Crawl Across the Ocean

Sunday, December 12, 2004

World's Biggest Margin Account

A few posts back, I tried to (satirically) make the point that in the current 'idea-assessing' environment in the U.S., the government could propose just about anything, no matter how idiotic, and the reaction would depend more on the 'spin' than it would on how idiotic the idea was.

Turns out, I needn't have bothered, since the Bush administration decided to demonstrate it for me. Last week they announced (admitted?) that they were planning to fund Bush's plan to partially privatize their Social Security accounts1 by borrowing roughly $1 trillion (maybe $2, but who's counting).

My first reaction was, "So they want to borrow a trillion dollars, give it to the population to invest as they see fit, hope that people earn a return above the interest paid on the borrowed money and then reduce people's benefits accordingly once they retire? i.e. They want to set up the world's largest margin account?2

But people seemed to actually be taking it seriously as a proposal, so I was starting to doubt my initial reaction. Luckily, I happened upon Paul Krugman's article in the NY Times which reassured me that it was Bush, not I who was going crazy.

If you're interested in this issue, I highly recommend reading his article. In fact, if you want to read one American columnist (and you also care about my opinion) than I'd recommend Krugman - alas he is taking a break right now to work on a textbook, but he'll be back in a few months (I'll let you know).


1 For those not following this too closely, the U.S. Social Security Program is similar to the CPP in Canada whereby tax revenues from people currently working are used to provide payments to the retired. Bush wants to change the U.S. system so that each person's taxes fund their own retirement. It's not a bad idea, but, since retirees are depending on the current taxpayers for their benefits, if the taxpayers start keeping that money for their own retirement - it leaves a bit if a gaping hole, so you need to inject a lot of cash into the system to make the transition.

2 A margin account is when you borrow from your stock broker to invest more money. If you invest $5,000 but borrow $4,000 of it, then if the value of your investment goes up to $6,000 then you have made a 100% profit (because you invested $1,000 of your own money and now it's worth $2,000). Of course if the value of your investment goes down from $5,000 to $4,000 you've lost all your money (since you owe $4,000 and that's all your investment is worth). The net effect of buying on margin is to increase the risk , without any net improvement in your odds (plus you have to pay interest). So it only really makes sense if you're pretty confident about what you're investing in (or you're just a gambler at heart).

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4 Comments:

  • Thanks. Now I know what a margin account is.

    By Blogger Zip, at 10:26 AM  

  • There's a Paul Krugman archive site:

    http://www.pkarchive.org/

    It's called "unofficial". I wonder what that means? I can't believe that he allows his columns to be posted there, without his consent.

    By Blogger dejour, at 4:04 PM  

  • Thanks for the link, dejour, it's a great site and I probably should have mentioned it in my original post (still getting into this whole blogging thing).

    Like you say, there must be some kind of offical permission for that site, from the NY Times and from Krugman. Perhaps the unoffical just means that it isn't managed or controlled (just permitted) by Krugman and his employers.

    Either way, it's worth a look.

    By Blogger Declan, at 12:42 AM  

  • Krugman is one of the few American columnists who actually sees the bizarre machinations of the Bush administration for what they are. Because he actually is an economics expert, he can dissect their voodoo bullshit beautifully. He drives them nuts.

    Nice post, Declan. You are one of the few Canadians following this issue. There actually is no crisis in social security in the U.S. Without any additional funding, the system is solvent to 2052. With a minor increase - say, a tiny rollback of the tax cuts given to millioanires - the system would stable for many, many years beyond that.

    This is simply a cash grab by Big Finance, who are being driven mad by the trillions of dollars sitting in that social security account. Raiding it will spell disaster, like most of Bush's plans.

    For some great coverage on this and other issues, check out the Bob Somerby's The Daily Howler at www.dailyhowler.com.

    By Blogger Timmy the G, at 10:02 AM  

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