The Thinker

Greenspan tries to sober up Congress

This just in: Chairman of the Federal Reserve Alan Greenspan says the government should consider cutting benefits for social security recipients.

Buh wah hah hah! Those of us living in or near Washington know exactly where this idea is going to go. Drag this sucker directly into your Congress’s virtual shredder. Snowballs will survive in hell before Congress reduces social security checks.

Oh they may get cut in less visible ways. Perhaps the retirement age will be allowed to gradually creep up again. This sort of a creative accounting technique is familiar to us federal employees. We’ve seen it before when it came time for our cost of living raises (“Let’s just move the date a bit and drop the costs into another fiscal year. We’ve just saved tens of billions of dollars!”) Put an older retirement age far enough in the future and most people likely won’t complain because they are too far from retirement to raise a fuss.

But even these tricks won’t seriously solve the problem of all of us baby boomers planning to retire soon. All Alan Greenspan is really doing is reinforcing that those fiscal chickens are coming home to roost for Congress as well as for the Bush Administration.

Remember in the 2000 campaign Al Gore proposed putting a lock box on the social security trust fund? It seemed an idea on which both sides could agree. Until, of course, we went into recession, 9/11 occurred and we started to give obscene tax cuts to the wealthiest Americans. Then it became important to show that our deficits were not as bad as they looked. So of course the government “borrowed” from the Social Security Trust fund. It did this by depositing its wonderful IOUs into the funds account with a promise to pay back the money with interest some time in the future.

What does this mean? Well, in actuality the social security fund is currently running a surplus. The surplus was $164B last year. Assuming the same surplus this year, and assuming Bush’s plans for a $521B deficit this year are correct (they are likely to be larger when the supplemental spending bill for the Iraq occupation and reconstruction is introduced) this means that the real government’s operating deficit for this year is going to be at least $685B.

But the surplus in the trust fund is projected to continue to shrink until the baby boomer retirements reach critical mass. At that point the fund begins to run a deficit. That’s when we borrow a lot more money, raise a lot more taxes, cut benefits to social security recipients or try some combination of all of them.

Unless we radically change our representation in Congress the federal government is going to be borrowing a hell of a lot of money in the future.

Yes, we will borrow in mega quantities, but only if we can get anyone to lend it to us. Have you looked at the value of the dollar against other currencies lately? Today one Euro is worth $1.25. A year or so back a Euro cost around eighty cents. There are short-term benefits from a low dollar. It makes our products cheaper to purchase and has a stimulative effect on our economy. But the long-term trend is not good because our financing is largely coming from overseas capital. In fact a lot of this money is coming from other governments anxious to make sure their currencies and their products don’t get too expensive. By buying dollars they are in effect taking their capital and putting it to work in the United States, instead of in their own country where it might otherwise be used. But at some point our deficits may become so bloated that foreign investors lose confidence that they will get a return on their investment.

If that happens our house of cards falls. Countries say “Well, no point throwing our good money after a bad return, we’ll use it ourselves.” If the United States cannot borrow enough money from overseas to finance its deficits then the government must drastically increase interest rates to attract domestic money. And when that happens money becomes more expensive for businesses and consumers to borrow. And that most likely has severe and negative consequences for our economy. The worst result would be a wave of inflation and economic stagnation, recession or depression familiar to many countries in South America, but not seen here since the Depression.

Greenspan is being a good fiduciary. We need someone to impartially tell us the truth. Our government must change its ways and stop foisting off costs of these magnitudes on future generations. It’s really sad though that instead of being responsible our government will tinker around the edges a little bit but do nothing to really solve the underlying problem. Congress can’t say no to anyone. Not to the businesses that finance their campaigns, not to us constituents who want more federal benefits, low taxes and increased services, and not to the president who wants to please his party base and reward his cronies.

The smart investor should be quietly moving more funds out of American companies and into solid overseas growth companies and funds. Unfortunately, even that is not a great hedge. And that is because if the American economy tanks, so will most of the world economy.

So the health of the world economy is in large measure dependent upon whether our Congress can stop pandering and start swallowing the castor oil.

I don’t wish to sound bleak but really: God help us. For those who believe in the power of prayer it’s time to go into prayer overdrive.


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