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.


Jim in San Marcos said...

Hi Jubilee

I agree that Congress has spent it all and going for broke.

But, I haven't seen anything that says that the government is now paying out more than what is coming in.

Can you give me a link to your source? I don't want to be caught sleeping at the helm.

Take care

Jim in San Marcos said...
This comment has been removed by the author.
Jubilee said...

Sorry, Jim, just updated with the link added.

Anonymous said...

I'm glad you are back. I was worried you quit. Don't give up now. Check out wc varones blog, 3/17/10 commentary. When you have a powerful message it gains velocity on the web. Think of it as the Leviticus 25 multiplier.

Besides I was was actually learning some economics here, and you've debunked a lot of the theories which never seemed logical anyway.


angryfutureexpat said...

Glad to see you're back Jubilee.

While I don't really agree that government deficits are inherently inflationary (we seem to be in the middle of a massive deflationary spiral), we've run out of options and some form of Jubilee has become necessary.

I know it is for me personally.

Justin said...

Thanks, guys, I appreciate the kind words. I will admit, the lack of traction has been frustrating. You talk about Jubilee and people treat you like you just dropped with a tinfoil hat, equivalent to suggesting we just grow wings and fly through space to a new planet...

The general awareness of the problem of debt is reaching critical mass, for sure, but who is talking about the solution? If the idea doesn't even reach the alternative press, what chance has it?

angry, I think we are already seeing big inflation, and in the teeth of the financial destruction we have gone through, any inflation should be worrisome.

I think as a matter of theory, the case is pretty plain: deficits are inflationary, since they amount to the creation of extra money.

wraft said...

I think the idea that printing money and spending it is inflationary is banker propaganda. The banks favor a slow deflationary squeeze because it overvalues their product, money.

Printing and spending money relieves the deflationary squeeze somewhat. To argue that it is inflationary, you would have to show there is merely a rise in prices without any significant gain in output.