Debut of Made-in-China Social Security Checks

The total federal budget for 2012 is $3.68 trillion. The interest on debt is $242 billion. The rest constitutes mandatory and discretionary spending. Discretionary spending refers to the budget appropriated each year. The discretionary budget is one third of the federal budget. Congress directly sets the level of discretionary spending ($1.24 trillion) and can choose to increase or decrease any programs.

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In 2012, 57 percent of the federal discretionary budget will be national defense. The rest will include education, health programs, and housing assistance. Mandatory spending ($2.44 trillion) includes entitlement programs, funded by eligibility rules or payment rules. Congress decides to create a program, determines who is eligible for the program, various criteria, and then estimates how much is appropriated for the program each year based on how many people will be eligible and will apply for benefits. Social Security, Medicare, and Medicaid are the most costly entitlement programs. Veterans Administration programs, federal employee and military retirement plans, unemployment compensation, food stamps, and agricultural price supports are also included in entitlement programs. Congress periodically reviews the eligibility rules and may change them in order to exclude or include more people. Mandatory spending makes up about two-thirds of the total federal budget. The largest mandatory program is Social Security, about one-third of mandatory spending. As the age demographic of the country shifts towards an older population, mandatory spending increases. The controversial national debt or public debt is $14 trillion to $100 trillion, depending on how many variables are considered. Nobody disputes the fact that, over the years, U.S. ran more deficits than surpluses because of recessions, inflation, sluggish growth, wars, oil price shocks, and a steady growth in entitlements. Two American presidents are largely responsible for entitlements, Franklin D. Roosevelt and Lyndon B. Johnson with the “New Deal” and the “Great Society.” All politicians recognized the popularity of the programs and considered it political suicide to reduce or repeal the benefits once extended. Tip O’Neill called entitlements the “third rail of politics.” Promising costly benefits to individuals predicated on an unsustainable Ponzi scheme eventually caught up with countries like Portugal, Italy, Greece, and Spain (PIGS), especially since their governments gave up their sovereignty and could no longer control their monetary policies, they were at the mercy of the European Union and its currency, the euro. It is heading in that direction for the United States. Right now, our temporary salvation is the fact that we can print our dollar. Several administrations changed tax policies, thus altering revenue; new unregulated financial instruments were invented and sold as debt securities to financial markets, creating the capability to finance large debt, and the capability to create dangerous bubbles that could burst. To service a debt, you must have enough cash over a period to repay the interest and the principal. Normal operating expenses of our country should be fully funded with current tax revenues in order to preserve borrowing capacity for future crises. If the president tells Social Security recipients that they may not get their checks by August 2 if the debt ceiling is not raised, he is in essence telling them that he does not have any Social Security lock box money, it has been spent long time ago and he must borrow from the Chinese in order to make payments on the Social Security Ponzi scheme. This should give Americans great pause. For the past three decades, the government has used deficit spending (spending more money than it receives in taxes) in order to cover operating expenses, stealing from Peter to pay Paul. Some economists argue that deficit spending is necessary during recessionary periods. We can all agree that it cannot be sustained indefinitely if it exceeds the growth rate of the economy. How does the government raise money in order to finance the debt? The Department of the Treasury’s Bureau of Public Debt attracts buyers and arranges for the sale of debt instruments: Treasury bills, notes, bonds, and inflation protected securities. Bills mature in less than a year, notes in two to ten years, and bonds mature in twenty to thirty years. Inflation protected securities (TIPS) are sold in various maturities and are indexed to the rate of inflation. Said securities are sold directly or on secondary markets. As the U.S. runs more and more debt, the Treasury must find new sources of financing or enforce stricter revenue collection (taxes). Sealed bid auctions are held to finance new debt and to roll over existing debt that has matured and is still outstanding. About 36 percent of public debt will come due within a year ($1.6 trillion) and another $3.5 trillion over the next three years. In 2009, the Treasury held an auction on average more than once a day to finance $7 trillion of new and maturing debt. How much more debt will international and domestic investors absorb before reaching a tipping point since the Federal Reserve has kept interest rates so low over an extended period? The more debt U.S. amasses, the more pressure will be put on the Fed to raise interest rates. Central banks hold reserves in U.S. dollars as a hedge against their own currencies. The price of oil is quoted in U.S. dollars. There is pressure to change that as the economic and political strength of the United States wanes. The sheer scale of borrowing necessary to sustain growing U.S. deficits, the possibility of default, and the bleak outlook of U.S. economic prosperity because of the recent housing collapse “could well exceed the absorption capacity of Asian central banks for dollar holdings.” International trade deficits could contribute to the devaluation of the dollar, driving interest rates upward in order to attract more foreign and domestic investment that would sustain our insatiable spending appetite. As long as investor confidence in the U.S. government exists, there is no danger that investors will dump the dollar in favor of some other currency or gold, triggering a stampede sell-off in U.S. stocks and bonds. Rising interest rates alone could plunge the world into a global financial crisis. Voracious government demand for credit can “crowd out” private sector investment, causing high unemployment and lack of capital formation. Available pool of creditors choose to lend their money to the government instead of buying corporate stocks and bonds. If business confidence is low because small business owners see higher taxes in the future or are uncertain about future government regulations, private investment will be “crowded out” resulting in more unemployment or lack of new job creation. The industrial base will weaken, the competition will diminish, research and development will dwindle, and acquisition costs will go up. “America is like no other dominant power in modern history – because it depends on other countries to sustain its military and economic dominance.” A strong economy supports a strong military, and a strong military supports statecraft. Past decisions on debt increasingly limit the ability of the government to maneuver economically and to deal with national emergencies such as war by running large deficits. The government runs large deficits now just to maintain the status quo. This “leaves the country more exposed to shocks and more vulnerable to the financial leverage of its creditors.” Thomas Jefferson summed up the quandary best when he said, “The laws of nature made it unfair to impose the debts of one generation upon another.” Perhaps, instead of nation building in Iraq, Afghanistan, Libya, and other countries that do not understand nor want democracy, who are not grateful nor thankful for our help, we should concentrate on our nation’s needs, our infrastructure, creating attractive investment opportunities in the process. We should also return our government to fiscal responsibility and our own citizens to self-reliance, not handouts and entitled cradle-to-grave welfare.