I ran across this post by Dave Lewis over on iTulip, in which he concludes that the raiding of Social Security is ultimately more responsible for our persistently low long-term interest rate environment than any other factor.
If he's right, it would mean that Greenspan helped create his own infamous conundrum. As if we need another reason to dislike the guy.
Quotes from the post, and some thoughts of my own, after the bump.
Many financial commentators have opined on the absence of the "bond vigilantes" from the US Treasury market. Bond traders now willingly accept low yields in the face of broad based commodity inflation, which hitherto would have, according to Mr. Grant, whose views I highly respect, above, inspired significant selling from the now "sleeping" bond vigilantes. I've been doing a bit of checking on the US bond market and think I have a few answers to the question, "where did the bond vigilantes go?," although a better question might be, "whose efforts have swamped bond vigilantism in the Treasury markets?"
First he considers the buying activity of the Fed itself, and of foreign investors. But the dollar volume there just doesn't explain it. However, the SS payroll tax increase from Greenspan's commission and the lowballing of inflation numbers (which began under Clinton, and which impact the COLA and therefore the actual benefit amounts paid out) could:
In sum then, the cumulative effects of SS tax hikes, which inflated SS income, and reductions in outflow due to recalculated COLAs are, I believe, the primary cause of our strangely low bond yield environment in the US. As one who has cited with alarm the growth of Chinese reserves to and above the $1Tln mark, I was amazed to find that Social Security holdings have grown even faster, and now total some $2Tln.
And of course we all know by now that low interest rates are great for stocks and even a rumor of the Fed cutting interest rates has the stock market salivating like a Pavlovian dog.
So that gets me wondering: was the Social Security "lockbox" shot down because it would end the artificially low interest rate environment? Observing what's actually happened, the Federal government really did just lend the excess trust fund money to itself. That means that the real crisis in Social Security is not in the payroll tax or the payout rules, but rather in how the government is going to generate the revenue to pay back all the raided funds. That makes it a general revenue crisis, not an entitlement crisis.
(And Medicare, by the way, is only a crisis because the cost of health care is a crisis. But that's because it is one of the few things whose inflation we cannot export to other countries with "free" trade agreements, PetroDollar shenanigans, and the like.)
Captive bidders and the Enron effect
That is, I argue, the captive nature of the SS Trust fund in conjunction with its size has been the main cause which engendered our low and reasonably flat curve yield environment. For it is the US Treasury itself which manages these funds. As those who lost all their retirement funds at Enron could tell you, captive trust funds invested in the company itself does not a diversified portfolio create- just the opposite effect is, in fact, created. When foxes (invariably from Goldman Sachs these days) guard the chicken coop, ultimately you have no chickens.
Thus the sad pattern appears again, even larger and more disturbingly than usual.