Social security systems can never become insolvent if the government has a sovereign currency.

[girl gone mad]

From Professor http://bilbo.economicoutlook.net/blog/?p=749">Bill Mitchell's blog:

Many readers have asked me to explain why social security and pension schemes run by national governments can never become insolvent. Some have heard me commenting on the radio recently about this. In the current recession, where automatic stabilisers are pushing the budget back into deficit to dampen the fall in aggregate demand there are now renewed cries that social security funds around the World are likely to become insolvent. There are the familiar howls that all the “debt” that is being built up as governments go into deficits (mostly because they have been dragged into them by the cycle) will require huge future tax burdens that will undermine the capacity of governments to deliver adequate social security and health care systems. I think its time to de-brief again. The short answer to these claims is: sovereign governments can always fund social security in their own currency. Always, always, and even always.

National social security systems can never become insolvent if the government has sovereignty in its own currency. Further, the pursuit of budget surpluses as a means of accumulating ‘future public spending capacity’ undermines the capacity of the economy to provide the resources that may be necessary in the future to provide real goods and services of a particular composition desirable to an ageing population.

A dominant theme used by governments, business lobbyists, and economists to justify the continued pursuit of budget surpluses has been the so-called intergenerational (IGR) issues. Simply put, it is claimed that a number of federal programs (such as health, social security, and education) are sensitive to demographic factors and with population ageing, the budget ‘blow out’ will be unsustainable. Before the US became bogged down in crisis, the US Government was trying to make a case for the inevitable privatisation of the US social security system as a means of keeping it solvent. Similarly, in Australia, the so-called intergenerational debate was central to the previous federal regime’s justication for pursuing budget surpluses.

The IGR argument is simple: (a) the budget cannot be allowed to reach the projected level because the increasing public debt would push interest rates up and ‘crowd out’ productive private investment; (b) increasing debt will also impose higher future taxation burdens for our children which will reduce their future disposable incomes and erode work incentives; (c) the economy must produce more jobs and people must work longer to accumulate more funds to finance their own retirements; and, sometimes, (e) higher levels of immigration are required to reverse the ageing bias in the population.

http://bilbo.economicoutlook.net/blog/?p=749">more...

[dkf]

1. No they will simply inflate all the value out of whatever you get so can't afford crap anyway.

But why? If the relation between money growth and inflation is so clear, why don't these countries simply print less money? If only it were so easy! The real problem most of these countries had was a large fiscal deficit. Let's think how that influences monetary policy. If a government is running a deficit, then it must issue iou's of some sort to pay for it. Roughly, speaking, it may issue money (dollar bills or their local equivalent) or interest-bearing debt (treasury bills and notes) denoted with the variable B. Mathematically we can express this as

Pt (Gt - Tt) = dMt + dBt,

or, in real terms:

Gt - Tt = dMt / Pt + dBt / Pt

where the two terms on the right are issues of new money (dM) and new interest-bearing debt (dB), respectively. This is an example of a government budget constraint: it tells us that what the government doesn't pay for with tax revenues, it must finance by issuing debt of some sort.

So why do these countries increase the money supply? The problem, typically, is that a political impasse makes it nearly impossible to reduce the budget deficit. Given the government's budget constraint, it must then issue debt. Now for US debt there is apparently no shortage of ready buyers, but the same can't be said for Argentina or Russia. If they can't issue debt and they can't reduce the deficit, the only alternative left is to print money: in short, when they can't pay their bills any other way, they pay them with money, which is easy enough to print. The effect of this, of course, is that these countries experience extremely high rates of inflation.

Note that whenever a central bank prints "fresh money" it can obtain goods and services in exchange for these new pieces of paper. The amount of goods and services that the government obtains by printing money in a given period is called "seignorage". In real terms, this quantity of goods and service is given by the following expression:

Seignoraget = dMt / Pt = New bills printed during the period / Price level during the period.

The monetary aggregate that the central banks control directly is the "monetary base", consisting of currency in the hands of the public and reserves of the commercial banks deposited in the central bank. Thus, when we refer to a central bank as "printing more money", we mean increasing the monetary base.

Note that since the government, by printing money, acquires real goods and services, seignorage is is effectively a tax imposed by the government on private agents. Such a seignorage tax is also called the inflation tax. The reason is the following. From the definition of seignorage:

Seignoraget = dMt / Pt = (dMt / Mt ) (Mt/Pt)

Since the rate of growth of money (dM/M=m) is equal to inflation (p) (assuming, for simplicity, that the rate of growth of output 'y' is zero), we get:

Seignoraget = pt (Mt/Pt)

In other terms the inflation tax is equal to the inflation rate times the real money balances held by private agents. This makes sense: the inflation tax must be equal the tax rate on the asset that is taxed times the tax base. In the case of the inflation tax, the tax base are the real money balances while the tax rate at which they are taxed is the inflation rate. In other terms, if I hold for one period an amount of real balances equal to Mt/Pt, the real value of such balances (their purchasing power in terms of goods) will be reduced by an amount equal to pt (Mt /Pt) after one period. The reduction in the real value of my monetary balances caused by inflation is exactly the inflation tax, the amount of real resources that the government extracts from me by printing new money and generating inflation.

http://pages.stern.nyu.edu/~nroubini/NOTES/CHAP6.HTM

[Fearless]

2. +1

[girl gone mad]

4. You're obsessed with hyperinflation, aren't you?

It's the only response you ever give to any economic discussion.

In this case, it's completely irrelevant.

[dkf]

6. To any discussion on printing money to pay down our debts, yes.

[girl gone mad]

7. This discussion isn't about printing money to pay down debts.

[dkf]

8. So why link the question of social security to the currency?

Isn't the point of currency the ability to print money?

[Selatius]

3. I always understood it to be a problem of control of the money supply.

Theoretically, you could have tax rates high enough to fund current obligations and surpluses to fund future obligations. The problem comes when you just keep engaging in deficit spending on stupid ventures like wars with no end or a Medicare supplement passed with no funding provision except to borrow more money to cover the short-falls. Eventually, you're going to find many government bond holders who are going to ask exactly when does the binge stop. It's an important question because it does affect the value of the Dollar against other currencies and whether the US government has enough leeway to deal with a monumental threat, such as fighting a war on the scale of World War 2 requiring national mobilization or dealing with something as big as the Great Depression.

Even if the government is fiscally sane and runs surpluses, except perhaps in times of economic downturn, and has a relatively low level of national debt, there's still going to be inflation affecting the math of funding future obligations to future retirees. Inflation is a much more fundamental issue, the result of fractional-reserve banking. Under such a system, inflation is practically a given. It's not possible to have fractional banking without some amount of inflation, which can almost be seen as a regressive tax on consumer purchasing power.

[girl gone mad]

5. A sovereign currency government does not need to borrow or tax in order to spend.

Inflation is always a constraint, but fiat currency derives its value via taxation. Just as the government spends money into existence, it taxes money out of existence. This is a balancing act, to be sure, which is why it is vital to elect good economic stewards. Right now our major threat is debt deflation due to poor fiscal leadership.

[wtmusic]

9. As long as SS has a cost of living adjustment, you bet it can.

The government can always print more money. Whether it's worth more than the paper it's printed on is another matter.

Ask Thailand if government can always fund social security in their own currency.

"The crisis started in Thailand with the financial collapse of the Thai baht caused by the decision of the Thai government to float the baht, cutting its peg to the USD, after exhaustive efforts to support it in the face of a severe financial overextension that was in part real estate driven. At the time, Thailand had acquired a burden of foreign debt that made the country effectively bankrupt even before the collapse of its currency. As the crisis spread, most of Southeast Asia and Japan saw slumping currencies, devalued stock markets and other asset prices, and a precipitous rise in private debt."

Sound familiar?

http://en.wikipedia.org/wiki/1997_Asian_financial_crisis

Of course, that could never happen to the dollar.

[girl gone mad]

10. Not sure how your link relates.

From your Wikipedia source, Thailand's currency crisis was precipitated by a high private debt burden, huge asset price bubbles, IMF interference, foreign exchange risk, private and local government debts denominated in foreign currency, and some financial terrorism thrown in for good measure. Malinvestments and overleveraged banks can often result from bad central banking policies, but this has absolutely nothing to do with the theme of Professor Mitchell's article.

It appears Thailand was able to swiftly recover via a modest increase in taxation. They revalued the baht, balanced their budget and repaid the IMF 4 years early. If anything, your link appears to support the MMT framework, not contradict it.

[wtmusic]

12. It relates because it disproves his main thesis.

"...sovereign governments can always fund social security in their own currency. Always, always, and even always."

Printing more money makes it worth less. Economics 101. You print enough, and inflation will happen. Always, always, and even always.

Not sure why you think inflation is irrelevant - as other posters have pointed out, it's central to why it's not a prudent course of action. Malinvestment, overleveraged banks, central banking policies blah blah blah...eventually they're all minor players. And with a cost of living adjustment it's very possible that the Treasury would not be able to print enough money to keep up with inflation.

Oops, forgot...this is the United States. Nothing like that could happen here.

[girl gone mad]

13. Your link does not disprove Mitchell's thesis in any way.

Thailand's crisis originated in private banking, not as a result of government printing, but it makes a good case study in how sovereign fiat currencies function. The baht devalued when investors rushed out of the currency all at once, similar to a bank run. This did result in a situation where the market was flooded with an oversupply of baht. The Thai government was able to soak up the excess supply by increasing taxes. This is exactly the solution Mitchell would prescribe. Thailand did not become Zimbabwe and there was no hyperinflation. They are now, as always, fully capable of meeting any social security obligations with a near fully revalued currency.

The situation with US Social Security is quite different from that of the Asian currency crisis. The Social Security funds operate like private bank savings accounts in terms of beneficiary expectations. The money owed by the government is accounted for as a private sector surplus (savings), and current and future recipients already plan and manage their finances accordingly. Paying back the SS obligations will not result in a flood of unexpected "new money", driving up demand for goods or debasing the currency. It's not telling people they've just won the lottery, it's paying back money they were already scheduled to receive.

The US currently faces significant deflationary pressures and can afford to expand the deficit with little concern for inflation, until full employment and full productive capacity is restored.

[wtmusic]

14. Printing a flood of new money usually results in a flood of new money.

I didn't know Mitchell was a Marxist MMT nut - there are so many objections to MMT it's really not worth arguing about. The fact that its a non-global, isolationist strategy which falls flat on its face with regard to the effects of a trade deficit make it a non-starter (the idea that people earn money as a way to pay their taxes is a close second).

"MMT does not, however, ignore the fact that the importing nation has given some of its currency to foreigners. This currency ownership represents a future claim over goods of that nation, which, as outlined above, are a cost. Similarly, MMT does not ignore the fact that cheap imports may cause the failure of local firms providing similar goods at higher prices, and hence unemployment. Most MMT commentators label that consideration as a subjective value-based one, rather than an economic-based one: it is up to a nation to decide whether it values the benefit of cheaper imports more than it values employment in a particular industry."

http://en.wikipedia.org/wiki/Modern_monetary_theory

What do you think happens if you increase money supply with cheap imports and high unemployment? You get expensive imports and high unemployment. Great idea, Dr. Mitchell. :crazy:

"While there is significant debate about solutions, the significant long-term risk posed by the increase in entitlement spending is widely recognized, with health care costs (Medicare and Medicaid) the primary risk category. In a June 2010 opinion piece in the Wall Street Journal, former chairman of the Federal Reserve, Alan Greenspan noted that "Only politically toxic cuts or rationing of medical care, a marked rise in the eligible age for health and retirement benefits, or significant inflation, can close the deficit."<83> If significant reforms are not undertaken, benefits under entitlement programs will exceed government income by over $40 trillion over the next 75 years. According to the GAO, this will cause debt ratios relative to GDP to double by 2040 and double again by 2060, reaching 600 percent by 2080.

In 2006, Professor Laurence Kotlikoff argued the United States must eventually choose between "bankruptcy", raising taxes, or cutting payouts. He assumes there will be ever-growing payment obligations from Medicare and Medicaid.<84> Others who have attempted to bring this issue to the fore of America's attention range from Ross Perot in his 1992 Presidential bid, to motivational speaker Robert Kiyosaki, and David Walker, former head of the Government Accountability Office.

Thomas Friedman has argued that increasing dependence on foreign sources of funding will render the U.S. less able to act independently."

http://en.wikipedia.org/wiki/United_States_public_debt

[girl gone mad]

15. The fact that you compare modern monetary theory to Marxism..

and the fact that you consider Thomas Friedman to be a legitimate economic source indicate that your interest in this topic is shallow, at best.

Again, nothing in any of your posts disproves Mitchell's arguments. The example you brought to the table actually provides evidential support for the idea of a sovereign currency government easily controlling its money supply (ergo inflation) via taxation.

As to your attempt to change the subject to trade deficits, this is a topic addressed sufficiently within the crucial work of Wray, Mitchell and also Minsky. If that's the best criticism you can muster, you're grasping at straws.

[wtmusic]

16. Of course I brought up trade deficits

because it's the gaping hole that not only can't MMT explain, but makes it look patently absurd. You claim this has been "addressed sufficiently within the crucial work of Wray Mitchell blah blah blah..." Bring it to the table then, instead of spouting empty academic blather. You sound like the editor of the Wikipedia article, who desperately claims that MMT "doesn't ignore the fact that cheap imports may cause the failure of local firms" and it "doesn't ignore the effect of an over-reliance on imported goods" - while doing exactly that. It's supposedly "up to a nation to decide whether it values the benefit of cheaper imports more than it values employment in a particular industry". The truth is that for every one person who will pay more for an item to support American jobs, there are 1,000 more who won't - all while unemployment hovers around rates which haven't been matched since the Great Depression.

Academics like Mitchell have the answers to everything - except why no one listens to them when it comes to making policy.

I will conclude with the observation that Mitchell himself lists Marx as one of his main influences: "I have often indicated that my economic roots come from Marx through Kalecki. Kalecki was a Marxist economist. Marx was the first to really get to grips with the idea of effective demand – that is, spending backed by cash."

http://en.wikipedia.org/wiki/Bill_Mitchell_%28economist%29#cite_note-marx-0

It must be embarrassing for one of shallow interests like me to have to point that out, but I thought you might want to know. :D

[Harry Callahan]

11. What type of return would an investor enjoy if he or she had to ante up the cost of the investment

not once, but twice?

Under unified budgeting, this is essentially what American workers, who are the investors, are required to do. The workers transfer funds in the form of Social Security taxes to the SS trust fund. The SS trust fund then transfers these funds to the Congress, who spend it to buy votes. However, Congress refuses to combine these activities with the general fund, treating them as an off-balance sheet liability.

The CBO reports show that Social Security has $2.6 trillion of assets; however, these assets predominately consist of receivables (treasuries) from the general fund. However, these receivables aren't collectible unless additional taxes are imposed on the same workers who invested in the SS fund in the first place. In the private sector, people go to jail for employing these types of accounting methods.

Congress must repeal the unified budget act to prevent further looting of the SS trust fund and to report budget deficits correctly. Then they need to find a way of fairly generating $2.6 trillion over the next few years to pay back the American workers.

If they don't, some day soon, this scheme will come crashing down. If you don't believe me, ask the people of Greece.