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How To Profit From The Impending Bursting Of The Education Bubble, pt 2 - "Knowledge How" & Diplomas As Fictitious Assets
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A Basic Illustration Of How The Blind Pursuit Of A Debt Funded Diploma Can Lead To Personal & Intellectual Insolvency
The same hypothetical leveraged positions expressed as a percentage gain or loss...
Despite extensive, self-defeating, harsh and punitive austerity measures that have combined with a lack of true economic stimulus, Greece has (to date) failed to achieve Primary Balance. For the non-economists in the audience, primary balance is the elimination of a primary deficit, yet the absence of a primary surplus, ex. the midpoint between deficit and surplus before taking into consideration interest payments.
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The primary balance looks at the structural issues a country may have. Government expenditures have outstripped revenues ever since 2007 and have gotten worse nearly every year since, despite 3 bailouts a restructuring, austerity and a default!
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Part 1 of this series illustrated exactly how those who pursue levered "know that" can and likely will fall into the exact same structural insolvency by having their fixed expenses born from the pursuit of the diploma on a leveraged basis outstrip their income. Reference this excerpt from How To Profit From The Impending Bursting Of The Education Bubble, pt 1:
...assume a $40k per year tuition for a 4 year business management degree, purchased with money borrowed at 6% (from our dear government guaranteed lenders (SLM, et. al.), deferred for and average of 2 years. An oversimplified straight calculation puts you roughly $178,000 in debt upon graduation for a piece of paper that would fetch you roughly $43,000 per year. Reference ehow.com:
In July 2009, people who hold a bachelor's of science (BS) in business management averaged $39,551 during their first year of employment
and $43,022 for the first one to four years. A professional with a BS in business management typically averaged $78,669 once they reached 20 years of employment.
Read more: Average Salaries for a Bachelor's Business Degree | eHow.com http://www.ehow.com/facts_5240719_average-salaries-bachelor_s-business-degree.html#ixzz2Gw6sriN5
Real wages have likely dropped since then, but even using the nominal assumptions above you would have been driven into the hole when factoring in real life expenses of:
- Taxes: Yes, you'd have to subtract local, state and federal taxes from said monies... At roughly 35% (bound to go up after we finish this cliff nonsense), we're now talking $27,964 average over four years. That puts you in the hole to the tune of roughly $12,035 per year you spent on that degree.
- Living expenses: Food, shelter (rent), clothing, transportation. In a NYC, even assuming the much less expensive outer boroughs,
Combined, we're talking roughly $3,000 per month or so, assuming you won't take in roommates. If you do, you can drop that figure to about $2,500 per month. Using the lower bound of this assumption, you are underwater (structural deficit) to the tune of about $2,000 per year. Please keep in mind that primary balance calculations and structural deficits don't take into consideration interest payments (for the sake of comparison). The underwater comment does not take into consideration the actual paying back of your loan yet, either.
So, on the fifth year following your freshman orientation, assuming you studied well, you would have laid out $176,000 facing annual debt service of about $12,000 or so - offset by a net income stream of roughly $28,000 to cover roughly $30,000 of living expenses. The negative $2,000 per year cash flow would result in a chart that is very, very similar to the Greek charts featured above.
So, why do these numbers look so bad? Well, the answer to that question lies in the value of the asset that knowledge seekers encumber themselves to acquire. The levered purchase of depreciating assets or assets with fictitiously high values is bound to lead to insolvency. Enter the....
Topic Of Knowledge
Knowledge that vs Knowledge How
- The collapse of Bear Stearns in January 2008 (2 months before Bear Stearns fell, while trading in the $100s and still had buy ratings and investment grade AA or better from the ratings agencies): Is this the Breaking of the Bear?
- The warning of Lehman Brothers before anyone had a clue!!! (February through May 2008): Is Lehman really a lemming in disguise? Thursday, February 21st, 2008 | Web chatter on Lehman Brothers Sunday, March 16th, 2008 (It would appear that Lehman’s hedges are paying off for them. The have the most CMBS and RMBS as a percent of tangible equity on the street following BSC.
- The fall of commercial real estate in general (September of 2007) and the collapse of General Growth Properties [nation's 2nd largest mall owner] in particular (November 2007): The Commercial Real Estate Crash Cometh, and I know who is leading the way!
What Is This Really About?
In the mean time and in between time, subscribers can glean my view of one of the big private post secondary educators who is having a problem with volatile earnings that are probably going to get worse.
Education Co. 1-3-2013
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It's not quite as bad as portrayed -
First - most people do not pay full freight; their costs are lower
Second - only part of the remaining total (after aid) is paid for with loans
However, anyone that fails to do a basic cost benefit analysis for a college education is a fool. Anyone that chooses a school and major without determining the employability of that choice comopared to others is a fool.
If you are genius level brilliant going to one of the best schools for a given subject and graduating at the top of your class you MAY be able to study anything, go for a graduate degree and end up employed - if only teaching that subject (though the market for professors in 18th century French Literature is a tad limited). However, if you have to incur ANY debt to do so, you should probably NOT be studying something that has limited employment prospects.
Certain degrees - engineering in particular - have good prospects and can be worth the cost of LIMITED debt to attain them. Other undergrad degrees are not particularly worth the cost if you need to take on ANY debt. Now there are always exceptions - a history degree from Princeton or Philosophy degree from Yale may work out fine for someone whose father has connections in investment banking. If you are part of the 'Capitalist Nomenklatura/Country Club' set, your employment prospects are fine, taken care of through family connections more than your college degree. But such cases are not the norm.
Many graduate degrees are NOT worth the cost. Law school is a a scam. Unless going to a top school and graduating at the top of your class, forget it. The big $$$ jobs go to a very few at the very top - the rest are left fighting for crumbs. You might do OK as a small firm lawyer but not if you've piled on debt to get there. Lots of luck finding any employment coming out of a second or third tier school. Even medical degrees are of questionable value dependent on the debt incurred to get them. Earnings are not what they used to be in this age of 'managed care'. You are pretty much guaranteed a job but few become wealthy practicing medicine today. Business school is a joke for most. An MBA is rarely worth the cost if you are footing the bill. Get a job and let your employer pay for an MBA if they really want you to have one. A ton of schools exist to fill this really unnecessary 'need'. Wharton or Harvard may look good but if you are saddled with a ton of debt to get those degrees the payback will be long.
Truth is that too many people are going to mediocre colleges, learning little while there and getting useless degrees. You should see some of the resumes and cover letters written by recent grads seeking employment.......hard to believe they got out of high school. The best students are learnign far more these days than they were 40 years ago but the majority are probably learning LESS in 12 years. FOr those in the bottom half, college is an iffy prospect at best. They will be going to mediocre colleges and likely gettign degrees which do little to increase their employability. Taking on debt for this group is suicidal.
An education for education's sake is a noble concept but you can obtain a very good education without ever going to college. At the same time, college is really a waste for many - a prolonged adolescence spent more on partying than learning. The very brightest benefit but for a large number college is a waste of time. And if you are going to a 'for profit' school.... unless getting a technical degree in a specific 'in-demand' field, don't waste your time. A 2 year 'business' degree is worthless.
Ultimately, the probnlem is that we no longer have the jobs we used to have. Manufactuing jobs have disappeared. Those blue collar jobs that remain are often far more demanding today. An auto mechanic probably takes more continuing ed classes to keep up than any other profession. Running a CNC machine on a factory floor requires a good math foundation. But the sad truth is that even a basic accounting degree - which in times past guaranteed you a job - is no guarantee today. Companies are off shoring basic accounting functions now.
If a good percentage of the jobs that remain are selling stuff made elsewhere, serving food or otherwise providing 'services'..... well... you really don't need a college degree for any of those. And as for the jobs that require basic brute labor.... too many people simply do not want to do that work - and plenty of cheap immigrant labor WILL at the wages provided (too often too low but that ia a differnet issue)
Freidman was right about a 'global economy' in that jobs go to the cheapest labor - with only a few exceptions. The 'anchored' jobs that can't move are few - plumbers, electricians, mechanics, - jobs that require a skill, are licensed in some way and need to be in a specific locale. But even those have limits. Being a plumber in a NYC suburb isn't bad but not so great in boom-gone-bust housing markets. The sad thing is that a lot of good tradesmen are lousy businessmen. Unfortunately many people end up in these trades not by conscious choice but by default. And some of those 'anchored' jobs - meatpacking for example - which can't be moved have seen their wages go DOWN because (often illegal) immigrant labor now competes with local labor. No longer because cheaper alternative is availabe. The same happened to construction before that market imploded.
If you're some kid getting out of HS in podunk Wyoming or North Dakota, you're better off working for a fracking company for now and pulling in the $$C while you can (though in that case the long term health effects should factor into your peraonal analysis). I know someone who worked as a welder on the Alaskan pipeline - msde enough to effectively 'retire' at 30....... there are always opportunities - for some. But you'd better be willing to work hard and be reliable - rare attributes today.
Sorry but Reggie has hardly said anything here, and, more importantly, things are far worse than anyone seems to realize in this thread. The reason why so many students keep borrowing, even when there are manifestly little or no job prospects, is that they need the money just to live. In a sense, the student loan bubble is a bubble in poverty, otherwise known as a depression. Think, folks, before it's too late.
Come off it, no one is forcing people to take huge loans to no effect, or to disastrous protracted effect. They love credit they just hate debt. There are many ways to live in a bad economy, for god's-sake, it's still in at least modest to stagnant growth. Wait until it does a Greece impression and things get actually tough. If they were serious about finding a way to live they would be doing that right now. Many probably figure they are, or at least its a convenient delusion. How many yound people, who have never really worked for a living yet, think their future will be worse than their past? None I know of, almost none expect things to get realy bad, and for most it still hasn't. What we do know is students are the ones traditionally most likely to rebel first, at the sight of egregious injustices and wrong doing. The money and access to it, helps keep the lid on that. moreso if they feel they can ditch the debt, eventually.
The reality is that the year of 2009 is graduating and now the shit will hit the fan for them ... but welcome to social security and foodstamps ... for 99 weeks ... and then it will really hit the fan.
Like it or not, whole communities are now dependent on student loan money for their subsistence and livelihood. Where would a town like San Diego be without student loans? Everyone from physicians to fro-yo peddlers is basing revenue on student spending.
But is that so different to being an addict to issuing municipal bonds, that soon enough no one will want?
I appreciate your work, Reggie, but a circular argument is not the same as infinite regress. A circular argument is something like, P(1) requires P(2), P(2) requires P(3), and P(3) requires P(1).
Cause like good sheeps, they're trained to do just that.
Profes-ster Tax, bitchez.
"There's a new sheriff in town, and his name is Reggie Middleton".
- - 48 Hours
A large contributer to the problem is the result of the crash in 2008. Companies and governments are not hiring. Those are the major employers in this country.
Another is that the normal career progression is stalled. Older workers reach retirement age and actually retire, opening their positions for those below them, and so on until entry level jobs are made available. Now that zero interest rates have killed the retirement accounts of those at retirement age, they have to keep working. So entry level jobs are not made available.
Combine that with the high cost of education (caused by government subsidies) and you get a perfect storm.
Strange, even by Reggie standards.
So far so good. Student loans suck. No question about it. I fail to see how we can benefit from the bubble implosion though. How is there any benefit if Uncle Sugar is going to bailout the entire ponzi again? See the details surrounding the student loan bailout program "Pay as you Earn".
The answer is what Reggie States,"4 year degree at 6% interest." 6% interest that is "recourse debt."
so unlike homes, you can try and walk away but essentially you owe Uncle Sam the money when you show up for employment anywhere. They will garnish wages etc.
And if you are one of the lucky who land a job after school, with Reggie's stated average of 48k a year, the payback of the loan also decreases your take home salary.
Part of being in a bubble is knowing that it can run on longer than you think, so I expect State tuition to go to the moon. Then the migration to City Colleges etc will begin.
Some of the best business people in the world come from non-Ivy, smaller schools. An IVY degree is a rolodex-or a secret club. Not a rational investment.
College Education is impoverishing the middleclass and it's student-indentured servancy. Its a SCAM. Honestly, I learned more from Googling things than I did at College. And another sad component is that everyone expects their kids "have to" go to college. You are a shitty parent if you don't go into massive debt to send a kid to school.
^--Shitty Parent. Made the smart one go to junior college to figure out what he was interested in. The dumb one went to Afghanistan as a DOD civilian contractor.
The smart one wasted his time on music, theater, etc... The dumb one just got his own, personal, billion dollar contract.
Comment of the week! +1
I have to disagree. My BS in Applied Math from UCLA allows me to google at a higher level than the rest of you.
I dropped out after 8th grade, but since I'm 125 YO, it makes your degree look like a headstart education.
Kiss my grits, sonny.
Excellent work Reggie. Thank you.
Reggie,
While this is all a bad investment for the economy, and will end eventually, it's not necessarily a bad investment for the individual. Look up the income contingent repayment plan. This is not the ever more lax one they're proposing, and is open to all.
Basically, under it you can take out hundreds of thousands in loans, get a burger flipping job, pay a few hundred a year, and then get the balance forgiven after 25 years.
Combine that with the 3 years one can defer loans after graduation and I honestly have no Fing idea how anyone defaults on these things. Because insolvency is NOT a barrier to closing your student loan account in good condition. Guess they just don't give a shit.
It's all a joke at this point. Politicians just keeping it going so they don't have to admit they've failed the youth and the middle class.
I have been (trying) to read about the modification in the student loans. (I say trying because it makes me want to waff - having never taken out student debt.) It seems that the more you make, the higher the repayment rate is. And if you work for the government, the sooner your "extinguishment" date comes around. Fundamentally, it seems like a way for the government to further purchse the votes of the dim witted (via the early loan discharge for the government job watching porn all day). If you are successful, then you get hosed.
I could only look at it for two minutes before I retched.
Having gotten the essence, I had to wonder if there was a "zero bound" issue. You know - the more you make, the more you pay......so if you actually pay somebody for the privelege of working for them (think apprenticeships circa 1750) would the government then supply you with your loan payment - or otherwise write your loan down?
Some other astute individual observed that the forgiveness policy will greatly increase the number of no/low paid internships. This will therefore put a drag on pay levels for normal wage jobs. That will help the housing market for the entry level folks - now aged 50. Brilliant. It will also help with the federal deficit.
I hear that mortgage loan modifications is in the works. That might be true since we just got done forgiving the banksters from criminal penatlies for ForeclosureGate. If they put off the gun ban nonsense until after the debt ceiling negotiation, then we might find out what will go down with principle reduction in the very near future. I am sure that I will get sick.
Can any of these stupid f*&ks figure that if the government writes down the principle on its mortgage collateral, then the US credit rating will fall to AA faster than it would otherwise when the can gets kicked past the debt ceiling debacle in March?
How does one get a student loan without going to school? I would use the funds to invest in the markets.
Reggie:
1) I have to agree that most of the world doesn't look at college education as an investment the way you have - and frankly everybody should. I went to engineering school at the University of Pennsylvania in the late '70s. We looked at education as an investment back then. We did OK. Those who flunked out of engineering went to Wharton undergard. I don't know how they did.
2) People keep talking about the "education bubble." I raised the question on your last post (after most posters had left) as to how it could be possible to have a bubble in something that is not traded. There is no market for a college degree. There is no market for college debt, since it is almost all held by the government. The collateral behind such debt is more shaky than what was offered for housing ATM loans five years ago. The damage done to the economy by printing money to fund tuition was done immediately. We got tuition inflation and misallocated resources. The fact that students will now renege on their debts is immaterial. It is simply another tax not collected resulting in more money printing.
Could there be a market in student debt? Sure. China could buy it all - and I suppose in return extradite (what else would you call it) the indebted students to China to work in the Apple computer factories while the former workers bathed in the sun. Maybe the debt could be sold at open market prices to the TBTF banks, who could then put it back to the governmet as having been fraudulently misrepresented as having real collateral. That way the banks could buy it from the government for $0.10 and then sell it back at $1.00. Is this how you propose to cash in on the debt "bubble?"
I read that under very recent law, the debt could be forgiven if the student works for a "government" service company at close to no wages. Should I set up a lawn company as a government service and hire debt slaves for $0.10/hour while charging $50/hour to clients for their time? The students would be happy because they could get $150K in debt discharged after 10 years cutting grass, and I would have colleted the rent. Is that where you are going? Maybe I should buy stock in companies doing that on a mass scale. That would be Citi, JP Morgue, etc.
I think that you and Doug Casey are of similar minds on this. Casey is almost embarrassed that he spent four years getting his Georgetown University degree. (When pressed, he grudgingly (embaraasingly?) admits that Bill Clinton was in his class.) He says that whenever he interviews a new MBA for his investment company, he firsts asks how the candidate justified spending two years and $100K to learn business theory.
I haven't thought of separating the debt of education from the actual number of people in school. We might have two things going on here.
1) The debt for education.
2) The number of students attending college and if that institution has debt.
The bubble can be seen with the number of students attending college, and not focusing on how it's financed. More people are attending college than ever before and those students may not be a good fit for college. With so many students, college campuses are building more and more stuff. How is this "stuff" financed? If students can't afford to go to the school, will the loans the colleges themselves have get paid down?
It seem like there are multiple loans going on here, by the students and by the actual facility.
Add to that the number who are just in school to get their SS benefits, and we're paying twice.
I think that we all agree that there is a bubble in the perceived value of a degree, and that the price paid for degrees is bubblicious in the extreme.
There also seems to be a bubble in the number of students, although I think that that is dropping off.
Do universities have debts upon which they will default? That is a great question. If I were to choose a school, I would want to go where there was demonstrated intelligence on the part of the management/faculty by the lack of debt at the institution. But these days where it is widly known that all debt will be forgiven, intelligence might be better reflected in extreme leverage. Just another form of debt having obscurred true prices.
I firmly believe that instead of forgiving student debt, the federal government should go "claw back" from the universities, the tuition payments made by the students witht he federal loans. Defective product or something like that. Think of the tobacco industry. Maybe we should have banners on the side of university dorms: "Warning. Getting a college degree can be hazardous to your (financial) health."
I actually shouldn't have made the statement about schools taking on debt because I can't seem to find much information about it. If it is though, it would be nice to know how much they take on.
for profit schools are ponzi schemes, i work for one. I'm almost a government employee, once the funding is gone so is the school. But then again, what isn't these days? Maybe thats what the pyramid on money stands for........
From your other writings, I know you know this - but the problem is that our K-12 schools are, by and large, shit. Focusing your attention on the ROI of certain colleges is like looking at the pipes at the very end of the pipeline to see which puts out marginally better output. If you want to create change, start at the beginning of the pipeline, primary and secondary education, which most businesspeople treat as a black box. (Think about workforce grants from DOL, for example, which usually refuse to fund anything unless it starts at the postsecondary level.)
Your earlier articles, where you talked about teaching entrepreneurship and the like, are correct, but there's no way that government schools can do that. It falls to the business community, usually focused through coalitions (chambers, WDBs, etc.) who have the opportunity to take a far more activist and productive role in making that happen.
>>>Your earlier articles, where you talked about teaching entrepreneurship and the like, are correct, but there's no way that government schools can do that.<<<
One of my sons is CLEPping college credtis, taking free on-line university courses (to first figure out what he might be interested in doing) and importing middling priced French champaign by the case and selling it at 100% - 200% mark-up to stupid frat boyz at the local flagship state university (and he delivers.)
He imports the kind with " stately" looking labels.
I asked him if they were really that stupid. His answer was, "Yes. Most of them are business majors."
That government school is doing an excellent job of teaching entrepenuership.
I was a business major in college, and believe me when I tell you I was taught very little of practical value. Basics of accounting and finance was helpful, but the rest - HR, marketing, management - was all BS theory.
"I know you know this - but the problem is that our K-16+ schools are, by and large, shit..."
Fixed this for you.
The time for reform is over. If finance is fulled by hookers and blow then higher ed is fueled by blow and peer reviewed journals....
Lets break this bullshit system apart before it kills us all.
I agree with your thinking, but most legitimate non-ivy league schools aren't running 40K per year. A decent public university is running about $8-9K per semester for tuition and room and board (in-state tuition about $4500 per semester, room and board about $4000) whether you get an engineering degree, a business degress or a bachelors in Mongolian Womens Sexual Studies.
Where my bachelors degree cost my folks about $25K in the early 80's, I expect to pay about $65-70K for my daughter's.
The calculations of ROI are important regardless of the variance in the cost of the education
Actually the variance of cost of education IS the reason why these types of calculations are important.
Cant wait to see the results Reggie! I love you and want to have ur baby ( if I were a lady)
Given the wholesale destruction of the global economy, I can't imagine this analysis can amount to much, other than to provide a statistical sampling of where the connected kids go to school. After all, like Reggie states, a degree isn't as valuable as it once was, but rather, has been seriously diluted due to oversupply.
I like Max Keiser.
Theres a fine line between interesting and refreshing analysis and linking unconnected thoughts to make stuff look like tin foil hat stuff of nightmares. Reggie I like what you say but you're trying to be too complex to articulate it. Getting bogged down in other intellectual point scoring. Focus on the key points in your argument only, I.e. education isnt worth it on a cost benefit analysis. Real money is made by those who can manage resources and predict market and psychosocial movements. Build your trade thesis on what you think is a probable chance of occurring. Leave the student of knowledge how to the whats to the whys in an appendix. Much respect, yf.
P.s. samsung is a phd. Hoover. They have thousands of technical specialists, and also bought access to a shit tonne of sony patents.
Keizer is a tool and reads Zerohedge. I once brought up his name in a zh blog response and Keiser used the article on his show the next day.
Keiser if you are reading this please give us some solutions to the mess we are in and stop the Socratic posturing (everything is fucked etc.)
Well, I like Tom Woods.
Until Keiser treats him in an adult-like manner (instead of his childish ad hominem attacks), IMO, he's nothing but a tool-bag for the elite, as they are the only people who benefit from his smears.
For all I know, his "buy silver, bust JPM" grandstand is merely false opposition in a controlled fashion, generated to fill the void where otherwise coherent opposition would emerge.
I'd like to believe his words, but they're currently too incoherent. So that leaves me to wonder just why he tries to act like an anti-Kramer, all while behaving exactly like him?
Keiser did the same thing to Gary North. North destroyed Keiser because Keiser jumped on the Ellen Brown bandwagon. Brown wants to end the FED, and have CONgress print the money via the treasury instead.
Keiser got his ass handed to him, so he started calling names. I've avoided Keiser ever since.
Reggie, nice to know there is someone else out there with a working brain.
You see the "grand" design of the rockafuckers and other elites. Actually George Carlin coined it , the best.
After Reggie explains something, it seems so obvious. Brilliant. Thanks for the post Reggie.
Well done Reggie, probably the best post I've read from you.