the obligations of the [Social Security] trust fund aren’t tangible obligations fungible with other government debt. But at the same time they are obligations: they oblige the government to issue debt in the future, insofar as its tax revenue won’t be able to cover its pension promises.
A trust fund = an obligation to borrow? If your uncle Louie told you he was setting up a trust fund for you, and its assets consisted of his obligation to borrow the money, how secure would you feel?
On the other hand, you may feel confident that Uncle Sam will always be able to borrow. Don’t be so sure. A few months ago, one might have thought that Uncle Freddie and Aunt Fannie would always be able to borrow. That ended rather suddenly.
What do you like better about Sam? His balance sheet? His management team?
READER COMMENTS
Dan
Sep 10 2008 at 7:17pm
[Comment removed for supplying false email address. Email the webmaster@econlib.org to request restoring this comment. A valid email address is required to post comments on EconLog.–Econlib Ed.]
Matt
Sep 10 2008 at 8:19pm
The Organization of Sovereign Wealth Fund managers will bail out Uncle Sam with a takeover.
Jim Glass
Sep 10 2008 at 11:48pm
They don’t oblige the government to do any such thing.
If for example, the politicians decide to reduce SS benefits in the future so the bonds aren’t needed — and the approximately 15% income tax increase from today’s level to pay them off isn’t needed — the bonds can sit forever going unredeemed, as they already have since 1985 and are scheduled to do until 2017, even though they nominally are 15-year bonds.
And, if you tally up the interests of the various voting groups around 2025 — especially the seniors! — you will find that it is totally credible that they will instruct Congress to do just that by means-testing Bill Gates and the 15% of richest retirees out of benefits.
Even Bill and the richest 15% will have every reason to support that proposal.
j
Sep 11 2008 at 2:45am
If Argentina can borrow, if Ecuador can borrow, if Bolivia can borrow, why the doubt about old USA?
Garrett Schmitt
Sep 11 2008 at 11:21am
Uncle Sam runs the Bank, and in the game of Monopoly, the rules say the bank never runs out of money.
Seriously, though, how can the US Government default with all of its debt being dollar-denominated bonds? If we start getting SDRs from the IMF or the dollar becomes shaky enough that government contractors will only work for euros, then default becomes a concern.
For that to happen, though, the Fed has to be forced into a policy of hyperinflation, at which point US Government default will be the least of anyone’s concerns. Perhaps someone believes even the Fed will stop buying US Treasury bonds?
Jim Glass
Sep 11 2008 at 3:57pm
Russia defaulted in 1998 on debt denominated in rubles.
If a government can’t pay it debts the choice is:
1) Maintain the value of it’s currency and not pay via default (Russia’s choice), or
2) Inflate the currency and not pay by paying cents on the dollar in real terms.
People who say “The US can’t default” assume the US would do #2, but it’s not obvious that the effects of #2 would be less painful than those of #1. And it is possible for a government to choose #1.
To assume it is impossible for the US government to become unable to pay its debts, and thus be forced with the choice of #1 or #2, is naive, and the sort of belief that would support exactly the kind of behavior that could make it happen — such as by continuing current fiscal policy indefinitely.
Remember, S&P projects that on current fiscal policy the credit rating of the US will be “junk” by 2027.
Comments are closed.