Charles Krauthammer: What’s in Your Wallet?

If there are Federal Reserve notes in your wallet, I’ll gladly buy you a cup of coffee if you give them to me. And why would he make this deal? Check this out:

2042 is the fictional date for the fictional bankruptcy of a fictional trust fund. Let’s start with basics. The Social Security system has no trust fund. No lock box. When you pay your payroll tax every year, the money is not converted into gold bars and shipped to some desert island, ready for retrieval when you turn 65. The system is pay-as-you-go. The money goes to support that year’s Social Security recipients. What’s left over is “loaned” to the federal Treasury. And gets entirely spent. It vanishes. In return, a piece of paper gets deposited in a vault in West Virginia saying that the left hand of the government owes money to the right hand of the government. These pieces of paper might be useful for rolling cigars. They will not fund your retirement. Your Leisure World greens fees will be coming from the payroll taxes of young people during the years you grow old. That is why 2042 is a fiction. The really important date is 2018.

If you really believe piece of paper called financial assets are worth nothing, I’ll gladly take all of your cash, funds in your bank accounts, and other financial assets. In turn, I’ll even buy a week’s worth of groceries.

Of course, this pay-as-you-go claim is based on the premise that President Reagan and Alan Greenspan lied to us in 1983. Back then, the stated reason for increasing the payroll tax rates was that we would be pre-funding the Social Security Trust Fund to accumulate reserves for the retirement years of the baby boom generation. Even though I’m a Democrat who did not vote for Reagan in either 1980 or 1984, I prefer to believe that President was telling us the truth in 1983. But if Mr. Krauthammer and other fans of George W. Bush prefer to say that President Reagan lied to us – so be it. Now they may not wish to make such a brazen claim – but then they should cease and desist with this 2018. nonsense. Your choice Mr. Krauthammer. And if you prefer to mail me those financial assets, I’ll even pay the postage.

Update: David Altig makes a distinction between Treasury notes and Federal Reserve notes and tries to give Krauthammer more credit than I did. David’s point seems to be that the overall Federal financing position does not add-up in the long-run. Clearly, it does not so policymakers have the following choice: raise someone’s taxes or default. Few economists would disagree with the issue being what are the distributional consequences of how this choice is made. But this is more of a General Fund crisis whereas Bush and Krauthammer wish to pretend this is a Trust Fund crisis.

My complaint with Krauthammer’s rant was that its wish to dismiss paper as an asset, which would dismiss any financial asset as an asset. David is right that Federal Reserve notes are the IOUs of the Central Bank. But what backs these assets? It’s not gold so much as it is Treasury notes. So if the Federal government defaults on its IOUs, what does the Federal Reserve rely on to honor its commitments?