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Johnson: Rick Perry, Social Security and Ponzi Schemes

Ivory Johnson |Scarborough Capital Management, Inc
Monday, 19 Sep 2011 | 10:59 AM ET
Texas Governor Rick Perry
Getty Images
Texas Governor Rick Perry

Gov. Rick Perry has been lionized for calling social security a Ponzi scheme, rebuked for using the foul language of common sense that most Americans understand. Others might agree with David Letterman, who once opined that “there’s no business like show business, but there are plenty of businesses like accounting.”

Social security was established in 1935 to prevent the elderly from becoming destitute once they left the workforce. In 1940, there were 160 workers for every senior receiving benefits. Nowadays, three workers subsidize each recipient 4.2 percent at a time. In a perfect world, earlier contributions would pay for current benefits, although it’s clear that the money comes from the most recent investors, affectionately referred to as taxpayers.

One could suppose that had previous taxes been segregated for future use as planned, criticism of Gov. Perry would be justified.

Unfortunately, Congress spent that capital and accumulated $14.7 trillion in debt, $4.6 trillion of which is owed to the entitlement programs. Mitt Romney wrote in his book “No Apology” that if a banker misused the funds in a trust account the way politicians raided the social security and Medicare trust funds they would go to jail.

A cynic might describe that as embezzlement, but they’d have a hard time running for president.

What thin skin we seem to have?

Money laundering is defined as disguising illegal sources of money so it looks like it came from legitimate sources. The Federal Reserve, on the other hand, electronically credit the banks with money created out of thin air to buy bonds from their balance sheet, which in turn was used to inflate the stock market to everyone’s delight. It’s classified as quantitative easing on Wall Street, but where I come from, a place where two plus two still equals four, it’s known by a much more colorful name.

These are indeed strange times. U.S. money market funds have reduced their exposure to European banks by an estimated $700 billion and created a shortfall of greenbacks once used to fulfill other obligations. To prevent the fire sale of dollar denominated assets in Europe that might threaten the dollar as the reserve currency, central banks have agreed to issue financial fake ID’s, swapping U.S. dollars for Euros so the ECB can lend American currency to its banking system and manufacture liquidity, albeit with little regard for solvency.

Less than 60 percent of Americans vote in presidential elections, but nobody likes to get swindled. Perhaps if three decades of fiscal and monetary incompetence had been described in its proper context, the United States wouldn’t have $60 trillion of unfunded liabilities that the populace suddenly finds so objectionable. By all accounts, investors have confused fiat currency for wealth, politics for policy and debt for prosperity, a most untimely disposition. After all, a man who buys a brand new Porsche for $1,000 would have few sympathizers the next morning when his car didn’t start.

Considering the dubious financial predicament we now find ourselves in, diction is the least of our problems. Gov. Rick Perry has made a number of questionable statements, although his opinion about social security is worthy of debate. For example, if the principal from yesterday’s investor is available for today’s social security payment and there’s little need to access current cash flow to satisfy promises made in the past, then fine, maybe we should all celebrate — just show us the money before we order more wine.


Ivory Johnson, CFP, ChFC, is the director of financial planning at Scarborough Capital Management, Inc. and has over 20 years of investment experience. Mr. Johnson attended Penn State University, where he received a Bachelor of Science degree in finance. He can be followed on www.IvoryJohnson.com.

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