The following article is a rewrite
of an editorial in The Morgan Report earlier this year.
In May 2005, President Bush
traveled to the Bureau of Public Debt at Parkersburg, West Virginia, to prove
that the idea of a Social Security trust fund is a myth. The “holdings” of
Social Security stand at $1.7 trillion in treasury securities, which have been borrowed to cover the general budget shortfall of the U.S. This is the simple
truthful explanation of the budget “surplus” during much of the Clinton years.
The money borrowed from the Social Security system was applied to the
general budget deficit, and therefore the general budget showed a “surplus.”
This is an area dear to your
editor because as I was working toward my masters in Economics/Finance in the
’80s, my main professor asked me to apply for the White House fellowship
program. Without going into any detail, I did apply and part of the application
process was to write a policy change paper. The policy change paper written by
me was how to “fix” the Social Security system. This was done over twenty years
ago, when the possibility of finding a solution was much more viable than
today. My application was rejected and I never made it to the first round of
interviews. I had touched one of the political sacred cows and no one was going
to reach out and touch me.
One of several proposals now being
offered is to fund Social Security with U.S. bonds. This is something that your
editor has discussed with Jim Puplava of http://www.financialsense.com/.
forestall a problem that is becoming increasingly difficult; that is, that
foreign governments are becoming saturated with U.S. debt and yet in order to
continue to expand the money supply, the U.S. government must have a buyer.
Certainly, the non-government entity the Federal Reserve could buy the debt,
and this tactic is being used, but will not, in my view, come into full force
until the baby boomers become net redeemers of their “money.”
So in the meantime, why not have
the U.S. citizen purchase bonds with their Social Security contributions and
solve two problems? First, how to sell more U.S. debt, because this is becoming
a problem as foreign governments are getting their fill of U.S. bonds; and
secondly, how to help “privatize” Social Security? Fiscal conservatives state
that the real crunch to Social Security comes in 2017, when annual benefit
payments will surpass tax revenues. The government then will have to begin redeeming
the IOUs in the “trust fund” to pay benefits.
The liberal slant is that a
greater population base would solve the problem, but this is mere fantasy
because the U.S. population statistics do not support an expanding population.
This was the main point made in our discussion of The Great Bust Ahead— the
demographics are shifting and this alone will cause problems for the economy.
America's Social Security finances
are strained, but look around the world: a major demographic tide of declining
birthrates is pushing nations further and further away from the promises that
they've made to seniors. As nations age, they have fewer and fewer workers to
support more and more retirees.
Nations around the world are
"grappling with the long-term affordability" of their pension
systems, according to a World Bank report. China faces a demographic crunch. By
mid-century, its population will be older, on average, than America's, thanks
to its one-child policy. Starting about 10 years ago, China responded by broadening
a social security system and enlarging a private pension system of
"enterprise annuities," states Richard Hinz, coauthor of the World
India, also with more than one
billion people, has been trying to enlarge its pension system beyond that for
civil servants and employees of sizable corporations to those occupied in the
"informal" and small-business economy.
This discussion overlooks the most
important point of what the Mises Institute recently pointed out in an article
about Social Security. The
article pointed out that there is a popular misconception that there is some
kind of "full faith and credit" obligation on the part of Congress to
honor these "bonds.” The
plain and harsh truth is most have been led to believe that the current system
is a retirement program funded with segregated entrusted assets, the integrity
of which is guaranteed and backed by the U.S. government.
The debate about whether there is
a Social Security cash flow crisis in 2017 or 2042 also turns on whether those
"bonds" have any value. The basic assumption is that the
"bonds" in the fictitious trust fund somehow have value either for
the U.S. or for workers and their families. They do not!
As the Mises article states: A
bond is just a contract. A contract is an agreement between two or more parties
that creates an obligation to do or not do a particular thing, such as pay out
interest at a certain rate. Thus, one may not enter into an enforceable
contract with oneself, which is exactly what the U.S. is pretending to do with
those social security "bonds."
For a bond to be a real bond,
there needs to be at least two parties; for example, the U.S. and a citizen who
owns a U.S. treasury bond; or the U.S., as owner of a German bond, and Germany.
The U.S. cannot issue "bonds" to itself and have their terms bind
Bottom line: These Social Security
"bonds" are neither assets of the U.S. nor property of workers and
their families. In the not too distant future, the Social Security system will
not perform its function of providing any real security. You must take action
for yourself and depend on your own abilities. The ability of any government to
be all things to all people is an illusion that will become a harsh reality to
the general population over the next several years.
The $75,000 Social Security
We know that we have many readers
outside of the United States, and our discussion about Social Security may not
affect them directly, but it could indirectly. Because so much of the world’s
economic activity depends upon the spending power of the U.S., it should be
factored into your thinking about the ramifications of the current situation.
Long-term studies of commodity
prices have shown that over time, commodities return to their mean. This
“average” price, however, can remain outside of this range for a very long
time. Silver has certainly remained outside of its purchasing power range for
the past 25 years, and remains so today. Therefore we fully admit that having
this knowledge for the past quarter-century was of little practical value.
However, things are changing rapidly in the world’s financial landscape, and
the new silver age is rapidly approaching, first from a technological
standpoint and later from a monetary and wealth building/preservation
After Warren Buffett announced his
silver purchase in 1998, Forbes magazine ran a brief article on silver and
included a very interesting graph. We of course are well aware that Buffett
recently announced that Berkshire Hathaway did sell their silver just about the
time the Barclays Silver iShares Exchange Traded Fund began.
(see attached chart, or visit web site http://goldinfo.net/silver600.html)
This graph provided 600 years of silver prices in 1998 dollars. So, all the
inflation is taken out of the equation, and the prices reflect silver’s true
value. In constant dollars, silver’s purchasing power averaged $150 per ounce
in 1998 dollars for 600 years. This is the average purchasing power for 600
years; obviously, silver has nothing close to that “value” today, which provides
one unbelievable investment opportunity.
The question becomes whether
silver will ever reach either the $150 nominal value or, better yet, the
purchasing equivalent of the 600-year average? According to long-term
historical standards it must, but will we all live long enough to benefit from
this? The Silver Investor is on record as stating that silver could trade as
high as US$100 per ounce in nominal terms and perhaps higher. It is our belief
that this will most likely occur on a price spike and the price will quickly
adjust downward but establish a new range. We are looking at 2007-2008 as the
area for a large price spike, but not the final spike! We will need to study
the market activity to make our best call at the time.
Coming back to the Social Security discussion, what this system is supposed to do is provide a sufficient income stream to keep the contributors in a livable retirement for the rest of their days. The amount of $150 per day equals $4500 per month in purchasing power, or $54,000 per year— certainly sufficient in purchasing power for most Americans to retire upon. To obtain this level of income from “safe” T-bills would require over just over $1 million at the 5% current yield on T-Bills. Compared to 10,000 ounces of silver bullion that would cost roughly $110,000, it certainly is a risk profile that demands serious consideration. Not everyone will have a million in cash equivalents saved by the time they retire.
Before you think this writer has
completely lost it, consider the fact that for centuries silver was used as
money and the average worker earned roughly an ounce per day. One ounce of
purchasing ($150) could be considered valid, using the 600-year average we are
discussing. Ten thousand ounces is equivalent to 10,000 days, or, roughly, 27
years. This amount of silver would provide a safe retirement in days gone
by—and perhaps a safe retirement in the future?
What makes this exercise so interesting is the amount of people that could actually secure their future in silver. With 105 million ounces on the Comex, only 10,500 people could own enough silver in historic terms (10,000 ounces). Think about this .0004 percent of the total population of the United States each buying the equivalent of two silver contracts and taking delivery would totally wipe out the Comex silver supply as it stands currently.
No not really, because we focus on bullion more than the total supply of silver (bullion plus coins). However, the amount of silver in
coin form is estimated to be 550 million ounces. We know approximately 100
million ounces of that is in the silver eagle program started in 1986. Of the
remaining 450 million ounces, we do not know what percentage would fall into
the rare or semi-rare category. But if we took the entire 450 million ounces,
this would be 5 billion dollars in coin form. A pitifully small amount compared
to what America held at one time.
Compare this to what Social
Security holds, the $1.7 trillion discussed earlier. The amount of paper
promises outstanding versus the amount of real money in the world is
staggering, and at some point the two will start to close in on each other as a
very small percentage of people wake up to the economic reality that has been
pointed out recently by Paul
Volcker and even the World
Bank. Simply, the U.S. faces monetary problems ahead that might develop
into a crisis at some point.
Have U.S. banks have already
prepared for a worldwide collapse? The most profound evidence of this fact is
that the Federal Deposit Insurance Corporation (FDIC) has limited depositor’s
insurance to $100,000 per person under the Bank
Reform Act of 1991. Originally, an individual could have any number of
accounts all protected to the one hundred thousand dollar limit. Prior to this
legal change, the FDIC clearly stated, “Deposits Federally Insured to
$100,000.” Now it is the “Depositor,” only!
This subtle but real change should
be factored into your “cash” holdings. In Wisconsin some depositors received
the following notices in their bank statements: “Due to a change in federal
regulations, beginning July 1, 1993, our funds availability policy is amended
to permit exception holds to be placed on items such as cashier’s, certified,
teller, government, U.S. and government checks in certain circumstances.” Source: Money and Wealth in the New Millennium, by Norm Franz, copyright 2001.
By David Morgan
Mr. Morgan is a contributor to Mining Industry Review an e-TV program available at FreeMarketNews.com He also hosts a weekly Metals Wrap-Up each week on the Financial Sense Newshour. Mr. Morgan and has written numerous articles, his e-mail newsletter is issued on a monthly basis and includes economic news, overall financial health of the global economy, currency problems ahead and the reason why people need to be invested in the precious metals. Mr. Morgan pours over nearly every metals, economic, and financial newsletter and business publication and digests it to save his readers valuable time and money.
His book "Get the Skinny on Silver Investing" should be available by the end of July 2006. His private email newsletter is $99.00 U.S. by email. It includes 12 issues per year, plus email updates as required at no additional charge.
Information contained herein has been obtained from sources believed to be reliable, but there is no guarantee as to completeness or accuracy. Because individual investment objectives vary, this Summary should not be construed as advice to meet the particular needs of the reader. Any opinions expressed herein are statements of our judgment as of this date and are subject to change without notice. Any action taken as a result of reading this independent market research is solely the responsibility of the reader. Stone Investment Group is not and does not profess to be a professional investment advisor, and strongly encourages all readers to consult with their own personal financial advisors, attorneys, and accountants before making any investment decision. Stone Investment Group and/or independent consultants or members of their families may have a position in the securities mentioned. Investing and speculation are inherently risky and should not be taken without professional advice. By your act of reading this independent market research letter, you fully and explicitly agree that Stone Investment Group will not be held liable or responsible for any decisions you make regarding any information discussed herein.
P.S. For those that wish to pursue
this subject further
Social Security Ponzi Scheme Paradox
Cato Institute on Social
God Bless this Ponzi
End the Fraudulent Social
Security Program Now
The Luckiest Ponzi
Security Benefits are NOT guaranteed
Thinker looks at Social Security
The Outlook for
Is Social Security
Mises Institute Articles
The Fiction of Social Security Bonds
Bushes Impossible Social Security Plan
Economic Aspects of the Pension Problem