracks so that Studley Doright Obama can swoop down just after the nick of time to rescue her for the poor house after her legs are cut off.

      Hudson is right. Obama is a consummate liar and a fraud. In perception-deception management, he makes his idol Reagan look like a consummate B-movie actor. It’s disappointing that the dead liberal class rotting in the veal pen continue to give the bastard pass after pass after pass.

      1. John

        A liar and a fraud? More likely a BSer and a self-deceiver. The difference between liar and a BSer is that a liar says what he thinks is false, whereas the BSer doesn’t think about the truth of what he says.

        The self-deceiver says something, then immediately believes what he says.

  24. ArkanasAngie

    Speaking as a self proclaimed progressive libertarian … “y’all” might be surprised that an un-hijacked tea bagger has more in common with you than the bankers and their designated MSM voices.

    No more wedgies.

    I’m sure tea baggers would agree to hold things constant while we go after a common foe … Washington and Wall Street.

    What we need is a law and order candidate that runs on a third party ticket based of a let’s start with enforcing laws in Washington and on Wall Street in 2012.

    Wouldn’t it be nice to have a DOJ who was tasked with unearthing financial fraud? Wouldn’t you like to see Congress made to operate under the same laws you do (No More Waivers … to nobody)? Wouldn’t it be super duper for Washington to actually be more concerned with Main Street and not Wall Street?

    Tea baggers don’t want to cut social security. Tea baggers don’t want the unemployed rioting in the streets because their children are hungry. They don’t want people dying because of a lack of medical treatment.

    At the same time … we have got to get our financial house in order. And … apparently it is only going to happen if we throw the bums out. Unelect them.

    The debt ceiling talks are theater. Nothing else is going on while we stay focused on this.

    This kind of thing needs to be debated on the open floor of the senate not wrangled over in the back room by a bunch of made men (and women).

    1. Cahal

      It’s at the stage where voting for Ron Paul (had he not resigned) may well have been the most sensible option, simply because he would at least have tried to dismantle the current banking system.

      Although he may have been full of shit, obviously.

    2. attempter

      That ought to be true, but in practice they’re still supporting the Republicans in the same way the “progressives” (liberal teabaggers, as I’ve often called them) still support the Democrats.

  25. Jim

    Michael Hudson has argued that the “real Obama is a Republican Wall Street imposter in Democratic clothing.”

    I would argue, instead, that the Obama presidency respresents the exhaustion of the traditional “progressive” and “conservative” inpulses in American political life.

    By the end of the 19th century both “progressives” and “conservatives” converged in their collective support of a then emergingly massive and apparently limitless economic system.

    By the end of the 20th century both “progressives” and “conservatives” were comfortable in their roles as phoney alternatives within the “civilized minority” that increasingly controlled all the key social networks of power.

    Obama won the presidency not simply because of his alliance with Wall Street Bankers but also because of his rhetorical ability to touch our collective yearning for greater human connection.

    He has now completely betrayed this collective yearning and neither he nor the “civiilzed minority” which he presently represents(in both their left and right forms) will be forgiven for such a deep emotional betrayal.

    1. War Profiteering, the Original Capitalist Frontier

      It’s all makeup man, to see the real ‘Murican civility one needs to take a look at the 15000+ sorties and combat missions the plutocracy have pummeled upon Libya.

  26. Blurtman

    Regarding the special treasuries held in the SS trust fund, it has been reported that “The numeric average of the 12 monthly interest rates for 2010 was 2.760 percent.”

    As the POTUS has threatened the very payout of the trust fund, has he not increased the risk of these special treasuries, and should not they now return a premium to the equivalent “non-special” US treasuries? I mean, if the POTUS says they are in doubt, perhaps the return should be 20 or 30%, and not 2.76% or thereabouts.

    Also, why are expected payouts to US treasury bondholders not defined as “entitlements.” Why define the payouts of one set of treasuries, the special treasuries, thusly but not the other? And why did the POTUS not threaten the payout of the “non-special” treasuries?

    1. Cedric Regula

      Also, why are expected payouts to US treasury bondholders not defined as “entitlements.”

      Obviously because they paid for their bonds.

      hahaha. I was making a joke.

      I think the way the treasury sets the interest rate on the special treasuries when issued is they just look at the market rates for comparable maturities and say aha…that’s it! (that’s my serious opinion)

      1. Blurtman

        Yes, but the return should reflect risk, and the “special treasuries” are apparently more risky, and so the method you propose is illegitimate. It would perhaps be better from a liquidity perspective if the trust fund held regular, marketable treasuries. Without going to far into Bush land, perhaps the SS trust fund should be allowed to invest in other securities.

        1. Cedric Regula

          We did spend quite a bit of time at Angry Bear thrashing around the question if special treasuries are in anyway legally “subordinate” to tradable treasuries. We found no evidence of that and the SSA seems to make statements confirming they are just as good as “real” treasuries.

          Where there is the “catch” is SS says the payment amount and eligibility date are not guaranteed. So they can legally push things out or reduce benefits, but they cannot selectively default on the SSTF.

          So if they really wanted to twist the bounds of the law, I guess they could say the SSFT is payable in full 74 years and 364 days from now and not a moment sooner.

          But that’s why they let us vote in a democracy.

          1. Blurtman

            Obama seems to have made special treasuries subordinate to marketable treasuries by threatening the payout on the former, but not the latter. The liquidity of marketable securities is not dependent on bickering politicans as is special treasuries. To remove any doubt, perhaps the USG could refund the full $2.7 trillion of special treasuries with cash, and allow the SSA to invest in liquid securities. Could we all vote on that?

          2. Cedric Regula

            I think we should ignore the soundbite stuff for starters, and just wait and see what happens if they do chose to consider legalities if and when the time comes.

            Canada did change their national pension plan as you suggest, and they did it at market peak in 1998 I think, so the grass is not necessarily greener. Plus we would have the biggest hedge fund in the world and have to pay fees for that.

            The Lite version would be to separate the accounting from the general fund, so politicians couldn’t point to it all the time and say that’s were all our money is going (and coming). Then they would need to get real.

  27. Enough already

    Tuesday, July 26, 2011
    Republican Leaders Are Receiving Greatly Increased Contributions From Wall Street Firms

    Banksters and gangsters all and we keep feeding them more and more. The system is not broken as many say, it is grossly abused. And “we” through our so called “elected” officials allow this abuse.
    Speak out America. This is your country. It does not belong to Wall Street nor to Oil Street or even to Auto Street. It belongs to Main Street, the street you and I live on.
    WAKE UP AMERICA!

    http://www.goldmansachs666.com/2011/07/republican-leaders-are-receiving.html

  28. Yuccatree3

    As Arkansas Angie says, we need a third party and it is NOT the loonies involved in the Tea Party who have already been co-opted by the Republicans. Still and all, we DO need a third party that has not been bought and sold by the oligarchs in this country. Until justice and fairness and punishment for crimes returns to America, we are lost….

  29. Max424

    Michael Hudson: “[Money creation]… is a privilege that the banks would now like to obtain – the ability to create credit freely on their computer keyboards, and charge interest for what is almost free…”

    My score card reads:

    Banks and the Fed — plus $13 trillion; plus, approximately, $1 quadrillion in asset backing

    The United States of America: plus $400 billion (the ARRA, without the noise and nonsense); minus, potential trillions in asset stripping

    So, it looks to me like the banks have the edge in the early going. In fact, if this was a baseball game, I would have the banks ahead, roughly, 55 to 1 going into to bottom of the third.

    Not an insurmountable lead, by any means, if your playing slow pitch softball in a tight park, with a powerful wind blowing toward a short porch in left. Unfortunately, the banks and the Fed play hardball, their relief staff throws bebes, and the gale force winds in our cavernous park, are blowing in.

  30. Daniel L

    “It’s true that Pres. Clinton ran a budget surplus. The economy survived by the commercial banking system supplying the credit needed to grow – at interest. To force the economy back into this reliance on Wall Street rather than on government, the government needs to stop running budget deficits. The economy will then have a choice: to shrink sharply, or to turn almost all the economic surplus over to banks as economic rent on their credit-creation privilege.”

    I thought it was well understood that ex-FICA receipts, Clinton did not run a surplus. Also, deficit spending is provided – at interest. Unless the argument is that GDP can grow faster than debt, which we know for a fact is false (see: http://market-ticker.org/akcs-www?singlepost=2603173 “in fact have not had a single positive quarter where GDP has increased greater than total systemic debt since 1980.”)

    As for the assertion that running budget deficits is a requirement for growing an economy, I present Australia:

    Net debt/GDP ratio: Chart Six here http://www.treasury.gov.au/documents/1496/PDF/01_Debt.pdf

    GDP Growth: https://customers.reuters.com/d/graphics/AU_GDP0209.gif

    What Hudson is [poorly] describing is the Triffin Dilemma. Global growth is not possible without an increasing supply of US dollars.

    This whole argument is asinine, we could have solved this in the 60′s by having a small recession then and keeping our current account balanced and our national debt steady. Instead we said screw it let’s party.

    1. PaulJ

      @Daniel L said…

      “deficit spending is provided – at interest”

      Why do we pay interest on deficit spending?

      1. Daniel L

        Because we don’t do siegniorage. And whether you consider interest to be explicitly paid back or you devalue the currency through siegniorage the effect is the same – a dollar today is worth more than a dollar tomorrow.

        I’ll concede that a government bothering to create money via bonds is inefficient and results in a skim paid to bankers given the option of siegniorage. That does not change my contention that wealth should be able to be stored in currency without facing decreasing value due to government spending.

        1. PaulJ

          Daniel L said…

          “…That does not change my contention that wealth should be able to be stored in currency without facing decreasing value due to government spending.”

          If the government doesn’t spend, how will the stock of money increase as the economy grows, and as long as we have a trade deficit which removes money from the economy?

          1. Daniel L

            It wouldn’t. It would force the raising of interest rates here until the flows of money balanced out. This is relatively simple: if you consume more than you produce, you have to pay the bill eventually.

            I wish people would realize that it’s not a given that the US can continue to consume more than it produces, despite it going on for 30 some years now with a short respite [best image I could find http://t0.gstatic.com/images?q=tbn:ANd9GcQxfXLWpsL3RStdJybE6BXiRZpf1zWaF1OaUvp9ww3fYxcHcjGt

            Really, just ask yourself that: is it sustainable for the US (or any other country) to continually consume more than it produces, or is there going to be a consequence to that action?

          2. PaulJ

            Daniel L said…

            ‘…It wouldn’t. It would force the raising of interest rates here until the flows of money balanced out…”

            Flows of money coming from where?

            “…if you consume more than you produce, you have to pay the bill eventually.…”

            So your argument is that with nearly 20% unemployment/underemployment we are consuming more than we can produce?

          3. Daniel L

            “Flows of money coming from where?”

            If you offer a high enough return, capital will flow back.

            “So your argument is that with nearly 20% unemployment/underemployment we are consuming more than we can produce?”

            This isn’t an argument, it’s a fact. As a nation, we are consuming more from other countries than we are producing for them. The unemployment number is irrelevant. You could employ all those people and pay them with printed money and it wouldn’t change that the US is a sink, not a source of energy.

        2. F. Beard

          That does not change my contention that wealth should be able to be stored in currency without facing decreasing value due to government spending. Daniel L

          Then create your own private currency and manage it the way you wish to. And if you can’t create your own private currency then ask your Congressman why not?

          But as for government currency, that is a political decision for all taxpayers to make through their representatives.

          Furthermore, a big reason the US Government has to spend so much is because of its filthy relationship with the banks and to ameliorate the damage the banking system has caused.

        3. F. Beard

          . And whether you consider interest to be explicitly paid back or you devalue the currency through siegniorage the effect is the same – a dollar today is worth more than a dollar tomorrow. Daniel L

          But what if that dollar was worth less yesterday? What if today’s dollar strength is an anomaly?

          Because of our banking system we have an “elastic money supply”. It expands as loans are made – weakening the currency – and shrinks as loans are repaid – strengthening the currency. That elastic money supply is the cause of the boom-bust cycle. The bust is painful and people suffer. The government steps in to ameliorate the damage but so long as actual price inflation does not occur then you have no cause for complaint. However, the problem is that the government has helped the banks who are using that money to drive up the price of commodities so you do have cause for complaint – that the government props up the banking system.

    2. Leverage

      Australia is irrelevant, hint: balance of payments surplus. The neccessary deficit it’s run by other nations.

      1. Daniel L

        It’s funny you mention that, I had originally written: “Global growth is not possible without an increasing supply of US dollars. [Australia's growth is funded by US dollars via Australia running a current account surplus with China, which runs one with the US.]”

        Also, I do understand this. My point is that since you can have economic growth without running a deficit, at some point balance needs to come back into play or you end up in a hole you can’t dig yourself out of. See this table: http://en.wikipedia.org/wiki/List_of_sovereign_states_by_current_account_balance

        [2010 data] Countries in the bottom 11: Greece, Portugal, UK, Spain, Italy, US, Australia [rare for the Aussies, as a % of GDP it's roughly 3% this year, vs ~4.3% for the US]

        That said, I don’t think the money supply is a limiting factor on growth. Nominally, sure, but real growth, no. Otherwise the argument would reduce to saying an economy with a fixed money supply could not grow. This would be deflationary though, which is a bogeyman.

        1. PaulJ

          Daniel L said…

          “…This would be deflationary though, which is a bogeyman.”

          Bingo

          You just figured out why deficit spending is a necessity and thus paying interest on the peoples money is a giveaway to the rentier class.

        2. F. Beard

          Otherwise the argument would reduce to saying an economy with a fixed money supply could not grow. Daniel L

          A fixed money supply would reduce growth since it would offer a risk-free incentive to hoard money. But growth requires investment, not hoarding.

          The problem is not money creation per se but that we are all forced by one means or another (legal tender laws, government privileges for FRNs, etc.)to use a single money supply for private debts.

        3. F. Beard

          This would be deflationary though, which is a bogeyman. Daniel L

          It is no bogeyman! The money supply should not grow excessively fast but it should always grow.

  31. Sam

    I tell my Republican pals who are retired that if there is a default and their checks stop coming, that should be the happiest day. They talk the talk–small government. They get to walk the walk–their snout is removed from the trough. They are outraged.

    At the grassroots level, why don’t we just conduct a poll starting with Republicans: how many would pay taxes but give up Social Security and Medicare? donate the goodies back into the system. How many would give up Social Security to live on food stamps only, as many Americans workers have had to settle for as American jobs have gone offshore? I’d like to see those two questions answered by Republicans first. Then we could expand the poll.

    1. PaulJ

      Republicans (and some Democrats) want to take away someone else’s benefits, not their own…

  32. Paul Tioxon

    It is unfortunate that Dr Hudson, as smart as he is, is not smart enough. His analysis that Obama is delivering the Wall St plan to take down SSI, Medicare and Medicaid and create, as he calls it, socialism for the rich. If he would expand his analysis historically, he would see what he is talking about is simply capitalism, being restored since FDR took control of capital from the private sector and placed it under the regulation of the government for political direction other than profit making. It was at that point in history, that capital was put to work putting people to work, and NOT simply to make more money with more money in an never ending process. FDR was not despised and his New Deal policies continually attacked for no minor affront. So profoundly was the world changed, that the rich knew the world was to be remade by politicians in DC and NYC, at the UN, and not at the deal making money centers of the world. America had changed from “a country dominated by business to one controlled by government. … Joe[Kennedy]declared that “in the next generation the people who run the government would be the biggest people in America.” High public office, which FDRs administration opened to Catholics and Jews, had replace accumulation money as the greater social good…”. P one eleven. From AN UNFINISHED LIFE, BY R DALLEK.

    But that post war era will be looked back as a brief respite for the vast majority of Americans from the dominance of capital by financiers at the commanding heights of capitalism. Even before the Medicis of Florence, there were merchants who handled the finance of kings, lent them money, financed their wars. But the explosive power of the alliance of finance and state making is what makes the emergence of Western Europe powerful and wealthy simultaneously in a virtuous cycle of increasing political power and endlessly opening territories in which to make ever more money. The Medici Alorithm sums it up: “Money to get power, power to protect money.” The alliance with the state allowed the kings to internalize calculated financial initiatives usually followed without loss of focus by merchants, making money. For the state, making money is collecting taxes. This state organization allows the alliances with the financiers, because it eliminates the risk of being repaid. A dedicated funding source of money is built into the structure of the state, along with a bureaucratic staff to reach throughout the nation, to bring the revenue back to the strong, central government. It is so taken for granted today, that we are fooled by the appearance of territory that is recognized as a nation state but does not have a strong enough central government to effectively collect taxes at the level necessary to meet its operation costs and debt obligations.

    Think of Greece, but thinking politically over its history, when did Greece ever stand for long with a strong, central government. It had been dominated as a territory incorporated within some other empire since the ROmans. The core nations of Europe all have similar political economies that are marked by governments which for centuries had incorporated government components that acted more as profit seeking merchants along with state making and war making components. America is no different, since its founding and the alteration of its national government from the articles of confederation to a more perfect union with the US Constitution. This was done in no small part to show that if lent money, we would have the tax collecting authority across states lines to pay back the French, among others.

    Obama, is someone who ran for an office that has already been subsumed, for the last forty years, been surrounded by and dominated by the wealthiest and their paid agents. And when capitalism, defined as the social system that is an alliance of state, and its sovereignty, with capital and its unitary focus of endlessly accumulating profits, in whatever form, today, a financialized capitalism that makes money with money, instead of with commodities. What disturbs me is that seeing that capitalism could not be anything else other than the state, acting in parts as a business, and business, acting above the laws of the state, by political waivers granted via the alliance and mobility to go outside of jurisdiction, is completely missed, and called socialism for the rich. The society that we live in is under stress from a government that does not serve the people, but has gone back to before the New Deal, and serves the purpose of accumulating money. From Joe Kennedy pushing his sons into politics, because that is where the power was, and remained until recently, to work for socialist purposes, such as full employment, anti poverty programs, and Great Society legislation moving towards universal health care, we get billionaires who want to gut the state altogether and the citizenry in the process for more and more money. Obama is just a personality floating along the policies that move the Federal bureaucracy one way or the other. Some of the policies of the administration are preserving the NEw Deal/Great Society, and others are consistent with capitalism, such as it always was, before the structural changes that put capital under government control. It is not Obama that needs to be attacked, it is the policies. He will leave office one day, but the policies will still be in place or in contention for replacing what is in power.

    1. skippy

      “It is not Obama that needs to be attacked, it is the policies. He will leave office one day, but the policies will still be in place or in contention for replacing what is in power.”

      ———

      Those policies are projections of some ideology, all dressed up for general consumption. So until things get so bad that their nakedness is irrefutable, it will be hard yacka.

      I’m waiting for the spittle to fly’s from their lips, beliefs anger*, reduces their cognitive deception, that’s when the real fun will start.

      *Republican on CNBC a bit back, losing it for a second, where does property authority come from…god or government.

      Skippy…Mental brothels…methinks.

  33. Jeff

    What a wonderful forum for education this is.
    What a shame the average American will never read it.
    How to communicate the complicated ideas expressed here to the average American? Simplify.

    You have to make the ideas fit onto a bumper sticker.

    i.e. “Taxpayer Trillion$ for the bankers,
    Debts for the Middle Class”

    “If they can print trillions for
    bankers, so can they for your
    pension, Social Security & Medicare”

    Print them at home, clear packaging tape over them for weatherproofing.

  34. SRC

    Forgive me if this has already been advocated above — too many comments to follow them all.

    Professor Hudson’s proposal that the SSA liquidate trust fund holdings into the private market could be implemented if the Treasury Department were able (is it?, I don’t know) to swap the current special issue bonds in trust funds for standard publicly tradable Treasury bonds with similar face values and coupons. The special issue bonds can be put back to Treasury at any time, so the replacement regular bonds (which don’t have the put option) arguably merit a coupon premium to compensate for not having this feature.

    SSA could then sell its long-dated high coupon standard Treasuries into the bond market at a large premium to face value. This would fund current SSA disbursements for quite a while. These sales might depress the Treasury market, and perhaps this would provide a way for the Fed to undertake further monetary easing.

    An amusing thought is that in the future, this kind of swap could be used to increase cash flows into the SSA, courtesy of the private bond market, provided that Treasury were authorized to give special issue bonds to the SSA at higher than market coupons.

    That looks fishy, but in the present liquidity trap conditions, it may be that policies that would be dodgy in normal conditions would be helpful.

    Go ahead, austerians; beat me up.

    1. Cedric Regula

      I think they should have the special treasuries pay out platinum coins for a coupon. Then when they dump these formally non-marketable bonds on to the market they would be bid up to match yields of regular treasuries. The capital gains to the SSA would be near infinite. Then we could retire in style.

  35. Ro

    The subtlety of analysis is appreciated. Awesome as always. A couple of typos:

    “If you don’t want a Republican policy, they you should vote for me for president.”

    and

    “This worked after September 1008 with TARP, after all.”

  36. Charles

    On this one, the truth is somewhere between Hudson and Obama.

    First, it’s true that Social Security is fully solvent. But several points: (a) first, who does Social Security earn interest income from? The federal government. A disruption in the activities of Treasury could force the SSA to sell Treasuries at a discount, weakening the fund overall. (b) Second, there’s a cash flow question. In theory, since OASDI is in surplus, OASDI could pay all benefits from receipts. But (c) as we see with the FAA, if there’s a disruption in government employment, there can be a failure to collect taxes as well as a loss of services not directly connected to the activity. Finally, (d) although OASDI is in surplus, DI is not. That means that the checks of disabled people might indeed not go out. With Medicare, the problem is worse, because the program is not in surplus. I think the main effect would be that doctors would not get paid the full amount for their services (the so called doc fix). But realistically, the situation is unpredictable. As for Medicaid, default would mean crisis.

    Second, Dean Baker has said that Treasury could just keep writing checks, even if there is a technical default. This is probably true, though it would also represent a constitutional crisis. This is, basically, the 14th Amendment solution, that the Executive declares that since the debt can’t be questioned, and since Congress has authorized the expenditures, he will comply with their authorization in order to avoid questioning the debt. Baker says that the Federal Reserve would honor the checks. Also probably true. And as Krugman has said, if the credit agencies do a downgrade, the markets may well just yawn as they did with Japan in 2002. But as others have pointed out, pension funds who are required to have assets in AAA rated bonds would be forced to either change their charters or sell their Treasuries if debt is downgraded. So, a downgrade could indeed spark a rapid rise in interest rates. Finally, as a potential buyer of debt, I have steered clear of any US debt precisely because it’s so unpredictable. For the bond portion of my portfolio, I want predictable risks. US debt is, in my judgment, too risky given its low return. I’d rather hold cash than make 4% on a bond whose value could decline by 10% (even though if the situation persists for 2.5 years, the effect is essentially the same). Anyone who lived through the late 70s knows what I mean.

    Third, Hudson and others argue [added: elsewhere] that deficits don’t matter. It’s probably true that interest rates are not going to spike when the labor market is this slack. But the dollar has been dropping steadily as our political crisis has deepened over the last decade, and that in turn has been a factor in commodity price rises. Oil and food, for example, have been getting more expensive, and that has undermined American living standards even if overall inflation (which includes salaries) has been moderate or declining. Obviously, if salaries are declining and oil and food are getting more expensive, this is a disaster for the American people even if inflation is in check. So, while a strong currency does not necessarily equal a strong economy, strong economies tend to have strong currencies. Hudson is saying that American living standards can decay indefinitely without affecting the fiscal health of the country. This may be theoretically true, but in the real world, it is insanity.

    Finally, just as a stylistic point, look at Hudson’s argument. It’s largely based in ad hominem. That’s an indicator of the quality of the argument. Our political leadership certainly does suck. But just because it sucks doesn’t mean that any individual action they propose or take is wrong.

    Crossposted from MercuryRising, where I wrote it as a response to a commenter. To be fair to Hudson, he hasn’t raised the arguments I attribute to Baker and Krugman here. But from other things I have heard from him, I believe that these underpin his feelings that default is not a crisis. I do agree with him that this is a phony crisis, but until I know the precise details of the negotiations, I’m not prepared to say that the Democrats are in the tank on this. The evidence does lean that way, but it’s such a serious indictment that one doesn’t want to convict until we know for sure.

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