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Jan Mar |

`A cat may look at a king,' said Alice. `I've read that in some book, but I don't remember where.'
Tut, tut, child!' said the Duchess. `Everything's got a moral, if only you can find it.' And she squeezed herself up closer to Alice's side as she spoke.
In Alice in Wonderland the Queen calls for the lopping off of Alice's head even before her trial begins. Here in Bushworld, there's an added element to the topsy-turvy world view; for simplicity sake, let's call it class warfare.
For four years the policy has been to pump a kind of economic silicone into the body politic by running deficits designed to extend out the day of reckoning for the excesses of the 90's. Rather than paying for that puffery, we've gone into a situation of chronic deficit spending. Hell, we even fight costly wars ($150 billion so far) while lowering taxes. Deficits, of course, are papered over by the issuance of government debt in the form of Treasury notes.
Since Social Security (or payroll) taxes continue to run a surplus--the projection is that this surplus will continue until at least 2018 at current rates-- one of the ways the deficit is paid for, is by government borrowing of Social Security payroll tax receipts. That's because there is no lockbox.
What's actually serves as the lockbox is a ledger noting the same debt that sits in the vaults of of private and government central banks all over the world; i.e., debt that is backed up by the good name and faith of the government of the United States through Treasury notes. It is estimated that at present payroll tax rates the Social Security fund will not run into trouble until the year 2052. So, you have to ask yourself why an Administration that never mentions the present growing deficit its tax cuts have brought about, that hardly bats an eye as the country continues to run up huge foreign debt in its current account by importing far more than it exports (the present imbalance is over 650 billion a year and growing, as we outsource most manufacturing), has somehow seized on the perils of 2052 to focus its economic policy agenda.
Can you smell the rat, yet? The people who whisper in Bush's ear have found a way to beggar future generations for what will be at best only be a short term tookuslift for the stock market and a giant windfall for the brokers who get to manage the private accounts the administration proposes. To understand what happens, it's important to see how the proposal would impact the present system. As we said above, basically the payroll taxes collected today are used to cover the SS checks sent out today. The surplus in collected receipts, is redirected to cover deficits in the Government's general fund. The Government then issues IOU's in the form of T-notes back to SSA.And that's counted in the national debt.
What Bush is proposing, instead, is that a
portion of the
money covering today's payouts be instead diverted and put into private
savings accounts that would allow younger workers to invest in thestock market rather than in a guaranteed futurefixed income check the
system, as is, provides. As a result, multiple billions of dollars (depending on the specifics) would be diverted from the SSA and sent to Wall Street, where it could purportedly bring in higher returns and "give young workers a stake in the ownership society". The manner in which we cover this massive diversion of funds from the system, is still up in the air
but because the Administration has already promised it will not raise payroll taxes ,it will either be added to the national debt with the stroke of a pen in the dark of the night or will be covered in some other more mysterious way. One idea being floated in Washington is
that some juggling of the way cost of living raises designed to keep SS payments in line with inflation might be legislated as part of the plan. In other words, the benefits of those collecting
already, despite promises to the contrary, will be slowly shaved away to back private savings plans that could eventually founder if the market remain bearish. And flounder it might, for a long time to
come.
Despite all the extreme makeovers of the last four years, the
stock market remains in limbo. Deficit spending, uncovered war
spending, low interest rates, the devaluation of the dollar, the
normal quirks of Mr. Market, have all had the same effect: of
putting off the inevitable. And the inevitable is that stock market
valuations have been and still remain way above the historical norm no
matter how you figure
them.
The Wall Street pumpers will always tell you that this
time around
it's different but the fact is that valuations always come back to the
norm which historically, is somewhere, in P/E ration terms, from 16 to
10. That ratio today is at around 27. There is no exception, markets
always come back to the norm, and for
good measure, usually continue on past it, up or down. We have still
not shaken out the excesses of the tech boom, despite the bust, and are
therefore still in the process of
doing so. Historically, that could take more than a decade (it
took from 1929 to 1949 and 1966 to 1982 the last two times) or it could
happen faster with a major retreat but eventually, despite momentary
head fakes and jukes, the market will find its norm.
In Silicone Valley East (Washington, DC) the ugly duckling always
becomes a queen, at least for a day. The motto, of course, is whatever
it takes to get re-elected. No one in Washington ever worries about the
long term. When they do,
it's time to hold onto your wallet. The Social Security reform
being put forward has nothing to do with Bush's retirement --that's
laughable, though he did cite it yesterday in his speech on the
subject-- and everything to do with a scheme to prop up the marketswith new government-guided cash injections into the stockmarket taken
straight out of payroll taxes. If fund manager bonus checks can be compared to tookuses, you can see
them kissing them already. You should have attended one of the
many fund raising inaugural dances scheduled for Washington this past month. One thing is sure, the fat cats had a
ball.
4:08:09 PM
