Guest post by Brett Buchanan from It'sNotRealMoney
When I recently read the Wegelin & Co. Investment Commentary 265 dated August 24, 2009, it became clear to me that what would appear to be a nation where public and private borrowing has simply spiraled out of control is in fact much worse than it appears. In reading the report I skimmed down to Section 5, titled The USA’s Achilles Heel. As I read the section it became abundantly apparent that amidst all the bailout and stimulus money flying around there is an even greater story, a devastating one, the likes of which has not found its way into the main stream media. The story goes like this.
From the Wegelin & Co. Investment Commentary - A look at who are the most important creditors of America’s highly indebted public finances reveals something truly remarkable. It is the public authorities themselves! A study by Sprott Asset Management, a Canadian asset management firm distinguished for its intelligent macroeconomic analyses, showed that in 2008 over 4 trillion of the total outstanding public debt of some 10 trillion, or around 40 percent, was in the hands of so-called “intragovernmental holdings”. These holdings include social welfare institutions, whose assets, accumulated in order to be (halfway) able to meet future liabilities, are invested in special Treasury debt instruments, known as “intragovernmental bonds”. In other words, the paying recipient of, say, Medicare, the American health service, is an indirect source of finance for the Treasury. Unusual, remarkable, or rather, alarming? Debtors are now simultaneously creditors.
Many Americans are aware that our government has been tapping the tills of Social Security and Medicare but the methods by which they are doing it are so destructive the ramifications are nearly unimaginable. The Wegelin report states emphatically that our nation’s public trust funds – trusts that are theoretically funded by US taxpayer dollars and government (deficit) borrowings – are in fact holders of 40% of outstanding US Treasury debt (see chart above). Think about that. A parallel scenario would be one man taking out a credit card to pay another man back for money loaned to the first man from the second man’s credit card – but in reality they’re both using the same credit card. And they keep doing it over and over and over. I actually laughed when I wrapped my mind around that one.
These “intragovernmental bonds” are certainly not assets of genuine intrinsic value. Were we to consolidate both balance sheets – that of the Treasury and that of the institution concerned – it would produce a tautologous situation that would result in the total loss of value of the social welfare trust’s assets if the Treasury were in a position to avail itself of the capital market to an even greater extent.
It is no wonder that the Obama administration would fight so hard to grow this nation’s health care system to megalithic proportions. In doing so they would create yet another mechanism by which to mask the transfer of government deficits behind the veil of shadow accounting. Clinton used similar methods to create ’shadow’ surpluses by shifting social security tax receipts as income (credits) with no offsetting debit for future liability. Viola’. Surplus. Just like magic. Now Obama is headed down the same shadowy path. While the fate of Obama’s health care plan is yet to be determined, if it were to pass into legislation one thing is for certain – the US taxpayer would suffer unnecessary costs when public funds are mismanaged through shadow accounting.
And of course, as always, on the sideline stands the Federal Reserve – no doubt cheerleading for a new source of public fund manipulation so as to push private losses onto the public balance sheet. If the Obama health care plan fails to pass in Congress the ultimate culmination of this crisis will come sooner rather than later as the Fed and Treasury will have one less slush fund to tap.
My take-away from the Wegelin & Co. report is this – when the music stops who will be left standing? Foreign holders of our debt? Or perhaps the American citizenry? Therein lies the real crisis yet to unfold. Someone is going to stiffed.
The Wegelin report is titled, Farewell America. While I hope this title is either premature or incorrect altogether, I fear my hopes are naive. Perhaps a more appropriate title might have been, Farewell Trust – because If there’s one thing this crisis has taught me, maybe all of us, it’s that trust, the foundation on which all capitalism is born, is gone.
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