Bill Bonner

No discussion of the upcoming collapse of the bond market would be complete without a mention of Social Security.

At least, after they’ve lost their money in stocks, real estate and bonds, Americans will at least have Social Security to live on, right? Wrong!

You know all that money you pay in Social Security taxes? Where do you think it goes? Into current expenses and US bonds!

That’s right, the feds just use the money to finance whatever fool scheme they’ve got going at the moment…and give the Social Security Administration a bond in return. In theory, the SSA has assets. In practice, all they’ve got is the hope that the feds can squeeze enough money out of taxpayers to meet their obligations.

Can they?

Professor Laurence Kotlikoff:

Social Security has also played a central role in the massive, six-decade Ponzi scheme known as US fiscal policy, which transfers ever-larger sums from the young to the old.

In so doing, Uncle Sam has assured successive young contributors that they would have their turn, in retirement, to get back much more than they put in. But all chain letters end, and the US’s is now collapsing.

The letter’s last purchasers – today’s and tomorrow’s youngsters – face enormous increases in taxes and cuts in benefits. This fiscal child abuse, which will turn the American dream into a nightmare, is best summarized by the $202 trillion fiscal gap discussed in my last column.

The gap is the present value difference between future federal spending and revenue. Closing this gap via taxes requires doubling every tax we pay, starting now. Such a policy would hurt younger people much more than older ones because wages constitute most of the tax base.

What about cutting defense instead? Sadly, there’s no room there. The defense budget’s 5 percent share of gross domestic product is historically low and is projected to decline to 3 percent by 2020. And the $202 trillion figure already incorporates this huge defense cut.

Reducing current benefits, most of which go to the elderly, is another option. But such a policy is highly unlikely. The elderly vote and are well-organized, whereas 3-year-olds can neither vote, nor buy Congressmen.

In contrast, cutting future benefits is politically feasible because it hits the young. And that’s where Congress is heading, starting with Social Security. The president’s fiscal commission will probably recommend raising Social Security’s full retirement age to 70 from 67, for those who are now younger than 45. This won’t change the ages at which future retirees can start collecting benefits. It will simply cut by one-fifth what they get.

In other words, there is no question about whether the US government will default or not. It will default. The only question is how. Will it manage to slip out of its obligations by raising the inflation rate enough to slough them off? Or will it have to officially renounce them? Will it refuse to pay retirees? Or bondholders?

Any way you look at it, the situation is interesting. Retirees, employees, loafers and chiselers – all are stakeholders in the US government. They have something to lose and will fight to hold onto what they’ve been promised. Bondholders have something to lose too.

So far, the bondholders have been largely protected – even enriched. Stakeholders in Greece, Ireland and other countries have begun to feel the pain. In America, the class of stakeholders is actually increasing, as the public sector spends more and the private sector spends less.

Best guess: stakeholders, bondholders, placeholders, cupholders, napkin holders – they’ll all take a loss.


Bill Bonner
for The Daily Reckoning

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success in numerous industries. His unique writing style, philanthropic undertakings and preservationist activities have been recognized by some of America's most respected authorities. With his friend and colleague Addison Wiggin, he co-founded The Daily Reckoning in 1999, and together they co-wrote the New York Times best-selling books Financial Reckoning Day and Empire of Debt. His other works include Mobs, Messiahs and Markets (with Lila Rajiva), Dice Have No Memory, and most recently, Hormegeddon: How Too Much of a Good Thing Leads to Disaster. His most recent project is The Bill Bonner Letter.

  • kenn

    We have been told for years that deficits don’t matter. Gentlemen, start your printers!

  • Blair Dehuff

    There is no support whatsoever for your contention that the bond market is going to “collapse.” This is wishful thinking by gold bugs. We have been hearing this nonsense for the last 2 years. Yes, the bond market will eventually “correct”, BUT this is not a collapse. Based on historical measures, this would be on the order of about 15%, or less. This is not a collapse. You are spreading disinformation.

  • Bennet Cecil

    These are very interesting times. There is going to be poor economic growth until the democrats lose power in 2012. Japan, USA, UK and much of Europe need time to digest bad debts and restrain spending. Stagnation will transform into stagflation. 7-12% yearly inflation is likely and higher rates are possible.
    End corporate taxes on domestic manufacturing and we will get a return to prosperity. A flat tax on personal income would help too. Change the law so that contracts can be in gold instead of dollars and end the FED.

  • JRod


    You write as if you have returned from the future and know what happens with absolute surety. If you disagree with BB that is fine, but maybe you should leave some room for doubt.

    History is fine, but we have never been this far in hock before with this many liabilities facing us. Now get back to watching CNBC…


  • emdfl

    Let’s see, the price of gold continues to rise, the dollar continues to fall, the only reason the market has any upward movement is due to manipulation and the fact that China alone can destroy the bond market if they want to, I’d be more inclined to trust BB view of the future of bonds then BD’s.

  • John

    Agreed…. this house of cards is going to fall…no question about that.

  • Onza Libertad

    Blair – The collapse of the bond market isn’t even the issue… Ponzi schemes all end the same way: Disasterously. With unsustainable debt and unpayable entitlement programs, the end game is already upon us.

  • Mitch Gurney


    Your statement: “There is going to be poor economic growth until the democrats lose power in 2012” implies there is some expectation that the Republicans are better for the economy. What empirical evidence do you have that indicates a difference in skill sets between the two parties for managing the country’s fiscal affairs? To the best of my knowledge there have only been the Republicans and the Democrats running the show in Washington – along with Corporate America who plays them like the trifecta. Their accumulative performance over the years is a disaster to say the least.

  • a devils advocate

    “Let’s see, the price of gold continues to rise, the dollar continues to fall, the only reason the market has any upward movement is due to manipulation” I really, really hope gold keeps going up in price. It’s so easy to take gold from people. Its difficult to carry around and they have to keep it hidden so what are they going to do? Issue paper that represents gold. There you are more funny money supposedly backed by gold. Then it will only be time when it is backed by 50% gold and then 10%. Same old rat race. It is becoming way to funny. You couldn’t make this up.

  • Charlie Melton

    Why is there no room to trim defense, we are in a war, how about getting out of it? This article ignores the elephant in the room which is the amount of wealth that’s been transferred to the top since Reagan. 80% of the US population owns only 20% of its wealth, the top 1% own 40% and the top 5% own 60%. What would be thought of a business that paid its executives 80% of its capital and had only 20% left to operate?

  • Timothy Gawne

    Obama has GIVEN over FIVE TRILLION DOLLARS to Wall Street – with total commitments possible exceeding 20 trillion dollars!

    To pay for this, he now proposes to slash social security benefits – while of course keeping the regressive taxes on wages. This is not being realistic. This is theft.

    This is obvious. Social security is fully funded by a dedicated tax and has a trillion dollar surplus. Anyone saying different is either stupid or has a motivation other than respect for the truth.

  • Gil

    How can any voting american ever give thought to Social Security being allowed to fail? Are us Americans that stupid? We vote for these morons that hold the power to do whatever they vote, therefore does it not stand to reason that how a politician stands on the matter would become the largest voting criteria of the next century.

    Would you actually vote for someone that promised to dismantle Social Security? Social Security is ONE thing that most every honest American has contributed their hard earned wages towards.

    There are far too many other programs that can be ousted long before Social Security.

  • disinterested spectator

    The sad truth is that the retirement age probably will be raised for young people. When they pulled that trick the last time, in 1983, it worked. Because when you try to warn someone about what might happen to him 20 years from now, you might as well be telling about some aborigine living in the Australian outback. So, it’s up to those of us who are old enough to know better to try to stop this benefit cut for young people that will be coming out of the Cat Food Commission. Otherwise, they will be trying to move in with us when we are in our eighties.

  • MiHi

    The article automatically lost it’s argument when it uttered the word “ponzi”. It’s the largest telltale sign that you’re not listening to a learned scholar but a deranged, hostile loon.

  • e klepfer

    Hey fella..I am 71..and have paid into FICA for years at highest rate.. I never agreed to have the irresponsible Congress and Johnson redistribute Soc Sec money to unwed mothers and their kids and anyone else The Liberals feel should get monies..including millions of illegal aliens… Stop pitting young against old will ya?.. We earned ours, Congress redistributed what should be in cash savings and re-wrote rules who could dip into the Trust Funds.. Put blame where it belongs and quit twisting the situation to OLD Geezers..

  • Libertarian jerry

    The federal government will honor all of their Social Security obligations well into the future. However,due to inflation,the checks will be worthless,and the paper money won’t buy anything.

  • jscottu

    When Congressman Ron Paul says this stuff he’s called “crazy”. But any honest accountant can tell you the truth about social security. I have debated “journalist” til I’m blue in the face who cling to the notion of a SS “trust fund”. They swear that there is a huge pile of money just sitting there for SS retirees. It is sad.

  • Dr. R . E. Rosenberg

    The most ignorant claim by this so called authority is the claim that U.S. government bonds are unsafe. They are regarded by financial experts and advisors around the world as the safest most liquid assets in the world. They are a significant part of the portfolios of banks, countries, major corporations, millionaires, billionaires, and millions of individuals throughout the world. The U.S. government has issued these bonds for over 200 years without defaulting on a single note . In fact it is technically impossible for the default on these bonds since the U,S. owes dollars which it can legally print, unlike Greece, a country that could end up defaulting on its debts, because it owes Euro’s which it can’t print.

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