Greece, France, Ponzi and Perry

A couple of interesting factoids to give you some context for some of the news of the day.

It looks increasingly as if Greece will default on its debt.  That is a big problem for Europe generally and France in particular. The three largest French banks have almost $57 billion in Greek loans on their balance sheets according to this op-ed by Nicolas Lecaussin in today's Wall Street Journal.

BNP, Société Générale and Crédit Agricole together hold nearly $57 billion in Greek sovereign and private debt, versus $34 billion held by the largest German banks and $14 billion at British banks. French banks also held more than €140 billion in total Spanish debt and almost €400 billion in Italian debt as of December, according to the latest figures from the Bank for International Settlements. If either of these latter two governments were to default, their banking systems could collapse and take the French system with them.

Lecaussin quotes a bank executive from BNP to show the dimensions of France's banking and fiscal problems.  As I always say, it important to keep things in context.  Bank of America may have recently announced that they will be laying off 30,000 employees but consider the position that the French banks are in.

"Look at the French banks' debt holdings versus those of U.S. banks," he continues. "The total debt of the three big U.S. banks (Bank of America, JP Morgan and Citigroup) is $5.86 trillion, or 39% of GDP, while the debts of BNP, Crédit Agricole and Société Générale come to €4.7 trillion, or 250% of French GDP."

Rick Perry has also captured the headlines with his frontal assault on the Social Security System by calling it a Ponzi scheme.  Social Security dominated a good bit of the Republican debate last night and it appears that it is certain to be a major issue through the rest of the Republican primary.

This article provides some context on the Perry comments.  As you should know by now, Social Security was designed as a pay-as-you-so-system.  This means that the money for the benefits paid today comes from payroll taxes on today's workers.  Today's workers are going to have to depend on tomorrow's workers to pay their benefits.  There were about 42 workers paying into the system for each retiree back in 1945.  Today there are less than 3 workers for each retiree and that number includes part-time workers and government workers who get the money to pay their social security taxes from other private sector workers.

As the article points out, there are now only 1.75 full-time private-sector workers in the United States for each person receiving benefits from Social Security, according to data from the Bureau of Labor Statistics and the Social Security board of trustees.   This is calculated by taking the 94 million full-time private sector workers and dividing it by 53 million Social Security beneficiaries. If you and your wife work, it is as if someone else has moved in with you and you are paying their bills.

I don't know what you call it but the math will not work much longer.

I think I need to again refer you to my post from last February, "What Would FDR Say?" to remind you of FDR's vision for Social Security when it was first introduced.  FDR would be considered a conservative Republican today.

Lost in history is this quote from Franklin Delano Roosevelt in his message to Congress on January 17, 1935 asking Congress to enact the Social Security program.  It is clear that Roosevelt understood that the program he was asking for was unsustainable and had to be replaced by a "self supporting system" in 30 years or so. Unfortunately, that was 45 years ago.

"In the important field of security for our old people, it seems necessary to adopt three principles: First, non-contributory old-age pensions for those who are now too old to build up their own insurance. It is, of course, clear that for perhaps thirty years to come funds will have to be provided by the States and the Federal Government to meet these pensions. Second, compulsory contributory annuities which in time will establish a self-supporting system for those now young and for future generations. Third, voluntary contributory annuities by which individual initiative can increase the annual amounts received in old age. It is proposed that the Federal Government assume one-half of the cost of the old-age pension plan, which ought ultimately to be supplanted by self-supporting annuity plans."   ----- Franklin Delano Roosevelt

To make matters worse, Social Security only collected $545 billion in taxes in 2010 but paid out $577 billion in payments-a deficit of $32 billion.  This is without considering the $112 billion in Social Security payroll taxes that were cut in 2011 as part of the payroll tax holiday for 2011.  President Obama now wants to extend and expand the credit into 2012 and also include some employer payroll tax cuts as well.  It is effectively a doubling down strategy.  The cost of his proposal is estimated at $240 billion in reduced social security tax collections next year.  That is reducing Social Security collections by over 40% compared to what was insufficient to cover benefits in 2010!  As I wrote in my last post, Have You Been Framed?, this is a classic desperation move.  When you are running out of options you are more likely to do some really risky things. 

The less money people have, the more willing they often become to take on extra risk, just as a quarterback will throw a "Hail Mary" pass last in the fourth quarter or a basketball player will launch a deperate shot from half-court just before the final buzzer sounds.

When Social Security is already in such poor shape how can it make any sense to take $240 billion out of it on top of the $112 billion that has already been skimmed away?  Sure, they say that this will be "paid back".  Who is going to do that?  Young workers, hold on to your wallet!

I have little doubt that politics being what they are that the payroll tax holiday will be passed.  However, that is sad testimony to how things work in Washington.  We are way beyond any Ponzi scheme involving Social Security.  This Social Security payroll tax holiday is outright theft with no effort to even conceal the crime.