Kim Petersen: You write that the Treasury has stolen money from social security for current operating expenses and replaced it with worthless IOUs? But how worthless are the IOUs? Even if the IOUs have no open-market value, could the government default on its own IOUs without causing currency flight?
Allen W. Smith: The IOUs in the trust fund are completely different from any other government certificates. They are not real bonds in any meaningful sense of the term. They are a gimmick, created by the government in an effort to fool the public into believing that Social Security funds are invested in Treasury bonds, when, in fact, they have not been invested in anything. Money can be saved and invested, but it is not possible to both spend and invest money. Once the money is spent, there is nothing left to invest. Every dollar of the $2.5 trillion that is supposed to be in the trust fund has been spent to fund tax cuts, wars, and other government programs. Since none of the surplus Social Security revenue has been saved, none of it has been invested in anything.
What gives the special-issue IOUs the allusion of being real is that printed on the face of each of these documents are the words, Backed by the full faith and credit of the United States Government. The problem is that no provisions have been made for repayment of any of the Social Security funds. Given the deceptive practices that the government has already engaged in with regard to Social Security, it is hard to have faith that the government will repay the funds, and given the fact that some foreign lenders are already expressing concern about lending additional funds to the U.S., the credit of the United States government is not nearly as strong as it once was.
Most of the public debt is in the form of public issue marketable Treasury bonds that can be bought and sold in the open market at will. These bonds are as good as gold, so investors who hold such bonds have nothing to worry about. The government could never default on any of these marketable bonds without creating panic in the financial markets and causing currency to be withdrawn by foreign investors. Therefore, we can be absolutely sure that the government will never default on any of its public issue marketable Treasury bonds.
The special issue IOUs in the trust fund are a different matter. The government could declare the Social Security debt null and void at any time. Foreign investors might frown on such action, but, since it would not directly affect them, I think they would just view it as a domestic issue between the U.S. government and its citizens. Obviously such an act would be politically unpopular with the American people. But would it be any more unpopular than massive increases in taxes in order to repay the Social Security money? That is exactly what it boils down to. It will take enormous tax increases in the future in order to raise enough money to repay the $2.5 trillion of surplus Social Security revenue that the government has looted over the last 25 years. Unless the American people, and the Congress, support such tax hikes, the government will have no choice but to default on its debt to Social Security.