How do we pay back the Chinese for the Treasury notes?

[kentuck]

That they have for all the money they have loaned us? Wht if they want to cash them out and go into Euros? Where do we get the money? And what is the difference in paying off the Treasury notes to the Chinese and paying off the Treasury notes to the Social Security trust fund? Would we default on the Chinese? Would we default on Social Security but not on the Japanese and Chinese that hold our notes? What's the difference?

[begin_within]

1. We just become the United States of China.

[Ivote]

5. Outsource This Administration

:bounce:

[satya]

20. Best idea I've heard today! nt

[prodigal_green]

2. The chimp

is truly a Manchurian candidate/president. I've been wondering the same thing for years now.

[NewJeffCT]

3. To not default...

May require us to go through the pains of high inflation like we had back in the 70s and 80s... only higher this time.

[Vincardog]

4. We repay the Chinese by continuing to send them JOBS

and technology to clone. There is no difference between defaulting on T Bills too SS or anyone else. They are backed by the full faith on the US Government both ways.

[htuttle]

6. They'd probably want Hawaii

Not for themselves, but I bet they could get a lot for it from the Japanese.

[n2mark]

7. We repay China with turning over

the shrub and all his money.

[Disturbed]

8. How much does the U.S. Govt owe?

?

[Econslave]

11. treasury notes

China really has no reason to want to cash out those notes, but even if they wanted the US doesn't have to purchase them back right now.

Treasure notes are special bonds. Mostly they have 30 year maturities. Which means that 30 years after they have been issued they are automatically repurchased by the US government (and replaced by new T-notes). If China decides they don't want to keep purchasing the t-notes they can stop, and then either sell the ones they have on the world market, or wait for them to mature and accept the buyback.

However, its unlikely that China would sell them back at this time. economically they have a tiger-by-the-tail now since they have pegged so much of their business to exporting to the US. If they sell out those T-notes, they would massively depreciate the US dollar against their own currency. This would have the effect of ruining their economy.

Personally, I'm more worried about China stabilizing political system, which seems to be growing increasingly unstable.

[snippy]

29. The US dollar can not depreciate against the Chinese currency since

the Chinese currency is pegged at at fixed rate of exchange against the US dollar. Also, China does not have to sell any of its US treasuries to adversely impact our economy. All it has to do is reduce the amount it purchases each month and interest rates would shoot up. Finally, only a small amount (14%) of US treasuries have a maturity date greater than ten years. Most of the the publicly held debt has a maturity date of less than five years. http://www.publicdebt.treas.gov/opd/opds012005.htm

However, you are correct that China has the "tiger-by-the-tail" since China can not afford to see the US economy decline. Unless the Chinese government decides to think long term.

[Kansas Wyatt]

9. With mandatory self donated stocks from....

Halliburton
Carlyle Group
Major Defense Contractors
Big Oil Corporations
The MSM
etc. etc. etc.

On edit: That will sure give all of the alleged Patriots a stroke.

[rzemanfl]

10. With WalMart stores. n/t

[qwghlmian]

12. The difference is the same as

the difference between you owing money to me, on one hand, and you owing money to yourself, on the other. To pay me you have to come up with actual cash and give it. To pay a loan back to yourself, you just move the money (if you have it) from one pocket to the other, or if you don't have the money, you just mentally cancel the debt saying "I paid, I'm even with myself."

[kentuck]

18. Except you don't owe it to yourself....

You owe it to millions of people that have paid into the system all their working lives. You cannot, just because you want to, say that, "Too bad! We spent it. We don't have anything to pay." That dog won't hunt.

Only if it were as simple as you say. That sounds like something GW Bush would come up with...

[qwghlmian]

23. Ok you want another difference - here it is

those individuals abroad that hold US treasuries have the papers to prove it. They hold the US treasury certificates that they can present that are a legal contract between them and US government describing exactly how they will be repaid, and US government cannot unilaterally change the terms of that contract. On the other hand, for the millions of people who paid into SS "trust fund" no such contract exists, and US government can, with appropriate legislation, change whatever they like. Technically it would not even be considered a "default", because there is no contract to "default" on.

[kentuck]

25. By "US Government", do you mean the majority....

in the House and Senate? And would that mean it would take a super majority to break filibuster in Senate before it could be approved, if the Democrats filibustered? Or do you think George W Bush could make that decision all by his little ole self??

[qwghlmian]

26. by "US government" I mean

a new legislation. That would mean passing House and Senate with all it entails. The point, which you deliberately missed, is that there is no contract between Social Security and the people that cannot be changed (and has been changed in the past) unilaterally through legislation - unlike the contract that exists between US Treasury bond holders and the US government.

[kentuck]

27. Perhaps I am wrong....

But I thought there was a written contract and that at one time there were actually US Treasury notes stashed in W. VA or someplace that were there for the SS funds that were borrowed? Are you familiar with any information to that effect?

[qwghlmian]

28. The notes that SS holds in its funds are

"special" Treasury securities, not the same as the normal bondholders hold, and I am pretty sure that no physical certificates change hands, nor is that needed. But that is irrelevant - you were NOT talking about contracts between one branch of US government (Treasury) and another branch (Social Security). You were talking about millions of individuals paying FICA. Those are the ones that have no contract protection whatsoever.

[kentuck]

31. "no contract protection whatsoever" ?

Isn't there such a thing as a social contract between the people and their government that does not necessarily have to be in the form of a US Treasury note in order to be binding? Could that not be credibly argued?

[qwghlmian]

32. "Social contract" is a concept, not a legal document

and I would very much doubt that it could be pursued in courts. It is a nebulous thing, and very open to interpretation. A written contract is a concrete, well defined document, and can easily be used as basis for litigation if it is breached.

[kentuck]

34. There must have been a law that permitted the transfer of SS funds....

rather than just a "concept"? Could not a "law" on the books have the same legal interpretation as a "contract" or could it not be argued that a law passed by the Congress is, in fact, a contract between the government and the governed?

[qwghlmian]

35. I am not sure what transfer of funds you are talking about.

If you're talking about SS trust fund "investing" the surplus in US Treasury bonds - I think that is in the Social Security legislation somewhere (though I am not sure).

In any case, legislation is not a contract. A contract is an agreement that neither side can unilaterally change or dissolve, unless that unilateral procedure is explicitly allowed by the contract. Legislation can be changed any time, for any reason, by the US government legislative branch - thus it is expressly not a contract.

[kentuck]

36. But for the present time, they are both binding?

Until the legislation can be voted on and changed? That would be 2006 possibly, assuming the Democrats do not fold and give the Repubs the votes needed, or assuming the Repubs do not use their "nuclear" option to counter the "filibuster", and assuming the Repubs might win enough votes in 2006 Senate races to shut off the Democrats and then pass legislation to, in effect, destroy the Social Security fund by defaulting on the notes? Perhaps the Democrats might want to plant that seed in the voters minds before the 2006 elections??

[qwghlmian]

39. Of course - the Social Security legislation, I believe,

describes in detail how the benefits are calculated and how the taxes are collected. The only way to change that is to pass legislation that amends it. I don't know if it would be 2006. Conceivably, if the Republicans have the legislation already drafted and the votes lined up, it could be done next week.

I don't think they will try to pass legislation that explicitly defaults on the Treasury bonds that SS fund holds. The legislation will probably try to change Social Security mechanism in a way that would not necessitate the fund ever redeeming those securities, or actually leave them there to be redeemed as necessary during the transition period (since that 2 trillion they are talking about has to come from somewhere, might as well come from those bonds, it is just a technicality). Since neither I nor you (nor, I believe, any legislator yet) have seen the proposed law, it's too early to speculate on the details.

[kentuck]

41. I could see them defaulting if...

they had the 60 votes in the Senate. That could make 2006 very important.

[Canuckistanian]

13. In Goods and Services

Uhhhh, wait.

[izzie]

14. Giving them the numbered accounts held by the Swiss for our CEO;s

Nice we are such willing tax payers. Every one takes from us, even the rich. Where is Robin Hood when we need him?

[realFedUp]

15. American wives

for all those one and only boy babies...

[Zeke]

16. The Repo Depot...

China will repossess Taiwan and call it even.

Bush has the US military spread so thin,
the USA won't be able to stop China's Taiwan invasion.

That's what'lll happen.

[Name removed]

17. Deleted message

Message removed by moderator. Click here to review the message board rules.

[dogman]

19. Our first-born sons.

They don't want daughters.

[Sgent]

21. Actually

We just print the money.

Yea, it causes massive inflation, etc. But that's why government bonds are safe -- we can always print more money.

They are gaurenteed dollars, not yen, so its not a problem. The difference between us and say brazil is that no one will allow brazil to pay back their debt in peso's -- dollars (or euro's) only.

[kentuck]

22. So would they print money to pay off the SS notes (IOUs)?

also? And wouldn't the value be much less once it was inflated, unless they tried to change it from a contribution to some monstrosity that would be compared to the increase in wages, or something akin?

[snippy]

42. Unless the government returns to fiscal sanity and resumes

running an annual surplus it will have to print the money to make the promised benefit payments. And printing money like it was made out of paper will be inflationary. This is one of the more insidious aspects of Bush's plan to privatize Social Security.

Since an individual's guaranteed benefit will be reduced under Bush's plan by an amount equal to a return of 3% plus the rate of inflation on the private account contributions, it is possible that an individual's guaranteed benefit may be reduced to zero. This places an extrordinary inflation risk on the individual. Given that Bush may have the most inflationary fiscal policy of any president in US history, I think this is a particularly crappy aspect of his plan.

[qwghlmian]

43. I did not understand this phrase:

"individual's guaranteed benefit will be reduced under Bush's plan by an amount equal to a return of 3% plus the rate of inflation on the private account contributions".

First of all - what guaranteed benefit? Since the account is private, and named, whatever's there is what the benefits come from - what "guarantee" are you talking about?

And about the 3% - can you point me to any article that explains that? The Washington Post article was apparently wrong and WP printed a retraction. Where else did you see it?

On edit: ah I take it back. I went back and parsed your statement again :) Yes, the "guaranteed benefit" would be reduced - but wouldn't you expect it to be reduced if the contributions are reduced as well? That 3%+inflation is just the rate at which the SS fund is "expected" to grow. The more correct way of saying it would be:

"individual's guaranteed benefit would be reduced under Bush's plan by an amount that is proportionate to the reduction of the individual's contributions to the guaranteed SS plan". Is that not correct? And if so, why would you think it is unfair? You pay less in, you get less out.

[kentuck]

45. I think the proposal is...

to guarantee SS contributions tied to inflation or tied to the increase in wages and they would save a huge %, 30 or 40% by tying it to the increase in wages? That was my interpretation.

[snippy]

46. Social Security promises a "guaranteed benefit," which of course is not

guaranteed since the government can reduce it at any time. However, I was using Bush's terminology to refer to the monthly Social Securty benefit payment to an individual as opposed to the monthly payment to be received by an individual from a private account.

Bush's plan does not explicitly abolish an individual's Social Security benefits. Under his plan an individual would receive a "guaranteed" Social Security benefit reduced by an amount equal to a hypothetical payment which could be made from that individual's private account. That hypothetical payment is equal to a return of 3% plus inflation.

I have seen this explained in many different articles. I think the ones in the Wall Street Journal have explained it best. The Washington Post correction concerned the disposition of the principal amount contributed to a private account. There was no retraction or correction concerning the amount of the reduction of an individual's Social Security benefit. As I recall the correction explained the 3% plus inflation reduction very well.

[qwghlmian]

48. Ok - let me understand something

Let's say today an individual who pays 12.4% FICA is "guaranteed" a payout of $1,000/month after retirement. If, according to Bush's plan, this becomes 10.4% (and 2% goes to the private account) then his "guaranteed" payout should be reduced by approximately 16% - that is, it will be $838/month.

Another (equivalent) way to look at that reduction of $162/month is that that would have been the result of leaving that 2% in FICA after it increased at the projected return of all SS funds of 3%+inflation. Right?

Is this what you're talking about? If so - what is unfair about it? Would you expect the individual to be receiving the same payout after retirement although the FICA payments are less?

[snippy]

47. What if inflation is high? Neither the stock market nor the bond market

has provided returns in excess of inflation when the inflation rate was high.

I have no problem with the concept of reducing peoples' benefits if they exercise the option to reduce their contributions, but I think it is unfair for a US president to insist on following inflationary fiscal policies while telling people that their retirement plan should assume all of the risk of any inflation caused by his fiscal policies. I also think that is unfair to propose a limited private account contribution by an individual coupled with a potentially unlimited Social Security benefit reduction which is unrelated to the actual performance of the individual's private account investments.

[qwghlmian]

49. Snippy, I understand that SS fund "invests" in Treasury bonds

which is where (AFAIU) the 3%+inflation figure comes from. If Bush's plan goes into effect and you don't want to take the risks of private investing, you can duplicate the SS fund performance by buying US Treasury Inflation-Protected Securities (or TIPS). You would be getting, I presume, exactly the same performance as the SS funds in your private account. Of course, if you expect to make more, you'd have to take more risk - that's the ABC's of investing world.

[snippy]

51. I think TIPS (or ibonds for smaller investors) are a wise investment now.

I no longer contribute to Social Security since all of my income is investment income so I can not participate in Bush's plan even if I wanted to. I think that the inflation wild card makes it a difficult decision, particularly if you already have a 401k or IRA.

[LiberalEsto]

24. A mind-bogglingly vast

pile of tofu

[snippy]

30. The bonds held by the Social Security trust fund are non-transferable.

They can not be sold to anyone else. The US treasuries held by the Chinese government can be sold to anyone at any time for any price. If the Chinese government wanted to, it could flood the market and crash the price of the US debt, but that is unlikely since US government debt is the least risky debt to own. Consequently, any "crash" would be short lived.

When a bond or note or bill matures, the US government pays the holder with money from newly issued US debt. The amount of the publicly held debt does not change. However, when the US government begins to redeem the bonds in the Social Security trust fund, the government will have to issue new debt to raise the cash. That will increase the amount of the publicly held debt.

Because of the size of the US economy relative to the world economy it will be decades before the prospect of a US default is given any serious consideration by the global capital markets.

[kentuck]

33. By "non-transferable", do you mean...?

they cannot be transferred to the US Government in any manner either? Are they in the name of the Social Security Trust Fund or are they in the name of the US Government? Whose name is on the note? If they are in the name of the Social Security Fund, could it not be argued that they belong to the people that paid the money into the SS Fund that bought the Treasury notes in the first place?

[snippy]

37. By "non-transferable" I mean that they can not be sold in exchnge for

cash or anything else. When the the bonds in the trust fund mature they can be replaced by the US government with identical non-tranferable bonds up until the point in time that Social Security no longer runs a surplus. At that point in time the government will be paying benefits which exceed the Social Security tax collections. In order to make those payments the government will have to issue new securities to raise the necessary cash. Those securities will have to be bought by public investors, including foreign governments. That is the process by which the US government will redeem bonds held by the trust fund.

People who have paid into Social Security have no legally recognized vested right to receive the Social Security benefits which have been promised. That is why the government can reduce benefits or extend the retirement age. Bush is arguing that, since your benefits have to be reduced anyway, why not take a chance on making more money in the stock market than the reductions he is going to implement. He ignores the fact that such reductions are not inevitable.

[kentuck]

40. But they can only reduce benefits or...

extend retirement age by vote of our representatives, right? And if one Party does not go along with either, there is no change in the present law?

[snippy]

44. When there is corrupt one party control of the government, that party

can do whatever it wants. Remember the GOP motto:

Profits over people; Let us prey.

[kodi]

38. its pretty simple. we let them continue to oppress their people

You can't piss off your bankers over a little thing like human rights.

We, the West, we, America as the leader of the West has sold its soul for cheap blue jeans and Tupperware.

Teach your kids Chinese. They will be needing it a lot more than Spanish by the year 2050.

The American Century is finished.

It is time for the Chinese to exert their influence.

I hope only that the germseed of human rights that the West has nutured for generations since the Enlightenment can take hold in a brave new world where Western liberal democracies are not the dominant world powers.

[Sgent]

50. As long as

international ivestors are interested in buying US debt, denominated in dollars, the point is somewhat moot -- we can issue new debt to pay old or to pay social security obligations.

The problem comes when foriegn (or domestic) investors refuse to accept dollars as payment for our newly issued debt, but rather want euros, gold, etc. For current bonds, they don't have that option, but if they start refusing to buy new bonds it becomes impossible to continue our house made of cards.

At this point, we will already have significant inflation, and if we start to print money the inflation will skyrocket -- think the 70's on steroids.

Assuming we get the deficiet under control -- including social security outlays, we won't have any issues. Remember, from an outsider perspective their is no "social security trust fund", there is only total revenue - total expenditures. Paying back the current debt, although expensive, is really not a big issue. We will have to make the interest payments, but in a matter of 50 years or so the debt in inflation adjusted dollars will by a facter of 5 or so. The longer we roll it over, the smaller the actual debt in inflation adjusted terms.