Friday, July 29, 2011

Is Social Security Obama's secret piggy bank?

Zero Hedge is reporting that Treasury has determine it will prioritize debt payments over other obligations in the event no deal is reached. That probably is the right thing to do. It does raise the question of what is going to happen to all of the other obligations the government has.

I thought it was interesting that this afternoon Social Security updated their web site and provided the details of the payments due in August.

Note the amount due is $60.7 billion. This amount is comprised of Old Age ($49.5b) and Disability ($11b). The President has mentioned a few times that the $49b of retirement payments may not be made. I have to assume that he was excluding the DI number. It’s possible that someone thinks that DI has a preference over OAI. But I doubt that. This an all or nothing deal.

So the question is, “Where’s $61b coming from?”. SS has no cash at all. They do receive cash every day. Tons of it. In the month of July they will take in ~$53b. All cash receipts at SS are immediately returned to Treasury. Treasury, in turn, issues SS a Special Issue Note.

At the beginning of the month payments to beneficiaries are made. Checks are issued and electronic banking transfers are sent out. SS must have cash in the bank(s) to honor this. They get the cash from Treasury. To accomplish that they redeem the Special Issue Notes. This happens every month.

This chart shows the components of the debt. Note how big SS (and other Trust Funds) are – Blue)

The following slide is the debt as of today. The two components, Debt to Public + Government Series Equal the Debt Subject to Limit. We can’t exceed the limit. But there is nothing in the laws that would prohibit the NORMAL monthly operations between Treasury and SS.

BUT.....

Where would Treasury get the cash? Easy! They would sell securities to the public. Just like they always do. Who would buy these short-term government notes? Easy! The big banks would do it. They would take the same paper back to the Fed who would Repo it with a 0% haircut. Just like they always do. Could this be done for $500b? Easy! Just like it's always done.

I am absolutely convinced that Geithner has called the Fed and the big shots at the money center banks. Everyone will play ball. I’m willing to bet that Obama has called Dimon over at JPM and put it on the line.

O: “Jamie, I may need you to sign up for $200b of low yielding paper, are you in?

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J: “Count on me. I’m good for up to 500 large if you need it. And put me on the short list for the T Sec.”

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O: “Okay, thanks. You’re on the top of the list.”

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Add some more info:

-Treasury has being doing exactly this pattern of transaction with another Trust Fund for the past two months. They have been playing with the debt ceiling by running down the balance of FERS (Federal Employee Retirement – a clone of SS)

-It is not at all unusual for the SSTF to dip into its holdings of Treasury IOU’s. They do it nine months each year. The monthly shortfall ranges from 3 to 15 billion. There is absolutely no reason why this number could not be raised to 50 to 70 billion on a monthly basis.

What does this mean?

It means Obama misled us on the technical issue of whether SS checks can be sent in the event of default. He never said that they would not be made. He said they “might” not be made. So he was using the fear factor to sway opinion in his direction. In my view he had the money “in his pocket”when he said it was not available. (Didn't we once go to war over that fear factor thing? Are we doing this again?)

The entire FICA receipts ($52 billion a month) could be used by Treasury to make debt service and other payments. This would dramatically improve the liquidity picture. It could buy some time.

As of tonight we have a standoff. The House plan will be defeated in the Senate. The Senate plan will be defeated in the house. Obama has said that he would veto Boehner’s plan. To me, the possibility of a 'no deal' and a blown deadline is staring us in the face.

I’m just wondering if this is not the Obama script. Let the situation blowup. But have the consequences contained.

There would be tons of fallout. The markets would take it on the chin and the rating agencies would threaten action. My guess is that 500 federal parks might close, but the roof will not fall in.

In that scenario the White House would "look" good. They would be able to say that they were creative and avoided a crisis. They could blame the Republicans for the failure. It would strengthen Obama’s hand in the post August 2 debate. The end result would be that Obama gets a deal that takes him past the election. Which he wins.

A story like this is what gets people (re) elected to office. But if this is being orchestrated to that end, then it is a very sad story indeed. We’re being used.

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