Tuesday, March 16, 2010

Social Security, Debt, Federal IOUs, Inflation

I wrote about this issue a couple months ago, and now it has been confirmed: Social Security is now bankrupt. Right now, not some 20 or 30 years from now, as you will sometimes hear repeated.


We, as the unwashed sheeple of America, are supposed to buy into the idea that the federal government is issuing IOUs for previous Social Security payments.

Here is the facts when boiled down to monetary reality: the Social Security tax no longer covers Social Security expenditures, so the government is going to print new money to make up the difference. These are the so-called IOUs, but the reality is the same: new money is being printed to cover the deficit.

For decades, the Social Security tax brought in more revenue than was needed for Social Security programs. The extra money went into the general fund all those years and was spent. An IOU was created (an accounting ledger entry, really, nothing more), meaning they general budget was saying to the Social Security fund: "Hey, thanks for the money, I'll pay you back later".

The money came in, it was spent, it is gone. In this time of exploding budget deficits, where is the government going to get the money to pay off these IOUs?

Obviously, printing up all this money to cover the deficit is highly inflationary. It is an axiom of economics that needs to be more highly publicized and well-known: a federal budget deficit is inherently inflationary. I haven't seen the mathematical studies, but I am willing to bet that the percentage rate of inflation is highly correlated to the percentage size of the deficit. Given that we are experiencing double digit percentage deficits since last year, I would expect inflation to rise into the double digits this year as well.