Analysis: First Impugn Honor; All Else Will Then Perish

Over the past several months, President Bush has made a concerted effort to promote his plan to alter the Social Security system that has successfully provided for retired Americans for seven decades. In his zeal to diminish the credibility of the existing system, he has gone so far as to describe the assets held by the Social Security Trust as "a bunch of IOUs in a drawer." He said he saw them there.

Those "IOUs" to which he was referring are a collection of about two dozen, multi-billion dollar bonds issued by the United States Department of the Treasury, which issues debt instruments of various types and denominations to finance the operations of the federal government. Treasury instruments issued for short-term borrowing are called "bills"; those issued for intermediate term borrowing are called "notes"; and those issued for long-term borrowing are called "bonds." All Treasury instruments are backed by the "full faith and credit" of the United States of America. This means that no greater degree of obligation to honor the debt could exist—not by a person, not by a corporation, not by any public or private agency. But even against this backdrop of guarantee, the Treasury bonds issued to the Social Security Trust are extraordinary: among other features, they must be cashed on demand, and they must be cashed before any other obligations of the government that would be called at the same time and under similar conditions. That means these Special Issue Treasury Bonds are like what are called in the banking system "drafts on demand deposit accounts."

In plain English, a "draft" is a check, and a demand deposit account is a checking account at a bank.

If you walk into a bank with a check that someone has written you from an account at that bank, the bank must satisfy your demand for the amount set forth on the face of that check, provided that the funds are available and you can show that you are the named party on the check or that you represent the same. Checks are highly "liquid": they are essentially the same as cash money because of their on-demand feature. Other types of drafts that look like checks are not as liquid as bank checks. In particular, drafts on so-called "NOW" (Negotiable Order of Withdrawal) accounts might be treated for most intents and purposes just like checks, but they aren't checks; and if ever push came to shove in a time of difficulty for financial institutions, the differences between the real checks and the other instruments that only appear to be checks might become evident, much to the dismay of people holding drafts written from NOW accounts.

The Special Issue Treasury Bonds issued to the Social Security Trust are strikingly like checks, then, except that they are backed by the full weight of the nation's integrity as a sovereign state. Bank checks are backed by a federal insurance program that, although strong and solvent, cannot rise in surety to the level of a nation-state's fundamental honor.

President Bush seemed appalled that there wasn't cash money in the drawers of the Social Security Trust. After all, those funds in the Trust are supposed to be in some kind of "lock box" untouchable by outside interests. But to expect the Social Security Trust—or any trust, for that matter—to put actual dollars into a vault and keep them there until they are needed is stunning: by declining to take measures by which money can appreciate in value, the Trustees of the Social Security system would be gravely mismanaging the funds in their care. On the other hand, to place those funds at risk would also be imprudent. The only action, therefore, the Trustees have available to them consistent with their grave fiduciary duty is to invest the proceeds from Social Security taxes in the risk-free investments offered by the United States government through its Treasury bonds.

Vice President Dick Cheney, in an interview with Michael Medved of the Salem Christian Radio Network, attempted to explain that Mr. Bush was not impugning the ability of the United States of America to satisfy its debt obligations. Mr. Cheney explained that, when the Social Security system needs to draw upon those Special Issue Treasury Bonds, the government will be forced to satisfy those on-demand instruments without necessarily having the funds available to do so. That means the government will be forced to raise taxes steeply to meet the obligations, or it will be forced to enter the capital markets to borrow money.

Being from the political party with a history of currying favor by cutting taxes, the prospect of raising taxes to meet honor obligations would be anathema to the new breed of Republicans. With respect to the second possibility, Mr. Cheney represented that the idea of borrowing money to retire federal debt would be, in some way, extraordinary. In fact, though, it is not: a huge amount of the money generated at Treasury Department auctions of new Treasury instruments goes specifically to retire maturing Treasury instruments. Republicans should know this: in his time, Ronald Reagan ran large federal budget deficits year after year, so the government could not pay off debt that was maturing during his Administration. That meant the Treasury auctions of that era (and of Administrations previous) were to the expressed end of not just paying for then-current deficits, but also for paying off old federal debt.

To pose that the Social Security system must somehow be fundamentally redesigned because of the normal course by which deficit-riddled, tax-averse Administrations generate funds is to demand that the lender be punished for the irresponsibility of the borrower. It does not occur to Mr. Cheney and Mr. Bush that their constant refrain of low taxes has put the government in the position of being forced to constantly refinance debt with further debt. It occurs to them only to evicerate a social insurance program that is ideologically at odds with their vision of the way the federal government should interact with its citizens.

And so Mr. Bush would have the Social Security system at least partially privatized to bring about what he calls an "ownership society." Unfortunately, in order to wreck the current system—to "break it so that it can be fixed"—he would have the United States of America borrow, in Vice President Cheney's own words, "trillions and trillions" of dollars on behalf of the Social Security Trust, and the proceeds from those borrowings would then be lent to workers so that they could invest that money in stocks and bonds with the hope of earning enough money that they could both repay what they had borrowed from the Trust and have enough remaining to finance, at least in large part, their own retirements.

In other words, instead of the Social Security Trust having that "drawer full of IOUs" backed by the full faith and credit of the wealthiest and most powerful nation the Earth has ever seen, the Trust will have two drawers: one will have trillions of dollars in IOUs from millions and millions of average, working Americans; and it will have another drawer full of books of coupons that it will be filling out year after year for generations to come as it pays on the money it has borrowed from global capital markets.

To those who claim that this plan by the neo-conservatives could destroy the Social Security system, the response is almost too obvious to state: The point is not that this could wreck the system; the point is that, by its very nature, Mr. Bush's plan will.

And that means, from the perspective of the neo-conservative radicals who now control the United States, the plan will be highly successful.



The Dark Wraith has spoken.