Monday, February 07, 2005

Robert Reich's latest column in The American Prospect doesn't exactly promise that Bush's Social Security privatization program will bite the dust, but it offers lots of reason to hope so.
President Bush's agenda, as outlined in his State of the Union, is certainly ambitious. You may think that the president's success enacting it depends on how many votes he can round up in Congress. This is the standard way of viewing the political process, but it leaves out a constituency that may play the most important role. I'm talking about Wall Street bond traders.
Remember, the bond traders were the ones who forced Bill Clinton to scale back his ambitious plan for public investments in education and health care. They even turned Clinton into a deficit hawk. I saw it with my own eyes. The same bond traders may force George W. Bush to back down on his plans, too.

Like most people, my eyes glaze over if I'm presented with lots of financial technicalities, and Reich writes over the top of my head a few times, but even I understand that this privatization would be paid for by selling federal government bonds.
All the borrowing will create a deluge of new Treasury securities on the market. This will put extra pressure on interest rates because there's only a limited amount of savings out there to be borrowed -- and it'll push bond prices down.
The White House is telling bond traders not to worry because the extra borrowing will be paid back in 30 to 60 years when Social Security benefits are cut. But that may not convince the bond traders. After all, the extra debt will be added very soon, and it must be repaid. On the other hand, the promise to cut benefits three decades from now is just a promise. Who knows whether it will be kept? Thirty years from now, the politicians who have to impose those painful cuts might just back down.
So watch carefully, folks. If and when bond traders believe the president's plan is likely to pass, the value of Treasury bonds could plunge and interest rates will skyrocket. Mark my words: Even a hint of panic in the bond markets will be enough to kill the president's agenda for good.

The column is short. You can click here if you'd like to read it.

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