Yikes: 2 out of 3 Americans Can’t Answer Basic Financial Questions

This is frightening (via BlackRock):

It’s undeniable that the current state of the economy is complicated. However, for some it is entirely perplexing. In a recent survey of Americans over 50, only one out of three participants could correctly answer three basic questions on compound interest, inflation, and diversification.

This is particularly troubling, as basic financial knowledge is required when dealing with common financial decisions like student loans, mortgages, and retirement savings. Economics and personal finance are topics that often aren’t put into practice until far after high school economics classes are taken and long forgotten. The current economy is ever-changing, and education is key to understanding how to invest.

Source: The New York Times, “Financial Literacy, Beyond the Classroom,” 10/5/2013

I’m hoping to do my part in the coming decades to help fight this as I truly believe it’s one of the great problems we face today…..


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Cullen Roche

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services. He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance and Understanding the Modern Monetary System.

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  • Very Serious Sam

    What’s ‘binancial’? :)

  • Suvy

    Albert Einstein said that compound interest is the most powerful tool in the world. I agree. If you don’t understand compound interest, you’re gonna be taken for as a sucker.

  • Adam P.

    Physicians understand that every exponential process in nature either blows up or collapse. Economist refuse this idea even if they have a PhD.

  • Nils

    Einstein was not a Physician.

  • Nils

    So how many Americans over 50 have any significant savings for retirement?

  • http://pragcap Michael Schofield

    I would go so far as to say that a country whose citizens excell in their understanding of econ and finance will gain a huge advantage. What if politicians had to actually engineer the economy instead of playing stump the voters, or worse yet, cluelessly passing stupid laws?

  • Mercator

    Has the Fed taken way or diminished the most powerful financial tool in an effort to strong arm savers into risky assets, to save out banks?? And, for those that can’t accept risk, are they used as mules to bail out ignorant investors or home buyers. There are a number of ways to tap “other people’s money”.

  • Tim

    It really is one of the great problems of our time just because finance touches so much of a person’s life nowadays. All we can do is set an example, get the message out there, help the people we know, and hope that people absorb it and pass it on (or at least refer people to us).

  • .

    Completely agree. Finance is one of the only fields a vast majority of people use at least once a month, if not daily, but it’s not a required part of any school curriculum…

  • Rob


    Two questions:

    1. Why do you find this frightening? If you have ever worked with the consumer, you know that the result of the poll was a foregone conclusion. People aren’t uninformed about money because information on money is everywhere..no people aren’t uninformed, they are stupid. They have to have material things NOW…they will deal with the consequences LATER…they will find someone else to blame…or they will find someone else to pick up the tab. (Hmm…sounds a lot like our investment banking system…so it isn’t just individuals…it is institutions, too)

    2. Why didn’t you reference the actual article from the NY Times? The entire article is much better than the 2 paragraphs that BlackRock lifted from the piece.


  • Matt McOsker

    Well 3 out of 3 politicians probably can’t answer basic economic questions, and they run things.

  • Dunce Cap Aficionado

    How timely, was just discussing Jensen’s inequality and a method of smoothing not 10 minutes ago….

  • Dunce Cap Aficionado

    That’s what you meant by basic finance, right?


  • http://www.fanbrowser.com/ Cowpoke

    It’s when you look at for finances every other year. :)

  • Nils

    I don’t think they’re stupid. They’re just ignorant. It’s probably something psychological.

  • Nils


  • tradeking13

    I’m curious what ratio of Americans cannot spell correctly.

  • Suvy

    I’ve tried to explain this phenomenon to economists and they just don’t get it. I’m talking about heterodox economists as well. It’s quite sad. I’m starting to think that they don’t understand feedback.

  • Suvy

    To be fair, negative real interest rates are a way to push up the national savings rate and we need to push up the national savings rate. Yes, negative real interest rates do hurt individual savers, but it’s a mistake to mix up individual/household savings with national savings.

  • Johnny Evers

    I’ve found that even when they come in without knowledge, people can generally make good decisions when they take the time to address their options.
    I think the bigger problem is that most people don’t want to do that. They don’t like to plan.
    And sometimes, they avoid the subject of retirement planning, let’s say, because they know they’re screwed. Saving 50 a month might help them a bit in the long term, but spending that 50 this month makes them feel better now.
    It’s a tough situation. Part of you wants to say, ‘The heck with them if they can’t take care of themselves.’ But the better part of me wants to set up the economic/social/life system so that even a dummy can reasonably succeed.

  • fin

    ignorant citizens are much easier to rule, this has been the playbook for rulers for thousand years… So goes financial

  • pantmaker

    …and every politician I’ve seen doesn’t know their ass from two dollars.

  • Suvy

    The whole idea of “retirement planning” is kinda useless. If you want to have a good retirement, you just need productive assets that provide a consistent and sustainable cash flow. Most people don’t understand that. They just look at the trendline that goes exponential and start pouring in.

    Most people are just idiots when it comes to money. They’re ignorant, stupid, and don’t know basic math. On top of this, they never change their views. It’s great for people who do know it though because their ignorance is usually exploited.

  • jaymaster

    The monetary system as it currently exists is not natural.

    I understand exponential systems quite well. As an electrical engineer, I use them regularly in designs. They can be managed and controlled, and exploited to do useful things.

    And while my circuits might be based on something “natural”, in my opinion, they are man made, and not natural. They don’t explode or collapse unless I want them to.

    100 or 150 years ago, this was not the case. But since that time, we’ve learned more about these systems, so we can safely exploit them now.

    Monetary systems can be analyzed similarly.

  • Johnny Evers

    Well, yeah, but isn’t that part of retirement planning — to accumulate productive assets that generate cash flow and/or to save/invest enough so that you can acquire those assets.
    You also need to consider insurance, part-time work, real estate, budget expenses … all part of planning.

  • http://orcamgroup.com Cullen Roche

    A recent study I conducted found that I am dumber than some people think. :-)

  • http://orcamgroup.com Cullen Roche

    Hi Rob,

    1. I think most people are misinformed or uninformed about money and finance. Think about this – we use money almost every day. It’s a central aspect of our lives. But we don’t learn about it in school, most of us don’t learn much about it from our parents and our jobs don’t require much understanding of it. But it’s central in most other aspects of life.

    If you want to be informed and understand the world around us, which is pretty crucial to success, happiness, etc then you should have a sound grasp of what money is, why it matters, how we use it, etc.

    2. I was just being sloppy I guess. Sorry. But I agree – the whole article is better.

  • jaymaster

    The original article in the NYT is pretty decent. It even offers some potential solutions.


  • Randy Laws

    There is some education provided at the High School level. I personally teach the National Endowment for Financial Education (NEFE) course to my seniors. NEFE materials are provided to interested teachers free-of-charge. It is a good syllabus that covers budgeting, career tracks, insurance, and investing. I’ve found the seniors very receptive to it, and I think that is the most critical time in their lives to get this information.

    I just wish there was a similar course covering MR……………..I would really like to teach that as well!

  • jaymaster

    Oops, don’t know how I missed Rob’s link above.


    Cullen, feel free to delete mine.

  • http://orcamgroup.com Cullen Roche

    That’s fantastic. That’s unusual, right? I haven’t heard of too many high school programs teaching this stuff. But it’s great to know it’s out there.

  • Randy Laws

    It is a bit unique. It isn’t incorporated directly within the school curriculum. I am a Navy JROTC instructor, and we have a lot more flexibility in terms of academics. All of the JROTC programs have been exposed to NEFE and are encouraged to include it within their curriculum.

    If you are interested in seeing exactly what is covered and provided, here is the link: http://www.hsfpp.org/about-the-program.aspx

  • Notagain

    Every one should be taught basic level finance , law , health care and parenting .
    yet non are currently mandatory at school level or after …

  • http://orcamgroup.com Cullen Roche

    Great. I’ll check it out. I’m buried until the end of the year, but this is something I’d like to start getting more and more involved in. Thanks.

  • GRock

    2 out of 3 can tell you who won dancing with the stars! Isn’t that more important?

  • Hans

    ha, ha, self effacing is good for the soul…

  • Hans

    There is a good reason for all of these, our teaching cartel…


  • Suvy

    That can’t end well.

  • Suvy

    The sad part is that my generation is gonna be footing the bill.

  • midas2

    Most Politicians seem to be unaware of how little they know of economics. It shows when they try to “engineer” it. Look at Ryan’s vague budget, for example. Do you dare look at Cruz’s remarks on finance?

  • midas2

    If you know about how American textbooks are done (Please the Texas school boards and you are on the way to a widely accepted timid content) so publishers can sell more of the same text. And avoid mention of the depression or trade unions or the black experience. Make sure to emphasize patriotism. No Evolution stuff or religious wars. America never lost a war, and we have a much higher standard of living than all foreigners.

  • midas2

    Not a “teaching cartels”. Rather the reactionary School Boards who want a complacent public. They prescribe what may be taught.

  • GT

    lol, hahaha, freaking hilarious!

  • fernand

    where do exponential resources come from to support exponential growth.

    exponential growth does not work in a finite world. Just ask the folks from Easter Island

  • gct

    Suvy a lot of 50+ people do not have retirement plans. Heck only 25% of us have over 25k in the bank.

    Conspicuous consumption got 75% of us. I am not one of them, but listen to my friends complain all the time. People basically want it easy or worse just hand their money over to an investor and do not understand nor care about the process until they lose some money. But they do have the bimmer in the driveway with their oversized homes and many credit cards.

    Many prefer it that way. I had to learn it the hard way a long, long, time ago.

  • lessismore

    I was once asked to teach 12 hours of basic financial literacy to high schoolers. I planned (what I thought was) a wonderful case-study-based project only to discover on the first day the students had no idea about percentages. They could not even tell me 10% of a given number. Needless to say, given the importance of percentages, I changed my plan and taught percentages. The students complained that they signed up for a class on money, not math. The fact is most people do not want the education they need.

  • jaymaster

    I agree, we are resource constrained. Or at least we could be at some point, unless or until we leave this planet or create new technologies.

    But that’s completely irrelevant to our current monetary system. We’re no longer constrained by the availability of any particular commodity.

    We can create or destroy money as we desire, and hopefully, optimize it’s use to our benefit.

  • Suvy

    Guess who’s gonna be footing the bill for all your reckless friends? That’s right….. My generation. The ignorance most people have towards math, economics, and finance is rather depressing too. People will learn that there are consequences for that kind of behavior. My generation will end up moving sharply to the libertarian right while entitlements will get cut sharply.

    I’m on my phone right now, but I recommend you to watch the video by Stan Druckenmiller on the issue of generational theft. He’s absolutely right and I’m afraid my generation won’t be paying for your generations ills. We’re simply unwilling to do so.

  • Suvy

    It’s crazy cuz I actually have a good amount of experience dealing with the way math is taught. I used to tutor a lot of kids and I’m also pretty young so I remember most of my education and it is really, really depressing. There is useful time being spent on propagandizing kids with lies where they spend most of their time listening to some stupid teacher yapping about something completely useless. Most kids have no clue about finance and the way math is taught makes them hate it. Economics and finance aren’t even taught while they’re learning all sorts of useless bullshit. Rebellion, curiosity, a willingness to learn, and the willingness to question are all discouraged. It’s especially a problem with boys.

  • JK


    Can you elaborate on how negative interest rates are a way to push up the national savings rate?

  • Odie

    Every generation is footing the bill for the preceding one if that one is consuming without working. What people do not seem to understand is that on a macroeconomic level a society can not save money to prepare for the future.

    Let’s imagine it is 2050. The total retirement savings are 1 billion dollar and all goods and services are represented by 1 million cars. Thus, 1 car will cost $1000. Now imagine people had saved 1 trillion dollars instead. Does that change anything about how many cars will be available? No, they will just cost a $1 million per car.

    When a society wants to “save” for the future it is nonsense to save money. You can save resources, especially non-renewable ones, and make sure to invest in a way that productivity in the future is maximized. The more productive a worker is the more non-working people he can support with his labor. Having people putting dollars in an IRA helps only as much as it preserves resources for future consumption. Otherwise, it only achieves to distinguish the haves from the have-nots.

  • Suvy

    Negative real rates basically transfer income from net savers(mainly households) to net borrowers(businesses, corporations, and governments). Who consumes more of their income: households or businesses/governments? Remember that the national savings rate is GDP not consumed.

  • JK

    Are you saying that negative real interest rates increase investment… and investment increases national savings (Keynes)?

  • Fed Up

    RIP efficient-market hypothesis.

  • Suvy

    Yes. I agree with Keynes 100% with regard to this issue.

  • Greg

    So you guys are just gonna let your parents and grandparents suffer Suvy? Even though most sacrificed for their kids? If that is going to be your attitude our planet has about two/three generations left.

    The working are always “footing the bill” for the retired, so what?

    Your selfishness will be your undoing. You didnt do this alone my man.

  • Suvy

    Don’t get me wrong, I’m not advocating a removal of the welfare state. You can fix the problem by sharply raising taxes and raising the retirement ages. Otherwise, a default will be forced and it’ll be a lot more painful for all of us.

  • Suvy
  • Anonymous

    2 out of 3 Americans voted for Obama…….

  • Greg

    Why does retirement age “need” to be raised? As we are able to produce more with much less why do we need to keep people working for some employer 5-10 more years?

    Personally I dont think we should expect most people to enter the workforce til 25-28. 35 years of service/work should be considered the standard and allow people to have 15-25 years to be involved grandparents /great grandparents.

    If you put your nose to the grindstone for 30+ years that should be enough. Ive been doing what I do for 25 years and frankly Im ready to stop working for someone else. Ive saved and along with SS I should be able to travel a little to see my grandchildren, stay involved in some local causes and relax. My spending will provide the income for you and your buddies so you can follow in my footsteps.

    Asking for more work out of each person is against the whole virtues of capitalism. It has been presented as encouraging productivity and improved standards of living. Asking people to work longer is not improving their standard of living, its deteriorating it

  • http://brown-blog-5.blogspot.com/ Tom Brown

    What are the three questions?

  • JK


    I watched this. It’s nonsense. Tell us… EXACTLY what is are the old stealing from the young?

    1) Are they stealing dollars? Ok, let’s lower people’s taxes and keep paying for SS, Medicare, etc.

    2) Are they stealing real resources?… we’re not running out of real resources.

    IMO the way we are stealing from the young is by allowing deteriorating infrastructure, by not improving education, by not maintaining enough aggregate demand to sustain low levels of unemployment, etc. It’s realy living standards that we “steal”.

    Sounds to me like Druckenmiller thinks money is a finite resource.

  • Greg

    Agreed JK
    Additionally virtually all the income of these elderly is spent not saved. Its immediately recycled through the economy driving incomes for the younger workers. There is NO sense in which the seniors on pensions are stealing anything from us. The Koch brothers are but not the average senior.

  • ET

    What the fcuk does President Barak Obama have to do with your education about the monetary system, money, financial knowledge/literacy or lack there of? Teach yourself.

    He is the a figure of authority, have some respect.

    It’s disgraceful the way to feel sorry for yourself!

  • DanH

    What was the alternative? The guy who modelled the healthcare plan your party pretends to hate ?

  • Adam P.

    Physicist of course; the title of this post had a “binancial” before a correction so… It happens sometimes to be incorrect expecially when english is not your mother language. Cheers.

  • Anonymous

    I never stated my political affiliation…….. However, what is your point? Is Romney care working? If you voted for Romney you would still get health care reform, but would there be a debt ceiling debate?

    Obama’s Congressional record opposing raising the debt ceiling……

    The post is stating that 2 out of 3 Americans over the age of 50 are financially as stupid as a bag of rocks…….. this is the generation that the young are suppose to look up to? Get educated from? Learn right from wrong……. No wonder we are having a debate over raising the debt ceiling.


  • Anonymous
  • Suvy

    What about the way it’s being used? You yourself just said that it’s not being used for infrastructure or for genuine investment. Instead, it’s being used to consume today and creates no return tomorrow. On top of this, there’s debt that will end up having to be paid back later.

    Rather than investments in infrastructure that have a future return, the resources have been transferred for consumption purposes. Druckenmiller points all this out. This generation from the ages of 28-37 will be the first one whose net worth was less than the net worth of that same age group 30 years ago while the net worth of everyone above the age of 50 has basically doubled. Transfer payments as a proportion of federal government outlays have more than doubled from 30% in 1980 to almost 65-70% today. That’s money not being spent on education, infrastructure, etc.. What about college students with large amounts of debt that students are walking out without any way of paying it back? It’s literally debt slavery.

    I’m sorry, but Druckenmiller is absolutely spot on.

  • Odie

    I am wondering if the people who think they know about compound interest really understand its implications. See the following example: Think of 3 guys, two “poor” guys inherit $10,000 at the age of 30 and one “rich” dude receives $1,000,000. All put the money in the same mutual fund that returns 6% annually over the next 35 years. One of the “poor” guys really works hard and adds another $10,000 each year to his savings. When they are 65 and close to retirement their savings look like that: The poor guy has made $66800, not bad. The poor hardworking guy has now added $1,181,200 to his savings; certainly hard work pays off. But let’s look at the “rich” guy. He has added $6,686,000 to his account. A difference that was $990,000 at the beginning has ballooned to $7,609,000.

    The problem with compound interest is, the difference in the initial monetary wealth will also compound and therefore widen the gap between the well-off and the not so well-off. Compound interest is a great tool to make the rich richer. Simple math; no politics necessary.

  • http://www.justaluckyfool.wordpress.com justaluckyfool

    WOW, and what would be the unintended consequences of “raising taxes and raising retirement age” perhaps -increase taxes and lower entitlement spending ?
    How would that work for ‘all the people’ ?
    BUT , why not do what (as stated on ” 60 minutes” (12/11/11)” President Obama said,”You can’t raise revenues by lowering taxes unless you get the money from somewhere else.” ?
    JUST ONE STUPID THING- raise revenue from somewhere else !
    Why not use the ‘most powerful force in the universe’ ,compound interest to serve “The People” instead of the private for profit banks?
    One simple step: Have our own Federal Bank ‘print money’ and lend that money out with interest attached. IF $36 trillion at 2%/year that would raise $2 trillion a year as “revenue from somewhere else”.
    Challenge or endorse this statement.

  • Suvy

    So we’re trusting bureaucrats and politicians to effectively allocate capital? They’ve already tried to make private investors allocate it the way they want it done and it’s ended in disaster

  • JK


    No, he’s not spot on. You ignored the most pertinent comment I made as it relates to you and Druckenmillers misunderstanding: “Sounds to me like Druckenmiller thinks money is a finite resource.”

    All you just did in yoru comment is repeat what Durckenmiller said without explicitly state EXACTLY what we are steal from the young?

    Tell me: Why can’t we 1) continue to pay for SS and Medicare and Medicaid, maybe even expand them, AND 2) invest in those things like infrastructure, educations, etc, AND 3) lower taxes on people giving them more purchasing power?

    What’s our concern? -> Inflation?? … Ok, let’s start doing these things slowly. And keep doing more until unemployment gets low, jobs are becoming more abundant, the elderly have financial security, our infrastrucutre is getting updates, our educations system is improving, and so on.

    Druckenmilller only makes sense if you think of money as a finite resource. It’s not. Just ask the banking system that expands and contracts the ‘money supply’ through Loans create Deposits.

  • JK


    Have you read Cullen’s primer? If so, specifically what do you disagree with? A lot of what you say sounds wrong to me….

    In sppeaking of subsidizing our elderly, you said: “it’s being used to consume today and creates no return tomorrow.”

    As Greg said above: “virtually all the income of these elderly is spent not saved. Its immediately recycled through the economy driving incomes for the younger workers.”

    You said: “On top of this, there’s debt that will end up having to be paid back later.”

    Are you talking about deficit spending and the national debt? … No, it’s doesn’t need to be “paid back” or “paid down” …the national debt is net financial assets for the non-government. It’s equity. The entire banking system credit structure relies on it. Unless we turn into a trade surplus country, get used to an indefinitely increasing national debt via deficit spending. When we trade with foreigners, if they’re not going to spend those dollars back into our economy (if they want to save them), then this is a huge demand leakage and drag on our economy. The U.S.Government must deficit spend in place of them otherwise we’ll have a very serious negative spiral effect for the U.S. economy.

    You said: “This generation from the ages of 28-37 will be the first one whose net worth was less than the net worth of that same age group 30 years ago…”

    Maybe that’s because too much income is going to too few people, and in order to maintain Demand this generation has been offered Debt: student debt, credit card debt, etc. Combine that with a poor economy with bad job prospects… and is it any wonder this group has negative net worth??

  • Greg


    Its not correct to label SS as a transfer. Money is taken out of paychecks to pay for it. Very little of what goes to seniors are transfers. They are revenue neutral, hell currently they are revenue surplus. Additionally, why should we be concerned about seniors consuming? Thats what you are supposed to do after you produced your whole working life. That “dis-saving” so to speak is the lifeblood of the incomes for the younger generation. Unless they are consuming scarce resources, what is the problem? Seniors consume healthcare, travel and give money to their grandchildren. I would guess that is over 70% of their spending. Are we in danger of running out of any of those things?
    Yes we need to keep training doctors and need to stop doing useless expensive procedures on many of our seniors (this is the area I work) but as I see it the future is improving for healthcare. We will be able to do more things non invasively, reducing complications and we have doctors who are more concerned with lifestyles (less call and nights) than being millionaires

    Our seniors are far from a drag. Other than the ones in Congress

  • gct

    Suvy why the hate?

    Every generation pays for the current retirement with SS. Always have paid it. Honestly the system was in place before the boomers. I understand your problem with the system. I blame our elected officials as they have robbed the SS system many times over the years when the surplus was spent some where else. Correct me if I am wrong here but excess funds were suppose to be placed in UST’s. Not a generation’s fault the excess funds were spent.

    I think your drinking too much rhetoric. First we blame the rich, the poor and now a generation. If you work you will pay for it as nothing is changing anytime soon. I do think it should dished out with a means test.

  • Suvy

    You run into a problem when population growth slows down though. It’s like a Ponzi scheme in the sense that you constantly need more people entering than leaving.

  • Suvy

    Regardless of the country, most people will be ignorant of math, economics, and finance. It’s not a country-based thing, it’s a people thing.

  • Suvy

    I have read Cullen’s primer and I do agree with the technical nature of the arguments you guys are making. The only issue comes in when we’re talking about the practical consequences. As I’ve said before on this site, I think high government debts are dangerous and the impact of them is nonlinear. We all know money isn’t a finite resource.

    Greg, you said that inflation could start to become a problem when full employment starts to come back. There are other issues with government debt as well. When government debts are high and an inflation takes off, you’re basically screwed with no way to stop it. If we ever get to an infinitely increasing government debt country, we’ll end up having runaway cost push inflation–I can guarantee that. The current account balance is negative because of worldwide causes and it is the driver of the world’s financial crisis.

  • MTM

    Is this really that surprising… I recently saw a poll survey on the street where 1 out of 4 people couldn’t name the country that the USA gained it’s independence from. Then they were given multiple choice and many people selected China, Japan and Germany. Definitely a “knowledge” gap out there.

  • Hans

    Midas, your school boards are simply an extension of the labor gangs and their educators….

  • Hans

    Dude, what about the $150 billion budget of the Deportment of Education?

    Whom is their leader, I ax?

  • Johnny Evers

    While it’s true that the working generation always supported the previous generation, usually that meant that the working generation took their parents and grandparents into their home and provided for them with their labor.
    But today, the retiring generation expects a monthly check (which we can afford) and vast amounts of health care, which we cannot afford.
    Some of you think of it as money, which can be printed up and given to doctors and nurses to take care of old people, so it’s all good, but it’s more illuminating to look at it from the labor involved.
    If Joe Working Person is working to take care of an elderly person, who is taking care of his children? Or maybe Joe objects to his state paying more for Medicaid than it does for education.
    Or if Joe Working Person is paid to build a road, that helps the next generation. If Joe is being paid to practice medicine on a 70-year-old obese diabetic in his last year of life, that road doesn’t get built for the next generation.

  • Johnny Evers

    I find it interesting the idea that ‘money is not a finite resource.’
    First of all, money is not a resource at all. Kind of a quibbling thing, probably, but money ‘buys’ resources and only if it’s accepted.
    The limits on printing money would be that printing creates real production or resources or labor. For example, if you print money and give it to me and I use it to clear some land and grow crops, not only have a I spent the money so somebody else will be compelled to produce but I have also produced an additional product.
    It is very important to make sure that printing or borrowing creates positive economic activity. I think in the past 10 to 20 years that isn’t happening as much.
    If you give somebody a check, they buy but they don’t produce. If a bank borrow money to buy a financial asset, they can skim money to pay their employees, but they don’t produce something new.
    And some of the money probably has negative consequences. Print money, give to unemployed, he spends it at the casino, recycle it back to the unemployed person. No benefit.
    Ah — and that leaves out the inflation constraint. Printing or borrowing money without creating positive economic output makes the money less valuable in the long run.

  • http://brown-blog-5.blogspot.com Tom Brown

    gct, you write:

    “Correct me if I am wrong here but excess funds were suppose to be placed in UST’s”

    I *think* both are done! I’m not positive, but this is how I think it works: SS has it’s own revenue stream, so $1 goes to SS that they don’t spend. So rather than leave the $1 sit there doing nothing, they buy a $1 bond with it from Tsy, and then Tsy spends it.

    SS hold a very large percentage (maybe 25%?) of all US Tsy bonds. That just represents the accumulation of revenue streams into SS that was NO spent immediately, but I assume Tsy did spend the money once the bonds were purchased. I see no problem with this: otherwise that money would just sit there, having been removed from the private sector.

    The Tsy bonds roll over just like any other… until SS needs to spend more than it takes in, in which case rather than rolling them over (i.e. purchasing more bonds with the principal of maturing bonds) SS uses some of the proceeds to spend. So if SS is spending more than it takes in, it’s total $ amount invested in Tsy bonds decreases. The opposite happens when it spends less that it takes in. If it spends exactly the same as it takes in, then the $ amount they have invested in Tsy bonds should not change.

    That’s how I’ve assumed it works, but I don’t know for certain.

  • Johnny Evers

    There are no T-bonds in the trust fund.
    What happens in that the excess contributions are spent by the Treasury, which then issues a voucher for the amount.
    So the SS fund has $2.7 trillion in vouchers.
    When SS begins to pay out more than it takes in, it must take those vouchers to the Treasury and ask to be paid.

  • http://brown-blog-5.blogspot.com Tom Brown

    This table talks about the government holdings including:

    “Social Security and Federal retirement trust fund investments comprise much of the Government account holdings.”

    Look at the link entitled

    “Ownership of Federal Securities”


    Also this chart is from a couple years ago, but it shows the “intra governmental debt” excluding the Fed’s holdings at greater than 30% of total Tsy debt:


  • Johnny Evers

    Those aren’t T-bonds.
    The ‘debt’ is a promise by the Treasury to pay the Social Security dept.
    They don’t trade on on any market.

  • http://brown-blog-5.blogspot.com Tom Brown

    Here’s the way Wikipedia puts it:

    ” When revenues exceed expenditures, as they did between 1983 and 2009,[38] the excess is invested in special series, non-marketable U.S. Government bonds. Thus, the Social Security Trust Fund indirectly finances the federal government’s general purpose deficit spending.”


  • http://brown-blog-5.blogspot.com Tom Brown

    Here’s more from wikipedia:

    “The treasury bonds provide interest on the money in the trust funds, and if the program sees a deficit, the excess funds from previous years plus any interest earned is used to pay beneficiaries.”


  • http://brown-blog-5.blogspot.com Tom Brown

    Johnny you write:

    “They don’t trade on on any market.”

    Which is why the Tsy refers to them as a special series “non-marketable bond” I suppose. But they do pay interest and they are backed by the full faith and credit of the United States, so they are bonds.

  • Johnny Evers

    Right — the Treasury spends the money, then issues special notes (electronic promises to pay Social Security back.

  • http://brown-blog-5.blogspot.com Tom Brown

    Johnny, other than being “non-marketable” I don’t see any difference between the intragovernmental Tsy debt and the public’s Tsy debt.


    Wikipedia actually calls the intragovernmental debt “bonds” …

    They are backed by the full faith and credit of the US gov, like regular bonds, and they pay interest like regular bonds.

    You refer to them as “notes.” I know the gov issued debt called “bonds” “bills” and “notes” but do you a reference for the term “note.”

    As far as I can tell, the only difference between this intragovernmental debt and public debt is the “marketability” of it: one can be sold on the open market and the other cannot (I guess is what they mean by that).

    Are you implying there’s some other difference?

    The point is that contributes a HUGE part of the the famous $17T we’re always hearing about.

  • Johnny Evers

    The marketability difference is big.
    A T-bond has a very high level of ‘money-ness’ as they say.
    It can be redeemed very easily as used as a medium of exchange, it can be used as a store of value.
    Also the market puts a value on T-bonds.
    These SocSec notes are basically promises. I don’t see promises as assets, especially when those promises aren’t backed by future tax receipts.
    In that sense, I really don’t count them as ‘debt’, either. When the time comes when the SocSec dept needs revenues it will have to ask the Treasury to issue new bonds.

  • Nils

    What is even the point of school these days other than keeping the kids locked up for a few hours?

  • http://www.justaluckyfool.wordpress.com justaluckyfool

    WOW_ _ “Yikes: 2 out of 3 Americans Can’t Answer Basic Financial Questions
    Read more at http://pragcap.com/yikes-2-out-of-3-americans-cant-answer-basic-binancial-questions#KbRk1mh7uLJEWX93.99

    Believe it or not- -That’s not bad, since 3 out of 4 economist Can’t Answer Basic Financial Questions!!!.

    What is money?
    What is the “FLAW” in the American Capitalism system?
    What is “genuine lending ” vs. “Fictitious lending”?

    Does anyone wish to add to the list ?

  • http://www.justaluckyfool.wordpress.com justaluckyfool

    NONE do better than a Private For Profit Bank;
    They need only have in their possession only $600,000 to “lend” out $10 million and get back @6% for 36 years ONLY $80 million. And they didn’t even own the original $600,000; it is OPM, Other Peoples Money.
    How’s that for equality and distribution of labor wages.
    How about the builders,laborers, and producers that may perhaps earn $200 billion on the production of houses sold in any given year for $1.2 trillion, wake up and realize that if these houses are sold with 20% down that the Private For Profit Banks (PFPB) will make a profit of $4.8 trillion (minus the $1.2 trillion they ‘printed out of thin air’ ) which becomes A REVENUE GAIN OF $3.6 trillion if the loans are at 6%/36 years.
    Those poor smuckes worked their tails just so they could put their fellow workers in debt to the 1% to EARN 300% on what they produced.
    Please show me where I have gone wrong/

  • Greg

    “If we ever get to an infinitely increasing government debt country, we’ll end up having runaway cost push inflation–I can guarantee that”

    I think an infinitely increasing debt situation is about as likely as me teleporting to see Cullen in South Carolina next month.

    We are the largest importer around and we only pay in dollars. Those numbers are way more important than any currency speculator trying to play a hunch. No “run from the dollar” is likely in our lifetime. If it hasnt happened yet, when our national debt went up almost ten fold in the last 35 yrs and doubled in the last 10, why would it be a problem when it goes up another 3-4% in a couple years. Its an irrational fear. Vincent has a very in depth and detailed analysis but it happens to be wrong, in my view. Precision does not equal accuracy.

  • http://www.moneyinside.ca Art

    Cullen, this is exactly the reason why I created moneyinside.ca (Canadian Financial Online Forum). I am a financial planner and I am shocked from lack of any financial education and knowledge. Thanks for your great blog.

  • JK

    Johnny Ever,

    You said: “It is very important to make sure that printing or borrowing creates positive economic activity. I think in the past 10 to 20 years that isn’t happening as much.”

    What is “positive economic activity?” … all Demand stimulates economic activity for whatever is being Demanded.

    Why do you think that in the past 10 to 20 years new money hasn’t been creating postive economic activity. Hell, 20 years ago there was barely an internet. Think of the all the business generated since then via the internet. And if your complaint is not enough jobs being created… maybe there are plenty of jobs being created from our Demand, but a lot of them are being created overseas?

    Again, Demand stimulates economic activity for what’s being Demanded.