Tuesday, November 16, 2004

...He holds no currency... 
A reader responds to this posting, in which I limned out the basic options for averting the Social Security crisis:

1.) Cut benefits (i.e., means test it, raise the retirement age)

2.) Increase Social Security taxes.

3.) Get a greater return on surplus dollars, sufficient to keep up with the expansion of the 65+ demographic, plus hedge against inflation risk. Bill Clinton at one point thought this was a good idea.

The reader says I left out a fourth option:

Quietly allow inflation to run about 5 percent a year for the next 10 years. Hide the true inflation rate by removing items from the Consumer Price Index. Fail to increase Social Security payments by the inflation rate. Pay seniors their promised dollar amount benefit levels, but in inflated dollars. Yeah, it'll take a wheelbarrow full of money to buy a peanut. But you were promised $800 a month and here it is so quitcherbitchen.

It's happening already. Look at the adjustments to the CPI in the last two years and you'll see the government systematically removing higher priced items to understate the true inflation rate. Greenspan himself mentioned that a little inflation wasn't such a bad thing, last Spring.

And he's right...I don't know a soul who doesn't think the CPI doesn't somewhat understate inflation. I mean, not to be a goldbug, but it is true, too, that the dollar yet hovers near 9 year lows against other currencies, while gold is bouncing off 16-year highs.

Weakening the dollar somewhat to take the edge off of the 2001 recession made sense. Especially for anyone who wanted to win electoral votes in manufacturing and export states like Ohio, Michigan, and Pennsylvania.

But that was a few years ago.

What happens when bondholders catch on?

Let's get it together, Fed. Get it together, Treasury.

Splash, out


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