IhsouV CristoV Nika

"There is no means of avoiding the final collapse
of a boom brought about by credit (debt) expansion.
The alternative is only whether the crisis should come sooner
as the result of a voluntary abandonment of further credit (debt) expansion,
or later as a final and total catastrophe of the currency system involved."
[Ludwig von Mises]

INTRODUCTION

As was stated in part two of this series on social security, we have a national debt problem and a fiscal crisis as well. This report will clearly illustrate both of these nemeses as well as the problems with Social Security and Medicare as well. Likewise, there is a coincident proliferation of government bonds. First we will take on the demons of debt and the bond creatures they feed on. Finally we will see who it is that’s paying the cost to feed all the creatures that are stirring – all through the land.

The Government Debt Demons
And The Bond Creatures They Feed On

Note the bottom right hand corner figure. This is the total public debt outstanding and is a bit over $7 trillion dollars. Directly above it is total nonmarketable debt of $3.4 trillion. At the top is the total marketable debt of almost $3.6 trillion. These figures are for the year 2004. Next is a table of the outstanding debt for the year.

The Government Debt Demons
And The Bond Creatures They Feed On

The total public debt outstanding is the bottom right hand corner figure of $7.6 trillion dollars. Directly above that is total nonmarketable debt of $3.65 trillion. At the top is the total marketable debt of almost $4 trillion dollars. All figures are for the year 2005.

Remember the phrase – nonmarketable debt, as it will be gone into great detail eventually.

In 2005 the total federal debt was $7.6 trillion and in 2004 the total was $7 trillion, which gives a yearly increase of $.6 trillion dollars or an approximate increase of 9% in outstanding federal debt.

Notice that at the top of each of these tables we find the heading SUMMARY OF TREASURY SECURITIES OUTSTANDING. This clearly shows that the debt demon that is upon us is fed by treasury securities. A government bond is an I.O.U. – a debt obligation to be paid in the future as are all forms of paper fiat.

TOTAL OUTSTANDING PUBLIC DEBT IS $7.6 TRILLION DOLLARS

The following is from the United States Bureau of Public Debt, which can be accessed at Treasury's Public Debt site. I would advise taking some of the following information with a large dose of salt – it helps the messins go down easier. We will take a closer look at what is said in due time.

DEFINITIONS

What is the difference between the debt and the deficit?

“The deficit is the fiscal year difference between what the Government takes in from taxes and other revenues, called receipts, and the amount of money the Government spends, called outlays. The items included in the deficit are considered either on-budget or off-budget.

The off-budget items are typically comprised of the two Social Security trust funds, old-age and survivors insurance and disability insurance, and the Postal-Service fund. Generally, on-budget outlays tend to exceed on-budget receipts, while off-budget receipts tend to exceed off-budget outlays.

You can think of the total debt as accumulated deficits plus accumulated off-budget surpluses. The on-budget deficits require the Treasury to borrow money to raise cash needed to keep the Government operating. We borrow the money by selling Treasury securities like T-bills, notes, bonds and savings bonds to the public.”

What's the difference between the Total Public Debt Outstanding and the Total Public Debt Subject to Limit?

“The Total Public Debt Outstanding represents the total face amount or principal amount of marketable and nonmarketable securities currently outstanding.

The Total Public Debt Subject to Limit is the maximum amount of money the Government is allowed to borrow without receiving additional authority from Congress. 

Furthermore, the Total Public Debt Subject to Limit is the Total Public Debt Outstanding adjusted for Unamortized Discount on Treasury Bills and Zero-Coupon Treasury Bonds, Miscellaneous debt (very old debt), Debt held by the Federal Financing Bank and Guaranteed Debt.”

What is the Debt Held by the Public?

“Debt Held by the Public -- Is all Federal debt held by individuals, corporations, state or local governments, foreign governments, and other entities outside of the United States Government less Federal Financing Bank securities. Types of securities held by the public include, but are not limited to, Treasury Bills, Notes, Bonds, and TIPS, United States Savings Bonds, State and Local Government Series.”

[All the above quoted material from the United States Bureau of Public Debt, which can be accessed at Public Debt.]

Now we revisit some definitions on social security, so as to be able to compare how debt issuance either affects or doesn’t affect social security; and whether social security has any impact on the overall financial position of the economy and the general public at large – We The People.

Note, the following information is according to the 2004 annual report of social security and the related Trust Funds, which is how they perceive the finances to be, which perception will be more closely examined a bit later on.

HOW SOCIAL SECURITY IS FINANCED

“Social Security is largely a pay-as-you-go program. Most of the payroll taxes collected from today's workers are used to pay benefits to today's recipients.

In 2003, the Old-Age and Survivors Insurance and Disability Insurance Trust Funds collected $632 billion in revenues.

Of that amount, 84% was derived from payroll taxes and 2% from income taxes on Social Security benefits. Interest earned on the government bonds held by the trust funds provided the remaining 13% of income.

Assets increased in 2003 because income exceeded expenditures for benefit payments and administrative expenses.”

[Source: The 2004 Annual Report of the Board of Trustees of the Federal
Old-Age and Survivors Insurance and Disability Insurance Trust Funds.]

Social Security's Demographic Challenge

“The number of retired workers is projected to grow rapidly starting in 2008, when the members of the post–World War II baby boom begin to reach early retirement age, and will double in less than 30 years. People are also living longer, and the birth rate is low. As a result, the ratio of workers paying Social Security taxes to people collecting benefits will fall from 3.3 to 1 today to 2.1 to 1 by 2031. At that ratio there will not be enough workers to pay scheduled benefits at current tax rates.”

Ratio of Covered Workers to Social Security Beneficiaries

The Long-Run Financial Outlook

“Social Security is not sustainable over the long term at present benefit and tax rates.”

“Within 14 years the program will begin paying more in benefits than it collects in taxes.”

“By 2042 the trust funds will be exhausted.”

“At that point, payroll taxes and other income will flow into the fund but will be sufficient to pay only 73% of program costs. One way to illustrate the financial shortfall of the Social Security system is to examine the cumulative value of taxes less costs, assuming currently scheduled benefits and tax rates.

In present-value terms, the shortfall over the next 75 years is $3.7 trillion, which is roughly equal to the total U.S. government debt held by the public today.”

Cumulative Income Less Cost Based on Present Taxes and Scheduled Benefits

The Cost of Delay

“Each year, Social Security's trustees provide an estimate of the financial status of the program for the next 75 years. In changing from the valuation period of one year's Trustees Report to the next, an additional year with a large imbalance between taxes and benefits is added to the projection. As a result, the estimated cost of meeting Social Security's financial shortfall tends to go up every year.”

Social Security's Unfunded Obligation on January 1 of Each Year

[Source: Social Security Administration, Office of the Chief Actuary]

It appears that the social security administration and the trust funds that “fund” the social security program are quite a bit more concerned about their solvency than Mr. Krugman is. I do give Mr. Krugman credit (no pun intended), as he definitely is not a worry-wart.

So let’s start digging a little deeper to see what we can find that may help us figure out these demons of debt that feed upon the bond creatures, who feed in turn on whatever they can, as beggars can’t be choosey.

The following chart shows the relationship or ratio of federal expenditures as compared to the gross domestic product.

Federal Outlays and Receipts

Trends

As they say, the trend is your friend. That is if you happen to be on the right side of the trend or if the trend is a nice and friendly trend. However, some trends aren’t all that nice  – a case in point being the above trend.

Notice in the bottom left corner that Federal expenditures were well below 5% of the gross domestic product prior to 1930, down to approximately 3% for several years. Then notice how after 1933 the trend took off upwards, hitting 5% in 1935 and 10% by 1942.

Suddenly, there is a huge spike up during the 40’s to 45%, but this is attributable to the war and the cost to feed the dogs of war, which consume huge amounts of national resources. The sinews of war is money, as the saying goes.

After the ravages of war subsided, the feed bill more or less dissipated and Federal expenditures dropped drastically to 15% around 1950, which was still is 5 times or 500% of what it had been prior to 1933. Since then the ratio has run as high as 25% and hardly ever below 20% since the late 1970s.

Two things stick out on this chart and scream – “look at me.”

1. The trend of a 20% ratio of federal expenditures to gross domestic product seems to be entrenched into the economy. This is not good as will be explained.

2. A 20% trend or rate is 7 times or 700% greater than it was prior to 1933. Why does the year 1933 seem to be so decisive for the financial health of the country?

Now let’s look at a chart of the Federal Deficit in regards to federal expenditures for the same time period to see what else we might be able to glean from the data.

So what do we see here screaming out, “Look at me, look at me?” Well this time I think there might be five little creatures staring out at us: