It’s all so immense that it’s hard to understand, so Karl Denninger reduces it to an easy-to-comprehend model:
Let’s start with the model but take it into the real world. We’ll use you and I.
You set up a business. I’m a “trustworthy guy.” You have employee who you wish to provide a pension.
So every week when you pay them, you take out $100 from their paycheck. You have 10 employees (including yourself) and you come to me with your $1,000 every week and give it to me. I take it.
But instead of sticking it in an account somewhere with your name on it (as a trustee would) I instead give you a piece of paper. It says I owe you $1,000. But it’s not a debt security. You cannot negotiate it like a check, nor can you sell it to anyone else — it’s only valid if you bring it back to me. It says so right on the face. I promise that if you bring it back I’ll give you the $1,000.
Here’s the problem — as soon as you leave I call up my 10 stripper friends and the local liquor store and throw a party. Guess what I use for the money? Your $1,000.
Now here’s the rub — I don’t have any other money. At all.
In fact, I’m in hock up to my neck. I earn $100,000 a year but I spend $170,000. And how do I do this? Well, among other things I have people like you giving me money to “save.” I also have a bunch of credit cards, and everyone thinks I’m a great guy — kind of like an uncle (just call me “Sam”) and so they keep raising my credit limit.
It’s a wonderful life, isn’t it?
Well, maybe for a while.
But there is a problem with this model. First, this isn’t a “Trust.” A Trust can hold funds for someone, and can even invest them in something, but the funds cannot be converted to the trustee’s use. They must be held segregated and not inure to the benefit of the trustee. Further, the trustee must act solely in the best interest of the beneficiaries of the trust, not their own interest. That’s black-letter law.
Then there’s the second problem — I didn’t invest the money. I blew it, and all of the rest of my money.
One day you come and ask me to redeem one of your $1,000 IOUs. I don’t have any money, but I have a cash advance available on the credit card — or at least I think I do. So I go to the local bank and pull a $1,000 cash advance, giving you ten crisp $100 bills.
Notice what just happened: As soon as you showed up, your IOU, which in fact had no legal status as debt, had to be turned into actual debt at that point in time. Now there really is $1,000 in debt out there — it’s on the credit card.
This is exactly what happened with Social Security and Medicare since Reagan’s “reform” of the systems in the 1980s. Every single Administration since has taken all the money and immediately blown it. There is no money.
