If it is truly pay-go, then it is a double-curse - not only did the previous surpluses hide government deficits, but, now that it is going negative, it will exacerbate the deficit.”
Sorry to be late in responding. Been on vacation. The government gets cash from people paying FICA tax. Since the 1980’s, the cash received has been enough to pay the retirees with money left over.
That extra is used to purchase the special issue bonds. Those bonds can be redeemed when the Treasury needs more money than the current cash received to pay retirees.
The government can not run out of cash, because they have the ability to print it. The USA is unique in this regard, because we are the world's reserve currency. Our monetary policy, and printing has a big impact on our citizens and other countries. Still, until another reserve currency is set up, we can not default on the debt. We can just print money.
So we are paying our creditors back with a devalued dollar. Another thing that is saving us is that so many other countries are even worse than we are. Hence people have stayed in safe haven Treasuries.
I am not an expert, and don't understand all this as well as I would like. It has been more than 30 years since I studied this stuff in college.
The payment of these bonds is not so different that redemption of any other government securities. We pay it with fiat money. It is not backed by gold or anything else other than the faith the world has in us.
That is why it was so irresponsible of Obama and the Treasury Secretary to run around talking about a possibility of default, instead of government shut down.
Of course, some people believe that this is a deliberate move to cause the world to lose faith, so that a global currency can be established to replace the dollar.
So, if I understand you correctly, you are saying that the government, which must, by law, honor claims for SS, would have made payments after Aug. 2 (absent a debt ceiling agreement) simply by printing money (that is, by having the Fed buy T-bills)?
This would work in the shor-term, but would, in the long-term, destroy the value of the dollar, which would beggar savers and anyone invested in dollar-denominated assets. On the “plus” side (if such a thing can be called a “plus”), it would allow the government to inflate away its outstanding pile of debt, maintaining the fiction that it was “honoring” its commitment to the “full faith and credit of the US”.
Of course, as soon as creditors (and potential creditors) got wind of the scheme, they would refuse to lend money or demand a higher interest rate, which would saddle future generations with much larger debt and pricing current debt (oftentimes linked to T-bill rates) beyond reach (which would cripple businesses).
And, as you noted, this is only possible because the US dollar is the world’s reserve currency; once we lose that, then we are well and truly f_cked.
Would it be fair (in your opinion) to say that raising the debt ceiling $2.4 Trillion is in fact a $2.4 Trillion tax hike, since it must be repaid (with interest to boot!)?
Just curious,
Mike