Silver: the most ludicrously undervalued asset in the Whole Freaking World

Staggering Stats About Silver Supply

By The Mogambo Guru

07/12/10 Tampa, Florida – I got a June 2010 brochure from silverinsidersreport.com that contained an interesting fact about SLV, the Exchange Traded Fund (ETF) for silver, which is that Peter Keusgen, the writer, says that SLV is “the main alternate source of storage” of silver and “which accounts for around 50% of world silver inventory”! Wow!

Well, interestingly, he doesn’t get into that whole controversy about whether there is actually any silver in SLV, but he writes that SLV has “been raided heavily over the past seven weeks,” and indeed since February 26, “17.9 million ounces – or 2,2557,000 ounces – have been withdrawn from the ETF by authorized participants.”

Naturally, being the typical clueless guy who can’t remember facts, figures or children’s birthdays (“There’s three of them, for crying out loud! How can I possibly keep up with that many dates or names?”), I don’t really know how to evaluate this information, but it becomes a little clearer when he goes on “to put it another way, 3% of the world’s silver inventory disappeared in just seven weeks!” Hmmm!

Immediately, I see that this is something that I can use to wave in the sneering faces of those disbelieving people who scoff at my advice to buy silver! I am almost drooling in anticipation of saying to them, with a nasty sneer on my face and with a voice dripping with contempt, “Now, what were you saying about me being an ugly little troll with crippling mental problems and an apparent fetish for silver? Huh? What about now, ya moron?”

Other interesting facts are that by 2008 worldwide demand for silver was about 900 million ounces a year, having grown by an average of 19.5 million ounces a year for the previous five years, while supply from mining and scrap was only 858.5 million ounces and growing at only 2.2% a year, meaning that supply was being outstripped by over 40 million ounces per year the whole time!

If that is not enough of a supply/demand imbalance to make you jump to your feet in eagerness to buy silver, longer-term it gets more interesting, because “in 1900 there were 12 billion ounces of silver in the world. By 1990, that figure had been reduced to around 2.2 billion ounces,” and now “today, there are less than 1 billion ounces in above-ground refined silver.”

In short, all the silver that was mined and refined since 1900 was used to create the gigantic electronic-based and electrical-powered economies of, mainly, America and Europe, and now that the silver has been used and thus disappeared, here comes China to need twice as much silver as was used by America and Europe! Wowser wow wow!

My few remaining brain cells that are still in, at least, intermittent working order are suddenly operating in hyper speed, conjuring up wild plans to somehow get some money, more money, lots of money, hopefully money acquired without actually working, to buy silver, which is the most ludicrously undervalued asset in the Whole Freaking World (WFW) and such a bargain at current prices that it makes the decision to buy it so easy that one must exclaim, seemingly involuntarily and with great relish, “Whee! This investing stuff is easy!”

The Mogambo Guru
for The Daily Reckoning

The Mogambo Guru

Richard Daughty (Mogambo Guru) is general partner and COO for Smith Consultant Group, serving the financial and medical communities, and the writer/publisher of the Mogambo Guru economic newsletter, an avocational exercise to better heap disrespect on those who desperately deserve it. The Mogambo Guru is quoted frequently in Barron's, The Daily Reckoning , and other fine publications.

View articles by The Mogambo Guru
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Related: Silver's Historical Correlation with Gold Suggests A Parabolic Top As High As $714 per Ounce!

DID THE US GOV’T AIM TOMAHAWK MISSILES AT BEIJING OVER ALLEGED DUMPING OF US TREASURIES AND BUYING GOLD?

from The Coming Depression :

By Nicola Zigic 

On June 28, 2010 three Tomahawk-laden submarines broke through the surface with a clear message to the Chinese communist leadership, “You’d better be careful!”. This new class of submarine, dubbed the “Ohio class”, was retrofitted to carry up to 154 cruise missiles and is just the latest version of “death bringing” weaponry. This strong armed tactic, along with two major military exercises involving some 37,000 personnel in the Asian theater has definitely made China stand up and take notice. The question is why? The answer appears to be decisions made by Chinese authorities regarding massive dumping of US treasury debt!

With the US economy teetering on a knife’s edge, it appears the US Federal Government is pulling all the stops and has figuratively opened the suitcase and is about the push the proverbial “button”.

A timeline shows in late 2007, China (the United States’ largest creditor) gave indication of growing concerned over the “monopoly money” policies of the Federal Reserve, as well as the continued pressure to reevaluate the Yuan/Dollar exchange rate. With over $900 billion of US debt exposure, China made it clear about who really “signs the paychecks”.

More Here..

More Evidence? U.S. government securities staged an explosive rally in the second quarter that stunned experts and outperformed other bond sectors. Here..


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Update:  Jesse’s Cafe Americain: China’s Rating Agency Downgrades US Debt Well Below Moody’s, S&P and Fitch’s AAA

Related: The Drums of War? Pentagon Provokes New Crisis With China

By Rick Rozoff

Global Research, July 10, 2010

Stop NATO

Three news features appearing earlier this week highlight tensions between the United States and the People's Republic of China that, at least in relation to the language used to describe them, would have seemed unimaginable even a few months ago and are evocative more of the Korean War era than of any time since the entente cordiale initiated by the Richard Nixon-Mao Zedong meeting in Beijing in 1972.

To indicate the seriousness of the matter, the stories are from Global Times, a daily newspaper published in conjunction with the People's Daily, official press organ of the ruling Communist Party of China, and Time, preeminent American weekly news magazine. Both accounts use as their point of departure and source of key information a July 4 report in Hong Kong's major English-language daily.

On July 6 writer Li Jing penned a news article for Global Times called "US subs reach Asian ports: report," which detailed the following recent developments:

"Three of the largest submarines of the US Seventh Fleet surfaced in Asia-Pacific ports last week, the South China Morning Post reported Monday [July 5]. The appearance of the USS Michigan in Pusan, South Korea, the USS Ohio in Subic Bay, the Philippines, and the USS Florida in the strategic Indian Ocean outpost of Diego Garcia was a show of force not seen since the end of the Cold War, the paper said, adding that the position of those three ports looks like a siege of China." [1]

The piece from the Hong Kong newspaper cited was entitled "US submarines emerge in show of military might: Message unlikely to be lost on Beijing as 3 vessels turn up in Asian ports," and was in fact dated July 4.

The author, South China Morning Post Asia correspondent Greg Torode, described the simultaneous arrival of three "Ohio-class submarines" equipped with "a vast quantity of Tomahawk cruise missiles" as a reflection of "the trend of escalating submarine activity in East Asia...." [2]
 
He further added this noteworthy data: "Between them, the three submarines can carry 462 Tomahawks, boosting by an estimated 60 per cent-plus the potential Tomahawk strike force of the entire Japanese-based Seventh Fleet - the core projection of US military power in East Asia."

The author quotes without identifying his name or nation a veteran Asian military attache with reported close ties to both Chinese and U.S. military officials: "460-odd Tomahawks is a huge amount of potential firepower in anybody's language.

"It is another sign that the US is determined to not just maintain its military dominance in Asia, but to be seen doing so...that is a message for Beijing and for everybody else, whether you are a US ally or a nation sitting on the fence." [3]

On July 8 Time magazine's Mark Thompson elaborated on the earlier report with language, including that of his title, "U.S. Missiles Deployed Near China Send a Message," derived from the South China Morning Post piece, which Thompson claims contained information planted by "U.S. officials...on July 4, no less" [4] in a clear signal to the government in mainland China.

The Time journalist added details, though, not in the original story, replete with a good deal of editorializing that perhaps serves the same source he attributes the contents of the Hong Kong article to and for the same reason: As a shot across the bow to China.

His account of last week's deployments included: "A new class of U.S. superweapon had suddenly surfaced nearby. It was an Ohio-class submarine, which for decades carried only nuclear missiles targeted against the Soviet Union, and then Russia."

The U.S. has eighteen nuclear-powered Ohio class ballistic missile submarines, fourteen still armed with nuclear warhead-tipped Trident missiles and four which "hold up to 154 Tomahawk cruise missiles each, capable of hitting anything within 1,000 miles with non-nuclear warheads."

"The 14 Trident-carrying subs are useful in the unlikely event of a nuclear Armageddon, and Russia remains their prime target. But the Tomahawk-outfitted quartet carries a weapon that the U.S. military has used repeatedly against targets in Afghanistan, Bosnia, Iraq and Sudan." [5]

With the arrival of the USS Ohio in the Philippines, the USS Michigan in South Korea and the USS Florida "in the strategic Indian Ocean outpost of Diego Garcia" [6] on the same day, "the Chinese military awoke to find as many as 462 new Tomahawks deployed by the U.S. in its neighborhood." [7]

The Time report also revealed that all four Ohio class Tomahawk-armed submarines were operationally deployed away from their home ports for the first time.

Thompson wrote that the coordinated actions were "part of a policy by the U.S. government to shift firepower from the Atlantic to the Pacific theater, which Washington sees as the military focus of the 21st century."

Regarding the submarines still carrying Trident missiles, he rhetorically added, "Why 14 subs, as well as bombers and land-based missiles carrying nuclear weapons, are still required to deal with the Russian threat is a topic for another day." [8]

All three journalists cited - Jing, Torode and Thompson - place the U.S. submarine deployments within a broader and also a more pressing context.

The South China Morning Post writer stated: "In policies drafted under then-president George W. Bush, a Republican, and continued by the administration of his successor, Democrat Barack Obama, the Pentagon is shifting 60 per cent of its 53 fast-attack [as distinct from ballistic and guided missile] submarines to the Pacific - a process that is now virtually complete.

"But the presence of the larger cruise-missile submarines shows that, at times, the US forward posture will be significantly larger."

The USS Ohio, for example, "has been operating out of Guam for most of the last year, taking advantage of the island's expanding facilities to extend its operations in the western Pacific.

"It is due to return soon, but the Florida and the Michigan are likely to remain in the region for many months yet, using Guam and possibly Diego Garcia for essential maintenance and crew changes."

Additionally, "The presence of the Florida, based on the US east coast, appears to confirm the US is still routinely bringing submarines under the arctic ice cap to East Asia." [9]

Just as the Pentagon is moving nuclear submarines under the northern polar ice cap to the Indian Ocean, so it has recently reached an "agreement [that] will allow troops to fly directly from the United States over the North Pole" to Afghanistan and "the region" by way of Kazakhstan, which borders China as well as Russia. [10]

The U.S. military "siege of China" is proceeding on several fronts, on land as well as under water and in Central as well as South and East Asia. But what primarily had been a policy of surveillance and probing China's perimeter is now entering a new phase.

That the U.S. currently has over 60 per cent of the Tomahawk cruise missiles assigned to its Japan-based Seventh Fleet near China emphasizes the qualitative escalation of Washington's show of strength vis-a-vis Beijing. One related to, as was seen above, a strategic shift of attack submarines nearer China and also to the crisis on the Korean Peninsula that was exacerbated by the sinking of a South Korean warship, the Cheonan, in March.

There has even been speculation that U.S. submarine deployments and other "messages" delivered to China of late were designed to pressure Beijing into taking a tougher stance toward North Korea over the Cheonan incident. What journalists have been referring to as messages would in an earlier age have been called saber-rattling and gunboat diplomacy.

U.S.-China relations sharply deteriorated this January when the Obama administration finalized an almost $6.5 billion arms sales package for Taiwan which includes 200 Patriot missiles. [11] An article on the subject in the New York Times on January 31 was titled, revealing enough, "U.S. Arms for Taiwan Send Beijing a Message."

China suspended military ties with the U.S., and bad blood has persisted throughout the year, resulting in Secretary of Defense Robert Gates scrapping plans to visit Beijing early last month when he was effectively disinvited by Chinese officialdom on the prompting of the military.

The White House and the Pentagon have been sending a number of unequivocal - and increasingly provocative - messages to China this year.   

The new U.S. administration signalled a confrontational approach early on. In May of 2009 Secretary of State Hillary Clinton, barely three months in her post, stated, “The Obama administration is working to improve deteriorating U.S. relations with a number of Latin American nations to counter growing Iranian, Chinese and Russian influence in the Western Hemisphere....” [12]

Later in the year then Director of National Intelligence (and retired admiral and former commander-in-chief of the Pacific Command) Dennis Blair released the latest quadrennial National Intelligence Strategy report which said “Russia, China, Iran, and North Korea pose the greatest challenges to the United States’ national interests. [13]

While Blair headed up the Pacific Command (PACOM) from 1999-2002, his role included overseeing a vast area of the planet that includes China (since the Ronald Reagan administration assigned it to that military command in 1983).

Arrogating the right to divide the entire world into military zones, areas of operation, has never been attempted by any other nation, any group of nations, not even all the nations of the world collectively (in the United Nations or otherwise). But the U.S. has and does do just that. It has even added two new Unified Combatant Commands - Northern Command and Africa Command - in recent years, in 2002 and 2007 respectively.

The Pacific Command is the oldest and largest of the six current regional commands (the others being the Africa, Northern, European, Central and Southern Commands), and was formed during the dawning of the Cold War in 1947. Its area of responsibility takes in over 50 per cent of the world - 105 million square miles - 36 nations and almost 60 per cent of the world's population.

300,000 troops from all major branches of the U.S. armed forces - the Air Force, Army, Marine Corps and Navy - are assigned to it, 20 per cent of all active duty American service members.

Pacific Command is in charge of military defense treaties with Australia, Japan, New Zealand, the Philippines and South Korea.

The U.S. is also alone in assigning the world's oceans and seas to naval commands. Washington has six naval fleets - the Fourth Fleet (the Caribbean, Central and South America) was reactivated in 2008 after being disbanded in 1950) - and just as Pacific Command is the largest unified, multi-service command, so the Seventh is the largest forward-deployed fleet, with 50-60 warships, 350 aircraft and as many as 60,000 Sailors and Marines at any given time. It is based in Japan and its area of responsibility includes over 50 million square miles of the (largely western) Pacific and Indian Oceans.

The U.S. also has eleven aircraft carriers, ten of them nuclear-powered and all eleven part of strike groups. [14] (China has no and Russia one carrier.)

The Time magazine article quoted from earlier mentioned that the deployment of four U.S. guided missile submarines to East Asia and the Indian Ocean is not the only development that China needs to be concerned about. The U.S. is simultaneously presiding over six-week biennial Rim of the Pacific (RIMPAC) military exercises in Hawaii with over 20,000 troops, 36 warships and submarines (25 American) and 180 planes and helicopters.

This year's RIMPAC, which began on June 23 and is to be completed by the end of July, includes for the first time the participation of France, Colombia - with which the U.S. has recently concluded an agreement for the use of seven of its military bases [15] - and the Southeast Asia nations of Malaysia and Singapore. The other countries involved are Australia, Canada, Chile, Indonesia, Japan, the Netherlands, Peru, South Korea and Thailand. The five-week war games involve "missile exercises and the sinking of three abandoned vessels playing the role of enemy ships." [16]

The combined task force commander for RIMPAC 2010 is commander of the U.S. Third Fleet, whose area of responsibility is approximately 50 million square miles of the eastern Pacific, Vice Admiral Richard Hunt, who stated, "This is the largest RIMPAC that we've had," and one which "clearly focuses on maritime domain awareness dealing with expanded military operations across the complete spectrum of warfare." [17]

Time's Mark Thompson also wrote: "Closer to China, CARAT 2010 - for Cooperation Afloat Readiness and Training - just got underway [July 5] off Singapore. The operation involves 17,000 personnel and 73 ships from the U.S., Singapore, Bangladesh, Brunei, Cambodia, Indonesia, Malaysia, the Philippines and Thailand.

"China is absent from both exercises, and that's no oversight." [18]

This February Cobra Gold 2010, "the largest multinational military exercise in the world," [19}, was launched in Thailand (separated from China by only one nation, either Laos or Myanmar) and as with all previous Cobra Gold war games was run by U.S. Pacific Command and the Royal Thai Supreme Command. Joining the U.S. and Thailand in this year's exercises, designed "to build interoperability between the United States and its Asia-Pacific regional partners," [20] were the armed forces of Japan, Indonesia, Singapore and, for the first time, South Korea.

From June 8-25 the latest U.S. Air Force-led Red Flag Alaska air maneuvers were held near the eastern Pacific. "The Red Flag exercises, conducted in four-to-six cycles a year by the 414th Combat Training Squadron of the 57th Wing, are very realistic aerial war games. The purpose is to train pilots from the U.S., NATO and other allied countries for real combat situations." [21]

Over a thousand airmen from five nations - the U.S., Japan, South Korea, Romania and Belgium - assembled at Alaska's Elmendorf and Eielson Air Force Bases for air combat training which "unites forces from all over the world."

"South Korea, a country already accustomed to working with U.S. troops, is also in Alaska to strengthen the two nations' ties after the sinking of a South Korean warship by a North Korean submarine.

"'We have the American Air Force in Korea, and the coalition and the combined working environment is very important,' said Lt. Hoon Min Kim, a member of South Korea's air force. 'And being able to perform under a combined environment is therefore essential as well.'" [22]

The incorporation of progressively more Asia-Pacific nations into what has been referred to as an Asian NATO is by no means directed solely at North Korea nor is it understood as such by officials in Beijing.

Participants in that arrangement, among them Australia, New Zealand, Singapore, South Korea and Mongolia, have troops serving under NATO in Afghanistan. Recently 140 new South Korean forces arrived at the Bagram Air Base in Afghanistan to reinforce a base in Parwan province recently subjected to repeated rocket attacks. Seoul's troop strength in the war zone is now at 230.

This month the government of Singapore announced it will increase its soldiers in the NATO-led International Security Assistance Force to "a record 162, from 97 last year."

"Next month, the Singapore Armed Forces (SAF) will send a 52-man unmanned aerial vehicle (UAV) team - its biggest deployment to Afghanistan - to Oruzgan [Uruzgan], one of two provinces where Singapore has troops." [23]

Earlier this year NATO announced that Mongolia and South Korea have become the 45th and 46th nations to provide it with troops for the war in Afghanistan. Mongolia borders both China and Russia and is the object of intense efforts by the U.S. to increase military cooperation and integration. [24] On July 6 NATO's Assistant Secretary General for Political Affairs and Security Policy Dirk Brengelmann paid a two-day visit to South Korea, where he stated, "Our security interests and security interests of countries like Korea coincide today more than ever."

A news report of his visit paraphrased his comments as asserting that "The world's biggest military alliance, NATO, is looking to increase cooperation with South Korea and other partners beyond Europe and North America," and added that "Speaking of cooperation, Brengelmann noted NATO's show of support for South Korea in light of the sinking of its warship Cheonan....The diplomat said some NATO members also serve on the U.N. Security Council and that the NATO members will try to ensure any Security Council action on the Cheonan sinking will represent their views expressed in the NATO statement." [25]

Another country that shares borders with China and Russia, Kazakhstan, has allowed the U.S. and NATO transit and overflight rights for the Afghan war and last week the nation's president, Nursultan Nazarbayev, signed a law permitting the Pentagon to ship "special cargo" - armored vehicles - through his country.

The U.S. and NATO have transited hundreds of thousands of troops through the Manas Air Base (now Transit Center at Manas) in Kyrgyzstan, which also borders China, since 2001 and in recent months troops have passed in and out from Afghanistan at the rate of 55,000 a month, 660,000 a year. [26] Washington has announced plans to open new training bases in Kyrgyzstan and Tajikistan, the second nation also adjoining China.

With Afghanistan and Pakistan, which also have borders with China, the U.S. and NATO have a military presence in five nations on China's western flank and a foothold in Mongolia. The U.S. and NATO war in South Asia will enter its tenth year this autumn with no sign of Western military presence departing from China's backyard.

The U.S. military remains ensconced in Japan and South Korea, has returned to the Philippines (including camps in Mindanao), is solidifying bilateral and multilateral military relations with practically all nations in Southeast Asia, and for the past five years has cultivated India as a military partner. [India is currently an observer at the RIMPAC exercises.) Japan, Taiwan and Australia are being integrated into a U.S.-designed regional and broader global interceptor missile system.

The U.S. is conducting regular military exercises, building military partnerships, stationing troops and opening bases around China's periphery, in addition to the positioning of warships, submarines and aircraft carriers in the waters off its coasts. 

What alarms China most at the moment, though, is a proposed joint U.S.-South Korean military exercise in the Yellow Sea, enclosed by both Koreas to the east and China to the north and west. 

China's Global Times recently quoted Xu Guangqian, military strategist at the People's Liberation Army's Academy of Military Sciences, issuing this warning: "China's position on the Yellow Sea issue demonstrates its resolution to safeguard national rights and interests. It also reflects that China is increasingly aware of the fact that its strategic space has confronted threats from other countries." [27]

China, which just concluded six days of naval drills of its own in the East China Sea, had more reason to be concerned when it was disclosed earlier this month that a U.S. aircraft carrier would join the maneuvers off its Yellow Sea coast.

On July 8 China renewed its opposition to the planned U.S.-South Korean war games, with Foreign Ministry spokesman Qin Gang telling reporters, "China has expressed its serious concerns with relevant parties. We are firmly opposed to foreign military vessels engaging in activities that undermine China's security interests in the Yellow Sea or waters close to China." [28]

An unsigned editorial in the Chinese Global Times of July 8 stated, "Beijing sees the joint exercise not only as being aimed at Pyongyang, but also as a direct threat to its territorial waters and coastline," and blamed South Korean President Lee Myung-bak for worsening relations between the two nations:

"It is not known whether Lee had thought of China's reaction when he announced in May the drill with the US.

"Did he foresee Chinese people's anger? Or, did he intend to provoke the country on the other side of the Yellow Sea?

"It is a shame and a provocation on China's doorstep.

"If a US aircraft carrier enters the Yellow Sea, it will mean a major setback to Seoul's diplomacy, as hostility between the peoples of China and South Korea will probably escalate, which Beijing and Seoul have been working for years to avoid." [29]

President Lee met with his American counterpart, Barack Obama, on the sidelines of the Group of Eight summit in Toronto late last month, during which a previous arrangement to transfer wartime command of South Korean forces to the nation in 2012 were postponed if not abandoned. In Obama's words, "One of the topics that we discussed is that we have arrived at an agreement that the transition of operational control for alliance activities in the Korean peninsula will take place in 2015." In the five-year interim "if war were to break out on the Korean peninsula the United States would assume operational command of South Korean forces." [30] 

If Washington is planning direct intervention on the Korean Peninsula as its military buildup in the region, including off China's shores, might indicate, the words of former South Korean president Kim Young-Sam a decade ago are worth recalling. Two years after stepping down as head of state, Kim revealed to one of his nation's main newspapers that he had intervened to prevent a second Korean war, that his government "stopped US President Bill Clinton from launching an air strike against North Korea's nuclear facilities in June 1994."

He initiated a last-minute phone conversation with the U.S. president which "saved the Korean peninsula from an imminent war," as "The Clinton government was preparing a war" by deploying an aircraft carrier off the eastern coast of North Korea "close enough for its war planes to hit the North's nuclear facilities in Yongbyon."

Furthermore, Kim warned the U.S. ambassador in Seoul that "another war on the Korean peninsula would turn all of Korea into a bloodbath, killing between 10 and 20 million people and destroying South Korea's prosperous economy." [31]

Any catastrophic event on the Korean Peninsula, and war is the ultimate cataclysm, could lead to hundreds of thousands of North Korean refugees fleeing to Russia and millions to China.

The nearly nine-year war in Afghanistan being waged by the U.S. and NATO has led to an explosion of violence and destabilization in three nations flanking China: Afghanistan itself, Pakistan and Kyrgyzstan.

Also, since 2001 Afghanistan has become the world's largest producer of opium and hashish, flooding the European and other drug markets. A forum entitled "Afghan Drug Production - A Challenge to the International Community" was held in Moscow a month ago.

A Russian report on the meeting stated "The situation around drug production in Afghanistan has gained a catastrophic character. Some 100,000 people died globally from Afghan drugs in 2009 alone. In all, Afghan-made opiates have claimed one million human lives in the past decade, and 16 million more ruined their health." [32] 30,000 of the drug-related deaths occurred in Russia. The United Nations estimates that Afghanistan currently accounts for 92 per cent of world opium cultivation.

China and Russia are viewed as, if not challengers to U.S. global dominance, impediments to its further consolidation. And not in the military sphere but in the fields of economics, trade, energy and transportation. Destabilization of their neighborhoods and frontiers is one manner of limiting competition.

All means fair and foul are employed to eliminate obstacles to uncontested supremacy, and what the world's sole military superpower (the term is President Obama's from his Nobel Peace Prize acceptance speech) truly excels at is expanding its international military machine with an unflinching willingness to use it.

Notes [see on site]

Was the Social Security Money “Borrowed” or “Stolen”?

A must read by Allen W. Smith - Dissidentvoice - July 9th, 2010

In December, the Obama deficit-reduction commission will make recommendations for budget cuts that will then be voted on, with an up or down vote, by the lame-duck Congress.  Already, there is much speculation that Social Security will be one of the big targets.  The rationale for cutting Social Security seems to be that, during such difficult economic times, everything should be a candidate for the chopping block, and that the public should support such cuts out of a sense of patriotism.   

The flaw in this argument is that Social Security has not contributed a dime to the budget deficits or the soaring national debt.  Social Security is funded exclusively by payroll taxes (also known as FICA taxes), paid into the fund by working Americans.  In 1983, the payroll tax was increased substantially in response to the recommendations, the previous year, of the Greenspan Commission on Social Security Reform.  

Prior to 1983, Social Security had operated on a “pay-as-you-go” basis with each generation responsible for paying for the benefits of the generation that preceded them.  The 1983 legislation changed the nature of Social Security funding.  In addition to paying for the benefits of the preceding generation, as was customary, the baby boomers were also required to pay additional taxes to partially pre-fund their own retirement.  The net result is that the baby boomers have paid more into Social Security than any other generation.  Yet they are often made scapegoats and blamed for the Social Security funding problem.  I am not a baby boomer, but I am very sympathetic to them.  They are getting a bum rap.

The intent of the 1983 legislation was to generate large Social Security surpluses for the next 30 years that were supposed to be saved and invested, in order to build up a large reserve in the trust fund that could later be drawn down to pay benefits to the baby boomers.  The 1983 payroll tax hike has generated more than $2.5 trillion that is supposed to be in the trust fund.  If the trust fund actually held this amount in real assets, full Social Security benefits could be paid until at least 2037 without any changes.  Unfortunately, none of the surplus revenue was saved or invested in anything.  It was all spent by the government on wars and other government programs without making any provisions for repaying the money.   

Over the past 25 years, five presidents, and the members of Congress, have participated in the great Social Security scam.  All Social Security contributions made by working Americans, except the amount which was needed to pay current retirement benefits, has been funneled into the general fund  and used for non-Social Security purposes.  Some like to say that the government just “borrowed” the money during the time period when it was not needed to pay benefits. 

But borrowing implies repayment, and no provisions for repayment have been made.  The government did not enact future tax increases that would automatically kick in when the Social Security money was needed.  Neither did they enact legislation that would end other spending programs once the Social Security money was needed so the money could be transferred to the trust fund.  The government spent the Social Security money, pure and simple, without making any provisions for future repayments.  The IOUs in the trust fund are not marketable, and they could not be sold to anyone even for a penny on the dollar.  The Social Security trustees confirmed the worthlessness of the IOUs in the 2009 Social Security Trustees Report with the following words:   

Neither the redemption of trust fund bonds, nor interest paid on those bonds, provides any new net income to the Treasury, which must finance redemptions and interest payments through some combination of increased taxation, reductions in other government spending, or additional borrowing from the public.

In order for Social Security to pay full benefits after 2016, it will be necessary for the government to begin repaying the money it has spent on other things.  This will mean increased taxes and/or additional borrowing.  Neither of these is politically popular, and there is no assurance that future politicians will be willing to raise taxes to pay for the irresponsible behavior of  past politicians.  If the money is not repaid in full, with interest, it will have been stolen by the government from working Americans who paid into the fund.   

Since Social Security would be fully funded until at least 2037 if the government had not used the money for other things, the only reason that politicians are advocating cuts in Social Security benefits is the fact that the government does not have the money with which to pay its debt to Social Security.  Given the fact that Section 13301 of the Budget Enforcement Act of 1990 made it a violation of federal law to use Social Security revenue for non-Social Security purposes, it is hard to justify using the word “borrow” to refer to any of the Social Security money spent after 1990, even if it is eventually paid back.

Dr. Allen W. Smith is a Professor of Economics, Emeritus, at Eastern Illinois University. He is the author of seven books and has been researching and writing about Social Security financing for the past ten years. Read other articles by Allen, or visit Allen's website.