Is U.S. Debt Held By Trust Funds (e.g., The Social Security Trust Fund) Real???

[solutions]

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Subject: Is U.S. Debt Held By Trust Funds (e.g., The Social Security Trust Fund) Real?
From: Solutions
Date: Mon, January 10, 2022 11:02 am PDT
To: ReadingLiberally-SaltLake@johnkarls.com
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Dear John,

I have just read your Suggested Discussion Outline for our Jan 19 meeting.

In chiding Stephanie Kelton for her ignorance about the current ratio of national debt to GDP, you yourself are ignoring the fact that many economists segregate the national debt held by trust funds (such as the Social Security Trust Fund) and focus only on the national debt held by “the public” (including foreign governments such as Japan and the Peoples Republic of China).

How do you justify ignoring this segregation?

Your friend,

Solutions


---------------------------- Original Message -----------------------------
Subject: Re: Is U.S. Debt Held By Trust Funds (e.g., The Social Security Trust Fund) Real???
From: ReadingLiberally-SaltLake@johnkarls.com
Date: Tue, January 11, 2022 6:31am MDT
To: Solutions
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Dear Solutions,

Thank you very much for your e-mail.


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The Short (and Somewhat Facetious) Answer To Your Q = “Yelling Janet Yellin”

I have reproduced below following the end of this e-mail an excerpt from my Dec 29 e-mail which you posted in the “Participant Comments” section of our website entitling your posting “Bi-Partisan Utter-Destruction of The Dollar (And, Consequently, The Economy}” – which is available at viewtopic.php?f=673&t=2147&sid=7d707320 ... e4848eefdd.

There are quite a few governmental TRUST FUNDS which are legal entities with fiduciary responsibilities for the Trustees.

The largest is the Social Security Trust Fund which is legally restricted to investing in U.S. Government bonds. And U.S. Treasury Secretary Yellin is the “Managing Trustee” of the Social Security Trust Fund.

But none of that prevented Secretary Yellin from COMMITTING CRIMINAL FRAUD by claiming LOUDLY AND OFTEN on television this past Fall that if the Debt Ceiling was not raised by Congress, Yellin would NOT make Social Security payments!!!

NB: As explained in the excerpt from my Dec 29 e-mail, the members of my Harvard Law Class of 1967 who participate on our weekly Zoom chats ACTUALLY BELIEVED YELLIN AND, CONSEQUENTLY, ASSUMED THAT THE SOCIAL SECURITY TRUST FUND ESTABLISHED IN 1940 UNDER THE U.S. CODE was, instead, a “figment of the imagination” of the news media!!!

But just because “Yelling Janet Yellin” treats U.S. Government Trust Funds (and their legally-required investments in government bonds) as fictitious is no reason why the rest of us should ignore reality.

And reality requires a much broader view of governmental regulation, subsidies, etc., of capital markets. And a historical dimension that produced these regulations, subsidies, etc.


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U.S. Governmental Trust Funds

The largest and best-known U.S. Governmental Trust Funds are the Social Security Trust Fund, the Medicare Trust Fund and the Highway Trust Fund.

As explained in the excerpt following the end of this e-mail, the Social Security Trust Fund was established in 1940 and the payroll taxes for Social Security (currently 6.2% for employees plus 6.2% for employers and 12.4% of the 15.3% tax on the self-employed) are immediately deposited in this Trust Fund. It is required to invest in U.S. Government bonds. Social Security payments are made from this Trust Fund. Its Annual Report for 2021 shows Total Income (read Social Security payroll taxes paid by employees and employers) was $1.118 TRillion less “Total Outgo” of $1.107 TRillion of “Benefit Payments” and $0.006 TRillion of “Administrative Expenses” – netting to a $0.011 TRillion “INCREASE IN NET ASSETS” from $2.897 Trillion to $2.908 TRillion.

Similarly, the Medicare Trust Fund immediately receives the payroll taxes for Medicare (currently 1.45% on employees plus 1.45% on employers and the remaining 2.9% of the 15.3% tax on the self-employed). The Annual Report for 2021 discloses that Treasury Sec’y “Yelling Janet Yellin” is also the Managing Trustee of this Trust Fund and (pp. 239-240) all of the assets (except an insignificant amount of “undisbursed assets”) are U.S. Governmental bonds and “U.S. certificates of indebtedness.”

The Highway Trust Fund immediately receives the 18.4-cent/gallon federal tax on gasoline and the 24.4-cent/gallon federal tax on diesel fuel. Established in 1956 to finance the federal Interstate Highway System, its annual reports are required to be submitted each year on March 1 by the U.S. Treasury Secretary. The latest annual report (dated March 2020 for FY-9/30/2019) discloses that the Highway Trust Fund lives virtually “hand to mouth” with only paltry balances – WHICH APPARENTLY ARE TOO PALTRY TO DISCLOSE WHAT THEY CONSIST OF!!!


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U.S. Capital Formation

You, Solutions, received your Economics Degree from M.I.T. relatively recently.

So you lack the historical perspective of someone who earned his Economics Degree 58 years ago.

As Germany and Japan began re-building their economies following World War II, America was mesmerized by their respective cultures – characterized by, inter alia, industriousness, inventiveness, and frugality featuring high savings rates.

The U.S. Government responded to the frugality featuring high savings rates (probably the most important reason for the response, but not the only one) with various programs that would generate savings (i.e., capital for investment).

For example –

(1) Corporate “qualified” pension plans (aka “defined benefit” plans), the contributions to which are tax-deductible to employers THOUGH THE INCOME EARNED BY THE “PLANS” IS NOT TAXABLE EVER AND EMPLOYEES ARE ONLY TAXABLE ON THE PENSIONS WHEN FINALLY PAID.

(2) Corporate “qualified” savings plans (aka “defined contribution” plans), the contributions to which are tax-deductible to employers THOUGH THE INCOME EARNED BY THE “PLANS” IS NOT TAXABLE EVER AND EMPLOYEES ARE ONLY TAXABLE ON THE PENSIONS WHEN FINALLY PAID.

[NB: The widespread switch from “defined benefit” to “defined contribution” plans several decades ago was engineered primarily by lobbying from corporations. Increasing longevity was increasingly leaving employers “holding the bag” for the additional cost and “defined contribution” plans shifted the risk of life-expectancy increases to the employees. Moreover, so-called LBO (“Limited Buy-Out”) Funds owned by wealthy investors, pension funds and university endowment funds, often found that corporations whose stock prices had exploded (NB: a statistician will prove that a significant percentage of companies will always “take off” just like a significant percentage will fail outright while the majority plod along) HAD OVER-FUNDED PENSION/SAVINGS PLANS (which, typically, had invested only in the company’s own stock whose value had exploded) so an LBO Fund could simply buy the company, liquidate entirely its acquisition expense by removing the excess pension/savings plan assets (minus the income tax on the removal), and then netting a QUICK PROFIT by selling off the target company.]

(3) Individual tax-benefitted retirement plans such as ESOP’s, ERA’s, IRA’s, Roth IRA’s, etc.

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Obviously, the U.S Government thought we were sociologically incapable of matching German and Japanese industriousness and thrift – so the U.S.G. had to provide “crutches” so that we could keep up.

Of course, the “flip side of this coin” was that the U.S.G. thought we were too hedonistic to save for retirement – so these “crutches” were intended to “kill two birds with one stone.”

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Comparison With Governmental Trust Funds

Corporate pension plans, corporate savings plans and individual retirement plans (ESOP’s, ERA’s, IRA’s, Roth IRA’s, etc.) are NOT managed by the U.S.G.

Indeed, many are managed by financial institutions but several of the individual plans are “self-directed” within certain guidelines.

In fact, any real-estate investor with COMPETENT tax advice will use a “Roth IRA” whose income/gains are tax-exempt even though contributions to it are NOT tax deductible.

The trick???

LEVERAGE!!!

And the fact that a self-directed “Roth IRA” can invest in real estate.

So the last time I looked (about 15 years ago) –

(1) Any young wannabe real-estate mogul will make a TOKEN contribution to a “Roth IRA” -- who cares that the TOKEN is NOT tax deductible???!!!

(2) Then all of the wannabe mogul’s real-estate investments are made by the “Roth IRA” with the “Roth IRA” undertaking the mortgages (I’ve forgotten whether the wannabe mogul can guarantee the mortgages but non-recourse mortgages are fairly common as the “Roth IRA” gathers steam, at least non-recourse vis-à-vis the owner of the “Roth IRA”).

(3) Then wave “the magic wand” and the “Roth IRA” contains zillions of untaxed wealth in only a few short years.


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Conclusion

My return Q for you???

If the U.S.G. creates all of these asset pools (corporate pension/savings plans, ESOP’s, ERA’s, IRA’s, “Roth IRA’s”, etc., etc.) with various tax incentives, WHAT DIFFERECE DOES IT MAKE FROM THE PERSPECTIVE OF MACRO ECONOMICS WHETHER THEY ARE FORCED TO INVEST IN U.S. GOVERNMENTAL SECURITIES AND/OR ACCEPT TREASURY SEC’Y YELLIN AS TRUSTEE???

Of course, economists are avid (or lazy, depending on your perspective) with their relatively-recent (only a few decades ago) inventiveness in often viewing Governmental Trust Funds as “figments of the imagination” of some, but not all, pols.

But if economists WERE REALLY SERIOUS about measuring the TOTAL macro-economic impact of the U.S. Government, I would posit that they should also include the impact of all the other programs (retirement, savings, etc.) that they have created with mandates, tax incentives, etc., THAT COULD BE CHANGED IN AN INSTANT WITH A WAVE OF THEIR “MAGIC WAND”!!!

For example, the U.S.G. could suddenly begin requiring corporate pension/savings plans to begin investing solely in U.S. Government bonds/securities!!! And/or force them to accept Treas Sec’y Yellin as trustee.

If so, would you favor treating those U.S. Government bonds/securities owned by corporate pension/savings plans AS NON-EXISTENT???

BOTTOM LINE???

IMHO, ignoring U.S. Governmental debt owned by Governmental Trust Funds is simply an excuse for the likes of Stephanie Kelton (our author) to drive the U.S. economy into the ditch!!!

And if you believe that excuse, just wait until Stephanie Kelton’s next book presumably proselytizing for requiring corporate pension/savings plans and individual retirement plans to invest in U.S.G. debt so that even more debt can be ignored!!!

AT LEAST THE “ADULTS” IN CONGRESS, IN DEALING WITH THE “DEBT CEILING,” STILL VIEW GOVERNMENTAL TRUST FUNDS AS REAL AND THEIR GOVERNMENT-BOND ASSETS AS REAL.

[I CAN TESTIFY AS A MANAGING DIRECTOR 1997-2002 OF ONE OF THE WORLD’S LARGEST INVESTMENT BANKS (Dresdner Kleinwort Wasserstein Ltd. – London) THAT THE GOVERNMENT BONDS HELD BY THE GOVERNMENT TRUST FUNDS COULD BE SOLD AT ANY MOMENT FOR FAIR MARKET VALUE. AND TESTIFY AS AN ATTORNEY THAT THE U.S. CODE SECTIONS GOVERNING THE GOVERNMENT TRUST FUNDS PERMIT THEM TO ACQUIRE THE GOVERNMENT BONDS ON THE OPEN MARKET (vs. buying them directly from the U.S. Government).]

ACCORDINGLY, AMONG ECONOMISTS (which include both you and me – NB: “me” is grammatically a “direct object” of “include”; if you would never say “which include I,” then you should never say “which include you and I.”), IT IS ONLY SOME WHO ARE ENGAGING IN “ALICE IN WONDERLAND” ANALYSES OF THE MACRO-ECONOMIC IMPACT OF THE U.S. GOVERNMENT – ARBITRARILY EXTENDING THOSE ANALYSES TO INCLUDE GOVERNMENT TRUST FUNDS AS IF THEY DON’T EXIST, WHILE ARBITRARILY EXCLUDING FROM THEIR ANALYSES SUCH THINGS AS CORPORATE/INDIVIDUAL RETIREMENT FUNDS CREATED BY GOVERNMENT SUBSIDIES AND MANDATES.

Enough already!!!

Thank you again for your e-mail.


Your friend,

John K.


PS – Stephanie Kelton’s Belief That NO GOVERNMENTAL DEBT IS REAL

Vis-à-vis the “Conclusion” immediately above my closing salutation, it is revealing that Stephanie Kelton does NOT think any governmental debt is real.

For example, she makes the bald-faced assertion (p. 90) – “the truth is the entire national debt could be paid off tomorrow, and none of us would have to chip in a dime.”

She does NOT explain for “the unwashed” what she means.

But from her constant worship of governments that issue their own currency, it would appear that she means that the “entire national debt” could be “paid off tomorrow” by paying it off with newly-printed dollars.

What would this mean referring to the closing paragraphs of Sec. E of the Discussion Outline reporting that the amount of currency currently in circulation per the U.S Federal Reserve is only $2.23 TRillion while the amount of the National Debt is $29.71 TRillion???

The first level of analysis???

The amount of currency (read “zero-interest infinite-maturity debt”) has suddenly increased from $2.23 TRillion to $31.94 TRillion -- and $29.71 TRillion of National Debt has suddenly been “paid off” (read “converted to zero-interest infinite-maturity debt”).

The second level of analysis???

It’s bad enough that we are currently facing 7% year-to-year inflation.

And that inflation is nothing more than a PARTIAL COLLAPSE of the dollar.

But what would your reaction be if you had been holding zillions of U.S. Bonds which the U.S. Gov had suddenly “paid off tomorrow” with zero-interest infinite-maturity debt (i.e., newly-printed dollars which suddenly number $31.94 TRillion rather than yesterday’s $2.23 TRillion)???

IMHO, you would be facing a sudden COMPLETE COLLAPSE of the dollar as “investors race for the exits”!!!

No wonder that Stephanie Kelton argues incessantly that a government that “issues currency” has A MONOPOLY on currency!!!

And no wonder that Stephanie Kelton does NOT “want to touch with a 10-foot pole” what happens when a currency collapses – SUCH AS 1920’S GERMANY AND 1990’S RUSSIA!!!

Because it’s not a pretty picture!!!

STARVATION FOR ANYONE WHO COULDN’T GROW/CATCH/SHOOT HER/HIS OWN FOOD, OR WASN’T LUCKY ENOUGH TO BECOME A WHORE/GIGOLO FOR SOMEONE WHO COULD.”

NO, STEPHANIE KELTON, THERE IS NO SEAMLESS TRANSITION FROM THE OLD CURRENCY TO, SHALL WE CALL IT “NEW-SUCKER CURRENCY”!!!

The 1920’s German economy ran on the British Pound Sterling for nearly a decade and the 1990’s Russian economy ran on the U.S. Dollar for approximately a decade while EVERYONE STARVED WHO COULDN’T GROW/CATCH/SHOOT HER/HIS OWN FOOD, OR WASN’T LUCKY ENOUGH TO BECOME A WHORE/GIGOLO FOR SOMEONE WHO COULD.”

It takes considerable time, Stephanie Kelton, for anyone to trust your “New-Suckers”!!!

Let’s consider Stephanie Kelton’s favorite “fairy tale” (quoting from her 6/9/2020 NY Times OpEd available at viewtopic.php?f=672&t=2139&sid=d76f5fa3 ... 229098c27b - NB: the 6/29/2020 date of her NY Times OpEd was the same date that the original hard-cover copy of “The Deficit Myth was first released by her publisher) --

“In 1998, I visited Mr. Mosler (whom she identified as “a successful Wall Street investor”) at his home in West Palm Beach, Fla., where I spent hours listening to him explain his thinking. He began by referring to the U.S. dollar as “a simple public monopoly.” Since the U.S. government is the sole issuer of the currency, he said, it was silly to think of Uncle Sam as needing to get dollars from the rest of us. My head spun. Then he told me a story about an experiment of his: Mr. Mosler had a beautiful beachfront property and all the luxuries of life anyone could hope to enjoy. He also had a family that included two teenagers, who resisted doing household chores. He wanted the yard mowed, beds made, dishes done, cars washed and so on. To encourage them, he promised to compensate them by paying for their labor with his business cards. Nothing much got done. “Why would we work for your business cards? They’re not worth anything!” they told him. So Mr. Mosler changed tactics. Instead of offering to compensate them for volunteering to pitch in around the house, he demanded a payment of 30 of his business cards, each month, with some chores worth more cards than others. Failure to pay would result in a loss of privileges: no more TV, use of the swimming pool or shopping trips to the mall. Mr. Mosler had essentially imposed a tax that could be paid only with his own monogrammed paper. And he was prepared to enforce it. Now the cards were worth something. Before long, the kids were scurrying around, tidying up their bedrooms, the kitchen and the yard — working to maintain the lifestyle they wanted. This, broadly speaking, is how our monetary system works. It is true that the dollars in your pocket are, in a physical sense, just pieces of paper. It’s the state’s ability to make and enforce its tax laws that sustains a demand for them, which in turn makes those dollars valuable.”

Yes, Mr. Mosler’s household running on business-card currency comprised a “simple public monopoly.”

BUT THERE IS NO SUCH THING IN THE REAL WORLD WHICH CONTAINS ZILLIONS OF CURRENCIES.

As 1920’s Germany discovered vis-à-vis the British Pound Sterling and 1990’s Russia discovered vis-à-vis the U.S. Dollar.

If Stephanie Kelton wants the IRS to collect taxes in the form of New-Sucker currency, good luck!!!

Any Americans who have NOT starved can easily exchange whatever FOREIGN “HARD CURRENCY” the U.S. economy has begun to run on for the next decade for worthless New-Sucker currency to pay the IRS.

But that’s not even “square one” in pulling the U.S. “out of the ditch.”




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MATERIAL REFERENCED IN THE SECOND PARAGRAPH OF THE FOREGOING E-MAIL --
Excerpt from my Dec. 29 e-mail which was included in your “Participant Comment” entitled “Bi-Partisan Utter-Destruction of The Dollar (And, Consequently, The Economy)” - viewtopic.php?f=673&t=2147&sid=41a6fdec ... 674a979c59


(D) Constant LIES By Pols Such As Janet Yellin Re The Debt Ceiling

Janet Yellin is the U.S. Treasury Secretary.

A simple Google search of “Yellin ‘debt limit’ social security” will document the zillions of times she said on TV this past Fall that if Congress failed to raise the debt limit, Social Security would NOT be paid.

This constituted CRIMINAL FRAUD since it was designed to frighten retired people into supporting a policy that they might otherwise consider unwise.

(1) Secretary Yellin’s LIE is untrue because Social Security is paid from A TRUST FUND WHOSE TRUSTEES ARE LEGALLY OBLIGATED TO MAKE PAYMENTS SO LONG AS THE TRUST FUND HAS ANY FUNDS.

(2) Per 42 U.S. Code Sec. 401(a), The Social Security Trust Fund was established on January 1, 1940, and all payroll taxes for Social Security are paid into the Social Security Trust Fund.

[Other payroll taxes for, e.g., Medicare, are paid into other Trust Funds.]

(3) According to the Annual Reports of The Social Security Trust Fund (the 2021 Annual Report is available at https://www.ssa.gov/OACT/TR/2021/ and others are available by changing “2021” in that IP address), the balance in the Social Security Trust Fund actually GREW from $2.897 TRillion in the 2020 Report, to $2.908 TRillion in the 2021 Report.

[NB: Per the 2021 report, Total Income was $1.118 TRillion less “Total Outgo” of $1.107 TRillion of “Benefit Payments” and $0.006 TRillion of “Administrative Expenses” – netting to the $0.011 TRillion “INCREASE IN NET ASSETS” from $2.897 Trillion to $2.908 TRillion.]

(4) 42 U.S. Code Sec. 401(c), provides that The Social Security Trust Fund’s “Board of Trustees shall be composed of the Commissioner of Social Security, the Secretary of the Treasury, the Secretary of Labor, and the Secretary of Health and Human Services, all ex officio, and of two members of the public (both of whom may not be from the same political party), who shall be nominated by the President for a term of four years and subject to confirmation by the Senate…..The Secretary of the Treasury shall be the Managing Trustee of the Board of Trustees (hereinafter in this title called the ‘Managing Trustee‘).”

ACCORDINGLY, AS “MANAGING DIRECTOR” OF THE SOCIAL SECURITY TRUST FUND’S BOARD OF TRUSTEES, Treasury Secretary Yellin knew full well that she was engaging in CRIMINAL FRAUD with her false claims that a failure to raise the National Debt Ceiling would affect operations of (and her fiduciary duties vis-à-vis) The Social Security Trust Fund!!!

IT SHOULD BE NOTED THAT HER BRAZEN LIES ARE MERELY ONE OF ZILLIONS OF EXAMPLES OF CRIMINAL FRAUD PRACTICED BY POLS – FOR WHICH POLS NEVER SEEM TO GET PROSECUTED – GOD ONLY KNOWS WHY!!!

BTW, as you’re aware, my Harvard Law School class of 1967 had monthly in-person lunches for 35 years at the Harvard Club of NYC which, with COVID, morphed into weekly Zoom chats permitting participation from classmates throughout the country – and I have participated regularly in both.

During our 10/12/2021 Zoom chat, I raised the issue of Secretary Yellin’s CRIMINAL FRAUD claims that a failure to raise the National Debt Limit would mean no Social Security payments. The overwhelming reaction was that the “Social Security Trust Fund” is not real with fiduciary responsibilities for Fund Trustees – but merely an expression invented by the media. WHICH JUST GOES TO SHOW HOW EASY IT IS FOR POLS LIKE SECRETARY YELLIN TO MISLEAD EVEN WELL-INFORMED PEOPLE.

ACCORDINGLY, during our 10/19/2021 Zoom chat, I came armed with copies of 42 U.S. Code Sec. 401 and the last two annual reports of the Social Security Trust Fund. The overwhelming reaction this time was that prosecuting Pols for their Criminal Fraud would be unprecedented. As already noted above – GOD ONLY KNOWS WHY NOT!!!

BTW, in all fairness to my HLS classmates, they tend to believe pols so it is understandable that they would have believed Secretary Yellin’s rhetoric and, accordingly, assumed that all the talk about a “Social Security Trust Fund” was merely a “figure of speech” invented by the media and NOT a real legal structure.