Where does the trust fund get the cash from which to buy the bonds? It just seems at some point there is money being pulled out of some magic hat, which to me screams 'inflation'.
The Social Security Trust Fund's main source of income is payroll taxes on workers and employers. This shows up as the FICA line on your pay stub; your employer contributes an equal amount. If you're self-employed, you pay the equivalent of both the "worker" and "employer" portions.
Throughout most of the system's history, there was a rough parity between the taxes collected and the benefits paid out on a yearly basis. The purpose of the Trust Funds was to serve as a "buffer" to ensure that benefit checks could be issued monthly in an orderly manner, even if payroll tax collections fluctuated over time. Following reforms during the Reagan administration, the system began to collect more in taxes than it paid out in benefits on an ongoing basis, with the intention of accumulating a large surplus -- invested exclusively in government-issued securities for safety -- that would be drawn down to pay for the retirement of the baby boomers.
As a result of some additional reforms passed later, the SS trust funds get some additional income from a tax on the Social Security benefits of high-income recipients. However, this is fairly small compared to the payroll tax.
The government is running without a balanced budget, that much we know. Are they issuing enough bonds to generate the cash to cover the shortfall in tax revenue? If not, how are they making up the difference?
Meanwhile, over at the General Fund, expenditures are higher than tax collections. To make up the difference, the Federal government issues bonds -- meaning that someone gives them money up front, in exchange for a series of payments.
On a side note, why is inflation so stinking high right now? Everyone (including the media) is complaining about high prices for food, fuel, raw materials, etc. To me it just looks like the dollar is devaluing. I remember when 1 British Pound was $1.50, now it's over $2. What is the root cause?
Don't get me started on the whole screwed-up way we talk about inflation.
The rising price of any good or service or group of goods or services doesn't prove squat about inflation one way or another. In an economy of any complexity at all, some prices will be rising and some will be falling. What the inflation number tries to get at is the change in the
general level of prices in the economy. For example, if the increase in the cost of oil were precisely offset by a fall in the price of steel (or whatever), there would be no change at all in the general price level, even though the price of oil rose. If the price of everything in the economy were to rise at the same time, that would definitely constitute a rise in general price level. However, except in very extreme situations -- like Zimbabwe -- that never happens.
At the simplest level, inflation means there is too much money chasing too few goods and services -- the money supply has been allowed to grow faster than the "real" economy. Unfortunately, figuring out both the "size" of the real economy and the effective size of the money supply are both fraught with statistical uncertainty. To make matters worse, there also appears to be a psychological "expectations" component that's even harder to quantify.
So, somewhere in the system, we're creating dollars faster than we're creating things to buy with dollars, but it's darn difficult to figure out where the problem actually lies. Much of the bad economic news -- bankruptcies, defaults, reduction in lending, reduction in the rate at which money changes hands, etc. tend to reduce the effective money supply. The Fed has been trying to offset this by buying special securities and paying for them with dollars it creates in an effort to increase the money supply and lower interest rates.
But the bottom line is, nobody knows for sure. One of the big undereported stories of the last twenty years is that many of the tools we used to rely on to figure out say, the money supply have become useless. M1, once considered the most definitive measure of total dollars, became so unstable sometime in the late 80's that the Fed quit using it. Ditto a number of other important metrics.
I remember when 1 British Pound was $1.50, now it's over $2. What is the root cause?
Exchange rates are a somewhat-seperate deal.
The main reason you'll accept that little electronic blip representing some number of "dollars" that your employer gives you for a week's work are that you have confidence that when you go to the grocery store or gas station and propose to exchange the electronic blips for goods and services, you'll be able to do so. The merchants accept the dollars from you because they believe the same thing -- they'll be able to acquire things they want by offering dollars for them. And so on.
So, the ultimate value of any medium of exchange -- dollars, gold, dinar, francs, pretty shells, etc. -- lies in people's belief that they can use it to get what they want. In one sense, a nation's currency is an IOU for the output of the entire economy.
For years, what we've been getting more stuff from other economies than we've been giving in return -- imports have been larger than exports. The net effect is that we push a steadily-growing amount of dollars to other countries, whose citizens assume that at some time in the future, they'll be able to use them to get something they want. (These are often held in the form of Treasury securities held by central banks of other countries.) Remember, those dollars represent a claim on the future output of the American economy.
At some point in this process, enough people decide that maybe the American economy won't be able to produce enough "stuff" to cover all those dollars, (or that inflation may require them to pay more dollars for what they want than they expected) so they start demanding more dollars in exchange for their "stuff," or to be paid in another currency. This makes Americans less likely to buy imported products -- because they cost more -- and since American producers pay most of their expenses in dollars, it lowers the cost of American goods in other currencies and makes it easier to export. So the imbalance straightens itself out over time.
Of course, this is a hugely simplified explanation on a subject that thousands of people have expended their careers on, and the real world is riddled with exceptions to all this, but at least it's a start.
