Wampum

Suppose that you are a salesman with a large quota to fill. Would you suggest to your potential customers that your company may not live up to its contracts with existing customers?

Writing at the Wall Street Journal’s Econoblog, Nouriel Roubini notes the following:

[The]financing needs of the U.S. government (between issuance of net new debt due to the ongoing fiscal deficit and refinancing of the existing maturing debt) will be close to $800 billion in 2005 and above $1 trillion in 2006-2008 …

That means that President Bush will need to sell about $4 trillion in Treasury bonds during his second term. If Mr. Bush is not able to sell those bonds at a good price, the U.S. economy may suffer a “hard landing.”

In speaking of the Social Security trust fund, Mr. Bush recently said:

Some in our country think that Social Security is a trust fund -- in other words, there's a pile of money being accumulated. That's just simply not true. The money -- payroll taxes going into the Social Security are spent. They're spent on benefits and they're spent on government programs. There is no trust.

The assets held by the Social Security trust fund are, of course, Treasury Bonds. Mr. Bush is claiming that the accumulation of Treasury bonds does not constitute the building of assets. “There is no trust” can only mean that Mr. Bush does not think that one can rely on the United States to honor the commitment it made to repay those bonds with interest.

Mr. Bush is relying on foreign central banks and investors to purchase $4 trillion in bonds over the next few years. Mr. Roubini:

Since 2001, there has been almost no increase in the net amount of holdings of U.S. Treasurys by U.S. residents. Almost all of the new net supply of U.S. Treasurys has been purchased by non-residents, and about two-thirds to three-quarters of such foreign purchases have been made by foreign central banks, especially in Asia, but also in other regions.

Thus, Mr. Bush is telling potential customers (foreign central banks) that the United States in untrustworthy in keeping its commitment to its existing customers (the Social Security Administration). By necessity, he must also tell those same potential customers that they need not worry about repayment, that they can trust the United States to keep its commitments.

That is a very dangerous game. Credibility is a unified whole. It can rarely be maintained in part and lost in part. If the potential purchasers of Treasury bonds listen in on Mr. Bush Social Security statements, they may conclude that “there is no trust.” In that event, they will demand a much larger premium for accepting a larger risk of non-repayment. That means much higher interest rates and an increased risk of a “hard landing.”

On the other hand, Americans may listen in to what, in effect, is Mr. Bush’s promise to foreign purchasers of Treasury bonds. That promise is that the foreign central banks can rely on the promise of the United States to repay its debts but that the American people cannot trust similar commitments. In essence, Mr. Bush is trying to tell foreign purchasers that if push comes to shove, it will be the American people and not Japanese and Chinese bankers who will get screwed. That may surprise many Americans.

Would it not be better to try to reassure everyone that the word of the United States is good and that everyone can trust in the full faith and credit of the United States of America?