I don’t think a default is going to happen. But the fear-based propaganda is still educational—especially when, even though the propagandists are trying to induce fear, they are unwilling to face up to how dire our situation really is. Planet Money ran a story yesterday about what would happen if there was a default on Treasury bonds. When it came to Social Security, they pretended there was a positive side to the default.
The supposed source of the blessing that Social Security would receive derives from the prediction that, if the government was to suspend payments on the debt, that the interest rates would go up for bonds in the future.
“Weirdly, if the U.S. does have to pay higher interest on its debt, it could help another big bondholder: the Social Security administration. The entire Social Security trust fund — over $2 trillion — is invested in Treasury bonds. This is required by law. If the new Treasury bonds Social Security buys pay interest at a higher rate, that would mean more income for Social Security.”
Here we have two people, the reporter for Planet Money and someone “who used to run Social Security” both acting as if this would be positive for Social Security. Both acknowledge a default would be bad for the country but both act like they are showing us evidence that Social Security would be helped if the government had to pay more interest on bonds.
To see how stupid this is compare two scenarios:
- Scenario #1: Bonds continue at their low rate of return. The Social Security cashes in those bonds to provide the benefits to retirees. Even though the interest is low, the government has to (A) borrow money to pay the principle and interest on the bonds (in other words, sell more bonds) and/or (B) raise taxes to pay back the money. Furthermore, it is doubtful that the politicians will allow social security obligations to not be paid just because the Social Security Administration doesn’t have enough treasuries to cash. So, again, the government has to (A) borrow money (in other words, sell more bonds) and/or (B) raise taxes to bail out the Social Security fund.
- Scenario #2: Bonds suddenly demand a higher rate of interest. The Social Security cashes in those bonds to provide the benefits to retirees. Since the interest rates are now higher, there is no need to worry about needing a bailout yet. But, the government still has to (A) borrow money to pay the principle and interest on the bonds (in other words, sell more bonds) and/or (B) raise taxes to pay back the money.
You see? The end result is the same under either scenario. Whether the interest rate on Treasury bonds goes up or down makes no difference. All that chunk of money that you have watched the government drain from your wages was all spent by the government as soon as they got it from you. It was taken by the government and then “invested” by being loaned from one account to another account. And the only way that loan can be paid back is if the government borrows even more money and/or sinks its tax-collecting teeth into the neck of the public even more deeply.
This is the most obvious truth in the world, yet two educated people get on the radio and feed you a line of garbage to mislead you and put you to sleep.