Wednesday, April 22, 2009

Washington Post proposes Social Security changes to address deficits

In an editorial today, the Washington Post proposed several steps to help address current and future budget deficits. Among them are two that would reduce Social Security benefits for future retirees:

Raise the Social Security retirement age beyond the slated increase to 67 to 68. As people live longer, it makes sense that they work a bit longer, too. This change could be made gradually, and eventually would save $10 billion a year, with savings left over to strengthen the disability program to protect manual laborers and those who need to retire early.

Reduce Social Security benefits for the well-off while protecting those who depend on the program. As controversial as Social Security reform is, every serious policy expert recognizes the need for changes, including benefit reductions. Better targeted reductions than across-the-board cuts.

Together, these steps would be almost sufficient to address the long-term Social Security deficit.

This page published by the Social Security Office of the Actuary includes estimates for these reform provisions as well as a number of others.



Brooks said...


I have a question for you regarding the nature of the SSTF "special issue" Treasuries.

I assume that these bonds are "backed by the full faith and credit of the USA" like other Treasuries, and that they represent an inviolable commitment -- legally and in the eyes of financial markets that affect the interest rate we must pay on our borrowing -- of a minimum amount that must be eventually spent on SS benefits.

I encountered the argument that defaulting on these bonds is not even technically possible, and that even if we just essentially tore up this intragovernmental "debt" and never spent even that amount on Social Security in the future, doing so would be perfectly legal and would have far less (if any) negative impact on our credit-worthiness as would default on other (regular) Treasuries. This argument came from Jim Glass in my exchange with him starting here

What do you consider the truth re: the above?

Thanks in advance for your reply.

Jim Glass said...

Hello again, Brooks.

Andrew addressed this issue a little while ago, taking Dean Baker to task on this very point (and similar ones).


...Dean says:

"It is truly incredible, and unbelievably galling, that anyone in a position of responsibility would suggest defaulting on the government bonds held by the Social Security trust fund ... the Social Security bonds carry the full faith and credit of the U.S. government."

[I]f Congress chooses to alter Social Security benefits so that bonds need not be redeemed that's NOT a default on the trust fund, as much as Dean would like to says that it is.

To claim that reducing benefits constitutes a default on the trust fund is simply incorrect, which Dean surely knows...

~~~ end quote ~~~

As they say, read the whole thing.

Brooks said...


Thanks. I'll check that out. I was hoping to get a reply from you on that EconomistMom thread. Will you be replying to my comment/questions there?

By the way, speaking of Dean Baker, I swung by his blog (as I do once in a while to see what that wacky hyperpartisan and his merry band of fellow hyperpartisan echo chamber hanger-outers are up to) and took him on on more of his baloney

Andrew G. Biggs said...


That's a good question, but I'm not sure how good an answer I have. Clearly, true default on trust fund debt isn't necessary, when you could simply reduce benefits to tax-payable levels beginning in 2017 (or whenever deficits start) and never need to redeem a dime of trust fund bonds. Alternately, Social Security could give up claim to the trust fund bonds and therefore not ask them to be redeemed. I can't imagine this happening without a change in the law -- the President couldn't simply order the SSA commissioner not to redeem the bonds -- so a benefit cut scenario is much more likely.


Brooks said...


Thanks for your reply. If I may follow up, let me approach the question differently by way of an extreme hypothetical scenario:

What if today (or next year or whenever) we eliminate SS FICA taxation and ended Social Security (permanently halting SS benefit payments) --

(1) Would that necessarily be legal (i.e, no one could get the courts to force the federal government to spend the SSTF balance amount on SS benefits)? I'm a bit familiar with Flemming v Nestor (thanks to Jim), but perhaps that applies to an individual claim in ways that would not apply on a collective, aggregate basis.

(2) Would that constitute "default" on the SSTF bonds?

(3) Would the bond market view interpret such action as some breach of trust (whether or not technically "default"), with a substantial adverse impact on their view of our credit-worthiness and the interest rate they would demand on our further borrowing?

WilliamLarsen said...

Brooks, I think I can answer your question.

"Myth 17
Social Security Benefits are guaranteed
“There has been a temptation throughout the program's history for some people to suppose that their FICA payroll taxes entitle them to a benefit in a legal, contractual sense. That is to say, if a person makes FICA contributions over a number of years, Congress cannot, according to this reasoning, change the rules in such a way that deprives a contributor of a promised future benefit. Under this reasoning, benefits under Social Security could probably only be increased, never decreased, if the Act could be amended at all. Congress clearly had no such limitation in mind when crafting the law. Section 1104 of the 1935 Act, entitled "RESERVATION OF POWER," specifically said: "The right to alter, amend, or repeal any provision of this Act is hereby reserved to the Congress." Even so, some have thought that this reservation was in some way unconstitutional. This is the issue finally settled by Flemming v. Nestor.”

“Workers and beneficiaries have no legal ownership over their Social Security benefits. Instead, what they have is a political promise that can be changed at any time, by any amount, for any reason. In any retirement system a lack of legal ownership is a source of insecurity. In one that is under-financed in the long run by 25 percent, it is a serious problem.”

In simple terms, Congress can pass legislation to simply stop SS-OASI and there is nothing anyone can do legally. The trust fund would simply sit there earning interest or congress could pass legislation that would use the trust fund to pay down the debt.

Brooks said...

William Larson,

Thanks. That addresses my Question #1 and perhaps #2. My Question #3 is still critical. We could, of course, default on REGULAR Treasuries (owed, say, to the foreign central banks), but the main practical question (leaving aside matters of fairness, ethics, etc.), is whether or not the benefit of erasing that debt outweighs the higher interest expense that would result from reduced confidence in the U.S. as a creditor. So my question #3 is basically asking if -- and to what extent -- reneging/defaulting/whatever on the "special issue" Treasury bonds in the SSTF would have such an effect.

Andrew G. Biggs said...

Brooks, my thoughts:

1. Yes, it would almost certainly be legal;

2. Probably not; the fund would still presumably roll over bonds as they matured, but it would never redeem them beyond that. So you'd simply get a larger and larger fund balance that would never be repaid;

3. Probably not.

Brooks said...



Re: #2, what if the bonds were "torn up" so to speak, with the obligation officially canceled (or for that matter, sold to China) -- would that constitute default?

Re: #3, I take it, then, that you are saying that it is grossly misleading for folks to characterize those "special treasuries" as "backed by the full faith and credit of the USA", since that characterization implies that we cannot renege/default on those bonds without reducing our credit-worthiness in the eyes of the bond market. Correct?

Also, in the post to which Jim referred me -- -- you write "the trust fund simply an obligation by the government to raise taxes beginning in a few years." What do you mean by "obligation" and how does this fit with your answers to my questions?

Thanks again.

John Bailey said...

Social Security's problems cannot be addressed in isolation. The country faces a number of severe problems, including an unsustainable health care system, as well as very difficult problems in the automobile, banking, and housing industries.

The Federal government has a variety of obligations/continuing committments, including:

Social Security
Federal Pensions
Deposit Insurance
Mortgage Guarantees

As discussed above, both private
and public pension funds are seriously underfunded.

None of these problems can be solved in isolation.

WilliamLarsen said...


Question 3 I think is immaterial if congress passes legislation to repeal the Social Security Act. The 1935 Social Security Act clearly gives congress the authority "The right to alter, amend, or repeal any provision of this Act is hereby reserved to the Congress."

Your specific question as to what would happen to the $2.4 Trillion in Special US Treasuries held by the SSA if the Social Security Act was repealed. I see no problem with the markets at all if the SS act was repealed. In fact we would most likely see positive responses. The notes could be burned or torn up without any problem to the market since the liabilities they were intended to pay no longer exist.

In addition, by law neither the dedicated tax nor the trust fund may be used to fund any non SS benefits. But then with the SS act repealed, that statute would also be gone as well.

I do not see any negative impact if the SS act were repealed and the Special Treasuries were burned, torn up or given to the US Treasury to pay down the debt.

Between 1970 and 1983 SS-OASI spent more each year than they collected in SS-OASI taxes. To pay full benfefits, SSA had to redeem these Special Treasuries. The Trust fund was exhausted in 1983 and SS-OASI borrowed $11 billion from the SS-DI and Medicare trust funds which were repaid. The last general budget surplus was 1957. This means there was no surplus funds to redeem any of the Special Treasuries between 1970 and 1983. What the treasury did was to borrow money prior to SS-OASI needing it and and exchanged the special treasury for the funds. No increase in the natinal debt, just a change in ownership of debt.

Brooks said...

William Larson,

Thanks for your answer. It seems at least plausible to me. I'm still wondering, though, if the bond market would view the government walking away from any Treasury bonds -- even intragovernmental -- as something akin to default, if not technical default, and if it would affect the interest rate they demand on our borrowing.

I'd be interested in Andrew's (and Jim's) answers to my follow-up questions (and interested in knowing if he agrees with your answer and explanation) if/when he has a chance.

Andrew G. Biggs said...

This gets a bit arcane given the number of hypotheticals. As I see it, the only way the government could truly default on trust fund bonds -- meaning, in such a way that the markets took it to be a default -- is if the government openly stated, 'We won't pay. We default.' Which is pretty unlikely, since it's unnecessary. Barring that, I don't see effective defaults on trust fund bonds through benefit cuts or the like having much negative effect on the markets, and probably a good deal of positive effect (since implicit debt competes with explicit debt). But again, it gets pretty hazy.

Brooks said...


Thanks. I realize that, as a practical matter -- i.e., with regard to the debate over whether or not to reduce projected SS spending or increase taxation -- my questions regarding the SSTF are probably moot, since it is simply inconceivable (politically) that we would spend less than a cumulative $2.4 trillion on SS anyway in the coming years and decades.

I was just asking out of curiosity, since I have considered that $2.4 trillion to represent the minimum amount we must eventually spend on SS ("must" meaning either in legal terms or to avoid default or something akin to default that would adversely affect our credit-worthiness), but Jim Glass made the point (elsewhere) that it represents no such obligation (real or in the eyes of the bond market) -- i.e., that we could tear up those bonds (and end SS permanently) and it would be legal, would not be "default" and would not have negative repercussions in the bond market.

Sounds like you're saying that we could accomplish the same result as my scenario above (ending SS and "tearing up" those bonds) without officially, explicitly stating that we were never going to "pay" on those bonds (instead just sort of letting them go on existing as a bookkeeping entry with the SSTF balance growing), and by avoiding such an explicit statement we would avoid any associated adverse perception by the bond market. Although I don't know whether or not there would be an adverse reaction in the bond market either way, I'm not sure whatever reaction they would have would be much different if we stated explicitly that we were not going to "pay" on those bonds vs. if that were apparent by our implying it via our other actions and statements, including the ending of the entire SS program.

So I'm still unsure of the answers to these questions. But I realize I'm asking a lot of follow-up questions about a hypothetical scenario with little/no practical significance, and you may not have time to continue answering such questions. Thanks for your the answers you've given.

Jim Glass said...

Brooks: I don't go over to "mom's" that often, if I missed something from you there I apologize. I'll send you an e-mail. You wrote:

I'm still wondering, though, if the bond market would view the government walking away from any Treasury bonds -- even intragovernmental -- as something akin to default, if not technical default, and if it would affect the interest rate they demand on our borrowing. I'd be interested in Andrew's (and Jim's) answers...Since you address me: The T-bonds issued to the public and intra-govt debt are two entirely different animals, issued with very different terms (as I've mentioned before -- and for all that so many people claim "they are exactly the same"). Payment of the T-bonds issued to the public is guaranteed by the Constitution (14th Amendment). Failing to pay a penny due on them would absolutely be default. But as to the intra-govt debt, such as the SSTF bonds...

As Andrew and Mr Larsen (and the SSA web site, and the SS Act, and Supreme Court) have said, SS is just a spending program that can legally be changed, reduced, or repealed by Congress at will. In the entirely plausible case that benefits are reduced in years to come so the bonds aren't redeemed, no default will occur. They'll just keep rolling over as they have until now. Or Congress will move them to the Medicare Trust Fund, (which it has an absolute right to do) as political cover, "to shore up Medicare", for all the funding benefit that would provide. ;-)

So we'll never see outright repudiation of the bonds, but as to its theoretical possibility, Andrew wrote:

This gets a bit arcane given the number of hypotheticals... As I see it, the only way the government could truly default on trust fund bonds -- meaning, in such a way that the markets took it to be a default -- is if the government openly stated, 'We won't pay. We default.'As a lawyer who works with finance I can tell you: Nope, not even then.

For a legal default to occur these conditions must be met: (1) There must be a debt obligation from one party (the debtor) to another party (the creditor); (2) that the first party fails to honor, causing loss to the second party; (3) which results in some party somewhere obtaining the legal right ("standing") to sue the debtor for damages compensating for the loss, or to otherwise invoke provisions specified in the debt agreement or law as occurring in the case of default. (In short, a court must agree that default has occurred.) All those conditions must be met.

The SSTF bonds are 0 for 3. (1) They are an obligation from the govt to itself, so there is no second party; (2) There can be no loss on the bonds, since the bonds have a value of $0 to the US as both an asset and liability, as shown on the consolidated balance sheet of the US (if you do/don't pay money to yourself how much do you gain or lose?) So there is no loss or amount of damages; (3) Nobody has standing to sue the US over the bonds, since nobody has any legal interest in them other than the US -- which isn't going to sue itself for doing what it is doing, and couldn't if it wanted to, because one can't sue oneself!

To make all this crystal clear, consider the exact same debt relationship established by anyone but the government.

Say your brother writes out a $500,000 note, meeting all requirements to be legally binding, including being legally secured by his home and all his other assets -- only he issues it to himself.

Then suppose one day he says, "I refuse to pay myself!", and defiantly tears the note into little pieces. Can he then get angry over that and sue himself in court? What amount will he claim in damages from himself? Will a judge spend court resources to hear that case?

It doesn't come close to passing the laugh test.

But substitute your Uncle Sam for your brother -- no other legal change -- and you get all kinds important and serious people pulling their chins and pondering it, invoking "full faith and credit" and "the world credit standing of the US", etc, and the great masses of SS participants believing them. Which is why Dean Baker can get by with repeating this hooey over and over with nobody ever calling him on it -- Andrew is the first I've seen, kudos to him!

Milton Friedman called the SS trust fund the greatest confidence trick ever, because somehow it mesmerizes people, locks their brains, out of seeing what would otherwise be patently obvious via common sense to anybody -- to the tune of trillions of dollars. He was exactly right.

Barring that, I don't see effective defaults on trust fund bonds through benefit cuts or the like having much negative effect on the markets, and probably a good deal of positive effectExactly. The credit market, and credit ratings, measure your ability to pay your creditors, outside parties -- not yourself.

If the US decides to pay less to itself -- via reducing the cost of SS, Medicare, agricultural subsides, etc. -- that improves its ability to pay its outside creditors: persons who own its bonds, you, me and the Chinese. So its credit rating will go up.Consider your brother again. Suppose he wrote that $500,000 note to himself as above, and then sealed it in an envelope upon which he wrote "My 'spend on myself for fun' Trust Fund". Then he waved that around in front of his creditors as proof that he intended to spend $500,000 of his future income on himself. So that they got nervous thinking, 'he can't afford that', and started to deny him credit and raise the interest rates on credit he already had..

And suppose that snapped your brother back to his senses, because he can't afford to have his credit cut off. So he then tore up that envelope with the note still inside and burnt the pieces in public, telling all his creditors: "Forget that! From now on I promise to pay you guys first! And you can watch me increase my savings as I spend less on myself".

Is that really supposed to hurt his credit rating, because he "defaulted" on his promise to spend his income on himself?? His creditors will hold that against him???

That's so far from passing the laugh test it is almost insane.

But change your brother to your Uncle Sam, and I have seen that exact argument made not only by Dean Baker but the likes of Alan Blinder and Paul Krugman.

Friedman was exactly right.

Brooks said...

Thanks, Jim. What you say sounds reasonable to me. It's quite possible that, even if we did officially, explicitly "tear up" those bonds (announce that we were not going to "pay" on them) that it would not have any adverse effect (even in isolation, as opposed to net of positive effects) on the bond market's view of our credit-worthiness. And if we didn't make such an explicit statement, but made it clear that, in effect, we are walking away from "paying" on those bonds and from spending at least that amount eventually on SS benefits, again it's quite possible that the bond markets wouldn't view that as a red flag of any sort, per your explanation. And I'm inclined to think that, at least, the bond markets would not react anywhere nearly as negatively to such moves as they would to default on regular Treasuries. But -- and I realize I'm asking about something that is hard to prove -- I still wonder if the simple fact that the government will not be honoring Treasury bonds (even though intragovernmental) would have an adverse impact (in isolation, not necessarily net) on the perception of the bond market of our credit-worthiness.

Perhaps I should also ask some bond market experts, since my question is one of perceptions from that perspective. Do you know of any bloggers (or others I could email) who may have relevant bond market expertise?

Jim Glass said...

"I still wonder if the simple fact that the government will not be honoring Treasury bonds (even though intragovernmental) would have an adverse impact (in isolation, not necessarily net) on the perception of the bond market of our credit-worthiness."~~~

Remembering how hypothetical this is, seriously imagine this scenario...

You write out a legal note for $100,000, secure it by your home, then issue it to yourself. Then you openly repudiate the note, tear it up, announce you won't pay on it.

Ask yourself...

Will Equifax, Transunion and Experian downgrade your credit rating because you defaulted on a legally binding debt to yourself?

Whatever your answer is, you can say the same thing will happen to the credit rating of the US if in the same way it repudiates debt owed to itself -- and do so with complete confidence that you will never be proven wrong in reality, because it is never going to happen. Congress will instead accomplish the same thing by letting the debt owed to itself roll over forever, or by "honoring it" while transferring it from one purpose to another, such as from "funding" the SS trust to equally funding the Medicare trust.

So your opinion can very happily disagree with mine, as neither of us will ever be proved wrong. ;-)

In such a scenario, what unquestionably would reduce your credit rating (and the US's in its analogous situation) is your getting your overall finances into such a mess that you are forced to cut back on your intended spending on yourself. But cutting back your spending on yourself (repudiating your debt to yourself) is not what causes your credit rating to fall in that case, it is the remedy for the fall in your credit rating.

Brooks said...


Just in case it isn't clear, I'm not disputing your premises or your reasoning (nor have my questions been rhetorical), nor am I disagreeing with you, except insofar as you seem certain of your answer to my Question #3, whereas I'm not certain and would need further confirmation (particularly from one or two people with bond market expertise, particularly pertaining to Treasuries) before reaching a firm conclusion.

Jim Glass said... seem certain of your answer to my Question #3, whereas I'm not certain and would need further confirmation (particularly from one or two people with bond market expertise, particularly pertaining to Treasuries)...Brooks, that's fine, but what are they going to say?

You'll be asking them about something that not only has never happened but has never even been considered, and which certainly never will happen. So nobody's ever even thought about it. What are they going to base an opinion on?

Moreover, from a legal perspective it can't happen -- and that's not an opinion, as a lawyer who works with this stuff I tell you as an absolute certainty that you simply can't legally default on a debt you owe to yourself!

(I don't know why this is so difficult for people to grasp -- except that Friedman was right.)

Find one person who ever has done it in the history of our legal system.

Try to do it to yourself! Seriously, write out a note to yourself and then don't pay it, and see what happens. Tear it up! Try to declare yourself in default. See what happens.

But ... if you do take this question to bond market professionals, I bet it will be an interesting exercise in "cognitive framing".

They have no more experience with "default on intragovernmental debt" than anyone else (as everybody's experience is exactly zero) and they have had just as much exposure to all the political arguments and posing over SS as everybody else.

So I'd wager money that they'd give answers like these to these questions:

(1) Q.: "If the US reduced its spending on SS and Medicare, so the bonds in the SS & Medicare trust funds were never needed or redeemed, would this harm the credit rating of the US?"

A: "Of course not. Reducing our future deficits could only help the credit rating of the US".

(2) Q.: "If the US voluntarily defaulted on the Treasury bonds in the SS and Medicare trust funds, reducing benefits correspondingly in the process, would this harm the credit rating of the US?"

A: "My God, that would be horrible! Voluntary default on Treasury bonds?? That must never be allowed!!"

Yet the two situations are identical.

The rhetorical trick in #2 is assuming in the question that default on Treasury bonds occurs, so it is assumed in the answer -- instead of examining whether or not meaningful default occurs.

That's exactly what Dean Baker did when writing: "It is shocking that people today are proposing to default on the SS Trust Fund bonds..."

Remember that there is no reason to believe that even the world's greatest T-bond trader knows anything at all more than Joe Average about the SS Trust fund, or its legal terms, or intragovernmental debt -- because he does absolutely nothing professionally with any of them, other than pay his payroll taxes and expect to get his benefits "that he's paid for" when he retires.

There is nothing to prevent him from believing every word that Dean Baker wrote, that Andrew refuted, because what does he know about it professionally? Nothing.

(I consider myself a competent laywer in my field, but what do I know about admiralty law, or mineral rights law, or fighting a parking ticket in St Louis? Nothing. So it would be foolish to ask me about any of those things just because I'm a lawyer. Well, it would be foolish to believe what I said).

In any event, if you ask professional T-bond traders: "What would the effects on credit markets be if the government openly repudiated the SSTF bonds", we know one thing...

Whatever opinion they may give, it will never be proven right or wrong by real world events any more than yours or mine will be! ;-)

The whole issue is that hypothetical -- and that being the case, I fear I've written much too much about it.

Brooks said...


Much of what you said is a repetition of what I had just responded to, and as I said, I’m not disputing your premises or reasoning. To clarify a few things I tried to be clear about in my prior comment:

First, my question #3 applies whether or not we are talking about actual, technical “default”, and whether or not the action I’m talking about would or could be “default” is not the ultimate question (just one assumption to determine in trying to get to an answer). In other words, even if we assume that it is not “default”, I still want to know if there would be an (enduring) adverse reaction – based on accurate perception or misperception – in the bond markets.

Second, again, I’m speaking of any possible negative isolated effect, not net effect after considering any related positive effects. It certainly may be that an action that reduces our projected spending makes us, on balance, more credit-worthy, even if it involves reneging/defaulting/whatever on some perceived “debt”, and there is some adverse effect in isolation due to some perception by some/all of the bond market that we are walking away from that “debt” and thus have less general commitment to our debt “obligations”. Heck, at least theoretically the same could be said about a nation’s or an individual’s “real” debts: a nation with a big enough debt could become, on balance, more credit-worthy by defaulting on some/all of that debt (because of the reduced debt service burden), and the same for an individual (if Joe is forking over almost his entire paycheck each month to Master Card and has such a huge balance that he’ll never get out from under it, and Sam was in such a situation, too, but Sam just filed Chapter 7 and now he has a lot more cash on his hands, I might consider Sam a lower credit risk if they each asked to borrow $500 from me). So I want to look at the effect I’m asking about in isolation, as well as in conjunction with any other inherent or very likely effects.

We could even de-link the “tearing up” of those “special issue” Treasuries from the reduction in projected overall spending and overall deficits that you presume. It could be part of an action that merely shifts funds around, perhaps even to be used as incremental spending in other areas. But we don’t need to get into that; the point is that I’m asking about an isolated effect.

Third, as for the hypothetical nature and the fact that it has never happened (that I know of in the U.S. – perhaps there are historical examples of other nations doing so), you have a firm view, if I’m understanding you correctly, that there would be no adverse effect, even in isolation, on the bond markets’ view of our credit-worthiness and thus on interest rates on our borrowing). You have this view despite the hypothetical nature based on thinking it through and considering what you think would make sense as a rational (enduring) reaction by the bond markets. So the hypothetical, unprecedented (that I know of) nature of the question obviously doesn’t preclude one having a strong opinion/view. You seem to be implying that, because my question deals with an unprecedented, hypothetical scenario, a bond market professional dealing with Treasuries could not have any greater insight into this question than you do, and since your view is based on what you consider (perhaps correctly) a rational reaction to such an action, there is nothing that could be gained from my seeking their views as opposed to feeling as confident as you are that your answer is valid. Well, I don’t know what insights they may have. Again, I’m not disputing your premises or your reasoning, but I would like to hear if someone with expertise in bond markets (ideally, as I said, working with Treasuries) would have the same view of what the perceptions of the bond markets would be.

As for lack of experience with such a question or misunderstandings, etc., regarding those “special issue” bonds, obviously I would weigh answers I got (in part) according to the extent to which I thought they knew what they were talking about, and I would present them (either upfront or as follow-up) with the kind of points that you’ve made. So I’m not worried about “cognitive framing”.

I appreciate your bringing to my attention this aspect of this issue. Because of the points you’ve raised, whereas I used to say that the SSTF balance represents the minimum we must eventually spend on SS benefits, I now say that it represents that “at best” and point out that even that may not be the case (because of what you’ve contended).

Jim Glass said...

Brooks, here a simple and clear two-part test for whether a "default" has occurred.

1) Who is the party that takes the financial loss?

2) What is the exact (non-zero!) dollar amount of the financial loss?

If you don't have a specific answer for both questions, there is *no* default. Period.

Now say a party (any party: you, a corporation, the federal government) issues a debt note to itself and then refuses to pay it.

What is the amount of the dollar loss to it? Zero.

(If you believe the fact to be otherwise, please specify how.)

Ergo, the answer to question 1) is "nobody", and to question 2) is $0.

Ergo, there is no default. Period.

Now you may well ask: "If Congress were to announce it is repudiating the SS TF bonds, what would the reaction of X, Y, Z, and the bond market be?"

And they may all very well have very different pronounced and dramatic reactions, in response to this political act by Congress, and according to whatever else is happening at the time!

But whatever there reactions may be they WON'T be because of any "default" on the SS TF bonds, because there WON'T be any default.

UNLESS you can name a party who will take a financial loss upon repudiation of the bonds, and the dollar amount of the loss.

So let's imagine that in the year 2025 Congress votes to repudiate exactly $300 billion of SSTF bonds. The question for you:

1) Who suffers a financial loss on that repudiation?

2) What is the exact dollar amount of that loss?

End. Period. Stop.

Brooks said...


Without getting into too much meta discussion, I do indeed get what you've been saying, so no need for continued repetition of your point and explanation. What you are saying is that even we explicitly repudiated that intragovernmental "debt", it clearly would not constitute default, nor would it cause anyone financial loss, and therefore there would be no adverse reaction to it (there may be some adverse reaction due to other acts and factors that accompany that act, but not to that act per se).

I'm saying: ok, I understand that reasoning and I'm not saying I see anything that is necessarily or even likely wrong with it. All I'm saying is that I, personally, would not (yet) feel highly confident in making that assumption (not that it's unreasonable for YOU to have that level of confidence in it, just that I would have to explore further to have that level of confidence in it).

Again, even if we assume, at least arguendo, that it wouldn't be default, and that bond markets wouldn't view repudiation of intragovernmental bond "debt" nearly as adversely as they would default on regular Treasuries, I still wonder whether or not there would be some adverse reaction simply on the basis that Treasuries, even of the intragovernmental sort, were not being honored, perhaps because it would be seen by at least some as a violation of something sacrosanct (any "Treasury" bond of any sort), either in the view of a given set of investors or, if we want to think a level deeper, what investors will think other investors will think when the headline is that the U.S. has repudiated a given class of Treasury bonds.

And just as one note, remember that markets often respond to signals, whether the underlying assumption is valid or not: If a company always pays a dividend to shareholders, then comes upon some opportunity or other change in response to which it would maximize shareholder value if they forego the dividend (and instead re-invest earnings or whatever), they may nevertheless pay the dividend to avoid giving the erroneous impression that the company is in financial trouble. To me, at least, it is not inconceivable that Treasury bond investors, whether due to their own perceptions or due to the perceptions they think others will have, would see repudiation of ANY Treasury bond, even intragovernmental, as a red flag. Maybe none of them would see it that way. I'm just saying that at least now, at least for me, I'm not nearly certain they wouldn't.

As I've said repeatedly, I'm not disputing the premises or reasoning in your argument that there would be no adverse reaction because such a reaction would not, in your (probably correct) view, be rational, given that this "debt" was just intragovernmental. I'd just like to get the perspective of some folks with relevant expertise and insight before closing the book on that question. So, no, for me, at least, it's not "End. Period. Stop." with adoption of your assumption. Rather, I have some further exploration to do. You feel satisfied with your assumption, and I'm not knocking that. But nor is it unreasonable or irrational for me to lack that level of confidence in it (at least for now, pending further support). End. Period. Stop.

Again, I appreciate you're bringing this point to my attention. I don't think we need to keep going over the same stuff, though. I get what you're saying. Perhaps you get what I'm saying, and if not, I don't think I can be any clearer. Again, thanks.