Social Security: Who Pays Off The Bonds Makes All The Difference By Dan McLaughlin

Matt Yglesias demonstrates what he doesn’t understand about finance:

A lot of people, including George W. Bush himself, seem unduly impressed by the fact that the trust fund does not consist of a “a pile of money being accumulated somewhere.” . . . Here in the United States . . . nobody accumulates literal piles of money. Instead they buy stocks, bonds, and other financial instruments. The Social Security Trust Fund is, like most of Bush’s money, invested in bonds issued by the U.S. government.

It seems to have become fashionable in the precincts of the contemporary right to start noting that these are “just IOUs,” which is to say a promise that the money will be paid. The fact that all bonds are just IOUs, however, highlights the importance of making good on them. . . Our ability to borrow money at a reasonable price . . . is dependent on the perception by investors and foreign governments that Congress won’t do this, even though it could.

Changing the law so as to no longer honor the commitment made by Ronald Reagan and the congressional leadership in 1983 would be a dangerous indication that today’s president and Congress don’t take such commitments seriously. That would be a poor signal to send at the exact same time the president asks the central banks of China and Japan to loan him a few trillion more dollars to cover the costs of the transition. After all, if bonds are “just IOUs,” who’s going to pay perfectly good yen for them?

(Emphasis added). Look, there are perfectly good arguments to be made about Social Security, but this ain’t one of them. Let’s say you can invest in two companies. Both are identical except that, for a third of their assets, they hold a portfolio of corporate bonds. Company A holds corporate bonds issued by, say, General Motors. Company B holds corporate bonds issued by . . . Company B. Wouldn’t you be just a bit skeptical about the value of Company B’s investment? Don’t you think Company B would get into some trouble with its investors if it just said “a third of our assets are invested in corporate bonds” and didn’t bother to disclose that they were buying their own bonds? There is a very big difference between buying bonds issued by somebody else and buying bonds you issued yourself.

Now, all of us make mistakes, and I’m certainly no expert on all the economic issues here – there’s a reason I haven’t delved too deeply into the Social Security debate – but if Yglesias can’t grasp that simple distinction, he really should not be writing about this issue

Content used with the permission of Dan McLaughlin from Baseball Crank. You can read more of his work by clicking here.

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