Now that it is clear that privatization of Social Security really means the imposition of a new (even the first ever) forced savings program, we are starting to see some speculation about what it would mean for equity and bond markets. BusinessPundit points to an article in CFO that explains how forced savings leads to forced investment which leads to distorted price signals:
- ‘Private’ Savings Accounts would “send a huge amount of money Wall Street’s way... “
- “hundreds of billions of PSA dollars would flow into stocks and bonds, possibly during a short period”
- “The government would have to issue between $900 billion and $2 trillion worth of Treasury bonds to raise enough money to fund the transition”
- “Corporations would respond to the signal of cheaper debt by increasing supply”
- “The prices of both government and corporate bonds would likely drop under supply-and-demand pressures...companies would be forced to offer a higher yield to compensate.”
- “the increase in demand for shares — about 4 percent in terms of total market capitalization — would cause prices to rise.... As a result, the inflated price would boost a stock’s price-to-earnings ratio, forcing new investors to pay more for the same corporate earning power.”
