A Dysfunctional System That Bankrupts A Generation

Wolf Richter's picture

By Wolf Richter   www.testosteronepit.com

Tuition has done it again: up by 8.3% for universities and by 8.7% for community colleges, according to the College Board. Here in California, tuition increases are outright ridiculous. Much of it will be paid for with student loans (though grants, scholarships, other aid, and tax credits will cover some of it). Student loan debt will exceed $1 trillion by the end of the year—a stunning amount. But unlike other debt, it cannot be discharged in a bankruptcy.

The skyrocketing costs of higher education add to the strains already weighing down the middle class whose median household income has fallen 9.8% between December 2007 and June 2011 (Sentier Research) and whose real wages have declined 1.8% over last year (BLS) and around 9% since their peak in 1999.

We all support education; we want the next generation to be productive. So now, under increased pressure to "do something," the Obama administration has come up with a Band-Aid, which includes income-based payment limits and ultimate debt forgiveness in certain cases—an accelerated implementation of program improvements that would have taken effect in 2014. Looking forward, it is likely that more taxpayer funded relief is on the way.

But the system itself is dysfunctional. The cause: a misalignment of interests within the complex relationships between students, universities, the student-loan industry, and the federal government.

Universities are businesses, and businesses have the natural purpose to charge the maximum price the market will bear. But unlike Walmart or the shop down the street, universities operate in a system that has become devoid of market forces, and when they demand higher tuition, the whole system falls in line to support those increases:

- Students want an education, and they have to get it within the higher education system. When costs go up, they can't massively drop out; doing so would endanger their future. They can choose cheaper universities and community colleges, but they're all within the same system, and they're all doing the same thing: jacking up tuition and fees. And the very logical mechanism of "out-of-state tuition" ends up being a highly anti-competitive measure. So students fight tuition increases the only way they can: obtain more funding.

- The student loan industry profits from processing student loans and related government subsidies. Naturally, they encourage students to take on more debt. Risk would function as a natural brake for making loans. But in the student loan industry, there is little or no risk as the government guarantees the loans, and loans cannot be discharged in bankruptcy. Further, the amount of a student loan is a function of the cost of a particular school—which further reduces price competition between schools.

- The government, in constant need of voter support, will fund or guarantee whatever it takes to allow students to get their education. Any cutback would be perceived as a way to strangle the education of the next generation. The only option the government would have is limit what universities can charge, similar to the limits that the government imposes on Medicare providers, but that option is a non-starter.

As a consequence, university budgets have become huge. Administrator salaries, bonuses, benefits, golden parachutes, and pensions have shocked the public when they're exposed in the media. Programs that have little or nothing to do with education swallow up more and more money. And sure, everybody loves to have well-equipped labs. The beneficial forces of market discipline have been wrung out of the system. Instead, it has become a mechanism for automatic and unstoppable tuition increases, made worse by cutbacks in state funding. The ultimate but innocent and well-meaning enabler: the setup of government guaranteed student loans.

At fault is the system itself. Like our healthcare system, it needs to be restructured and opened up to competition or to effective checks and balances when competition isn't possible. Solutions won't be easy, but with $1 trillion in student loans outstanding, there isn't much room left before it will bankrupt an entire generation (while the healthcare system is on the way to bankrupting the nation).

And there are more government Band-Aids on the way: Obama's Refi, A Special Tax For People Who Can't Do Math

Wolf Richter  www.testosteronepit.com

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Willzyx's picture

scholarships and grants = socialism

combatsnoopy's picture

Dude, you need at least a 3.8 GPA to qualify for an Asian minority scholarship.  The Affirmative Action clause discriminates against non-hispanics and non-blacks.  Yet whites, Italians, other children of European immigrants, Jews and Asians are still dominating campuses across the country.  Look at CIT, they got some funding and outperformed Ivy Leagues that were known to discriminate.  
Talent and hard work = WIN.   

Henry Chinaski's picture

The federal government recently became the sole source of student loan funding.  This latest plan consolidates payments into a single income-based payment, presumably through a payroll deduction.  This is simply a move toward a higher education entitlement that eventually ends up as a line item deduction on the pay stub of every worker.

Willzyx's picture

The federal government became the sole source of student loan funding quite a while ago.  Back during the 2008-2009 crisis, the US Department of Education bought nearly all federally guaranteed student loans off the banks' books.  Subsequently, all new loans originated from the Dept of Education.

Bailout the banks, but still make the kids pay their fair share.

airedalesrule's picture

Who controls accredition and how is that process governed?

Restcase's picture

You get price discipline in the market by eliminating or severely curtailing government backed student loans. If Aston Martin, Bentley, Roll Royce, Bugatti, etc. had auto loan programs structured like US student loans, they would be as rich and successful as universities. For a while.

Continental European system: taxpayer picks up the cost but admission is highly restrictive.

Canadian system: loans generally available, limited in scope (amount, time) ..."Canada Student Loans of up to $210 per week of full-time study or 60% of the student's assessed need (the lesser of these) can be issued per loan year (August 1–July 31). "

$210 a week, baby! And the number of Canadian grads is much higher proportionally than here.

The voters are trampling each other to get degrees they don't need and Uncle Sugar is there to make sure the voters get what they want while the education establishment gets everything it wants.

combatsnoopy's picture

The Universities lost a lot of funds to... um, WALL STREET?  They bought interest rate swaps and can't afford to cancel them either.

 

Again, feeble attempt at a pretend right vs left issue that's only hiding more corruption.  

csmith's picture

- The government, in constant need of voter support, will fund or guarantee whatever it takes to allow students to get their education. Any cutback would be perceived as a way to strangle the education of the next generation. The only option the government would have is limit what universities can charge, similar to the limits that the government imposes on Medicare providers, but that option is a non-starter.

 

- The government, in constant need of voter support, will fund or guarantee whatever it takes to allow buyers to acquire a home. Any cutback would be perceived as a way to strangle the dreams and aspirations of the next generation. The only option the government would have is limit what homebuilders and sellers can charge, similar to the limits that the government imposes on Medicare providers, but that option is a non-starter.

Sound familiar?

combatsnoopy's picture

Funny that you said that.  A pod of realtors can take out a free loan backed by nothing to speculate in $700,000 real estate they can't afford to artificially push up demand and then price.  As in a ponzi scheme.  

Student loans are often only $20-30,000 in comparison.  $40,000-50,000 is actually high for the group.

So basically, we're bailing out realtors who took out risky loans (subprimes were SUPPOSED to be backed by government bonds btw) on speculative, secondary properties they didn't need or couldn't afford.  But we're telling young adults that we have to subsidize their speculation habits and give up our upward mobility on their behalf.  Just so they can price properties way above the price equilibrium, to make real estate completely unaffordable. 

Funny, the cost of rent goes up with the cost of real estate and the excessive cost of shelter plus lowering wages makes student loans close to impossible to pay off in the first place. 

But young adults are expected to subsidize the speculation habits of realtors who are intentionally pricing real estate way out of affordable range for them?  

I'm relieved to see the generation isn't entirely stupid enough to condone that.  

The trouble with the Universities is that they are NOT expanding or creating more supply for the increasing demand to maximize profits.   We've got loads of Asians in developing countries who would spend their bottom dollar-not on Coca-colas but on a college education in the Western Hempisphere.  Esp. for culture and professional training.  

What the schools COULD do is sell their own bonds IN THE PRIVATE MARKET to finance their expansion, after they get rid of those knarly interest rate swaps with Wall Street.  Let the investors hold some serious proxies to influence their production, then increase the admissions drastically.  

We're competing in a global market and the US is lagging way far far behind in higher education.   

Racer's picture

yeah... you get a loan so you can get a job to pay for the loan that you got to get a job

Hmmmmm.......

 

steve from virginia's picture

Missing the point: the art of the scam has evolved from the ordinary Ponzi scheme to the 'new, improved' Conduit scheme:

http://www.economic-undertow.com/2011/10/18/enter-mr-conduit/

PS: the EU is also a conduit scheme.

Shizzmoney's picture

The only option the government would have is limit what universities can charge

I got a good laugh out of this; when watching the PBS "Frontline" on "For-Profit" colleges (like University of Phoenix), I laughed my ass off when the show both interviewed lobbyists for the "For-Profits" AND the "Non-Profits".  Yes, that is right - supposed "non-profit" (insert LOL here) colleges had lobbyists in Congress disspelling the "dilemma" of "For-profit" schools pushing their students to get government loans.

Considering the "Non-Profits" push students toward Private Debt, talk about the pot calling the kettle black!

I'll always remember after my first year at Northeastern University, they slashed my grants and scholarship, despite a 3.5 GPA, in half (I should of known; I was warned of this by a senior who told me NU often gave incoming freshmen 70-80% grants in the first year to make their to keep their freshmen enrollment ratio up, only to cut and slash in the following years).  

Now, if they were to put that money towards new labs/classrooms, I'd be more sympathetic.  But after I had to dropout due to me not being able to afford it, the school put up a new Waterfall outside West Campus, and the President got a raise in both pension and pay. 

"Non-profit" my ass.  They are ALL big businesses, and the over-financialization of higher education is why we are in the problem we are today. 

Barry Freed's picture

Let's not forget about the multi-trillion dollars SLAB (Student Loan Asset Backed) derivatives that have been traded just as recklessly and as widely as MBS were.  Banks simply cannot allow any write downs because their leverage on these SLABs even a tiny write down will mean insolvency.

blindman's picture

http://home.earthlink.net/~cadman777/treadmill-Jenkins.htm
TREADMILL
TO
OBLIVION
(BUY NOW -- PAY NEVER )
By
Merrill M. E. Jenkins Sr., M.R.
....
"The longer it remains undetected the more difficult it is to expose a false premise. Resistance to change builds with time due to familiarity and association causing less individual thought and effort required to perform a function. Changes always cause increases in the amount of human effort required to perform any given function and mankind has always sought to satisfy its desires with the least amount of effort. Thinking is a very special ability, that in fact raises mankind above the level of animal, but it appears to require a greater amount of effort than physical labor.

"There is no amount of physical labor man will not resort to, to avoid the effort of thinking."

Thomas Alva Edison

If the Public was to give some thought, they could not accept such concepts as 'Monetized Debt' which is based upon the basic premise that the more you borrow the richer you become.

Thinking about the existing conditions today: the government insists that the G.N.P. "backs" the "currency" in "circulation." It APPEARS true because an individual has to work to get "currency" therefore it is expected that others will give up their production or possessions to get it, (logical and rational superstructure). The Monetary Authorities (the commercial banks) that issue the "currency" say that the "currency" represents the monetization of debt and that in fact, nothing backs the "currency." "Currency" is accepted by individuals, for their goods and services because they believe that some one else will take it from them later in exchange for other goods and/or services. No one looks beyond the fact that the "currency" is still being accepted in exchange. Three quarters of all the "money" created is created by private institutions which through its purchasing power, exact three times greater influence upon government than the Public, and actually hold the non­bank public as their slaves. (Ref. Chapter LXXI "Money" the greatest HOAX on Earth."

". . .Private institutions issue the largest part of the money stock . . . ."

Page 16 Federal Reserve Bank of St. Louis Review February 1975

On page 22:

"The decrease in purchasing power incurred by holders of money due to Inflation imparts gains to the issuers of money . . . ."

On page 23:

"Monetary expansion and inflation come about primarily as the result of actions of the monetary authorities."

On page 4:

"When the Federal Government in June 1969 stopped trying to do anything about inflation it turned its activities toward developing scapegoats in order to get Americans to blame their neighbor for their problems. Had the scapegoat strategy not been so effective, it would be humorous."" ....

myne's picture

Obama's system sounds a lot like a subsection of the Australian HELP scheme.

It addresses the repayment side, without offering a price advantage to citizens, or regulating the industry.

Our industry is regulated by competition with government owned universities. They set their costs, and the comepetition have little choice but to follow.

The price for citizens is 50% of the full fee.

The loans are direct from our  central bank and administered jointly by the tax office. The interest rate matches the CPI every year so the real repayment does not change.

Repayments are made at marginal income levels. If you never earn enough, you never pay. Defaults are baked in, but it's deflationary, which should at least partially offset inflation - saving our reserve bank some trouble.

THAT's how you run a fair system.

ElvisDog's picture

Exactly, like the so-called Healthcare Reform Act, Obama's education plan has nothing in it to reduce costs. If anything, it will encourage universities to raise tuition even more because under the plan repayment schedules for student loans are extended. Classic Obama - tell everyone how he is helping them while in reality screwing them more.

UP4Liberty's picture

To Any A**hole Who Did Not Pay Your Student Loans Back - F**k You!  I slaved away for years after college to pay my student loans back.

TDoS's picture

I'm always tickled by people who support the parasitic, slave making ponzi, instead of supporting the people the ponzi is attempting to grift.  Defending the abuser, not the victim.

Sorry man, just because you were willing to trade real labor for the fake money they "lent" to you, doesn't mean I am.  Of course, they don't teach about the ponzi in school, and it wasn't until after graduation that I learned how money works.  But once I had that understanding -- once I learned that I was a "mark" in a massive con game -- I immediately withdrew my participation.

No one is obligated to continuing participating in a scam, once they realize that a scam is what they are participating in.

 

Barry Freed's picture

Who's the A-hole, an 18 year old kid with no assets or credit who borrows $150,000, the bank that loans it to him with no risk, or the guy who pays taxes to ensure the bank won't take a loss when the kid doesn't pay?

Henry Chinaski's picture

Hint:  Easy money loans inflate the cost of college generating greater demand for easy money loans.

mjk0259's picture

I paid for college working at minimum wage jobs without student loans. But that was a long time ago - not possible in most cases now. College costs up about 700%. Real income minimum wage declined. Plus when I graduated, I got a half dozen job offers all with full medical, etc and paying annually 5 times what a year of college was costing me. If someone graduates today with $50,000 in student loans and can't find any job or only a part time minimum wage job, I don't see how they are ever going to pay it back except after massive inflation. Barring some kind of massive economic recovery/huge technology improvements like cheap energy, matter transporters, etc. That doesn't look to be on the horizon right now.

ElvisDog's picture

When I went to college in the 80's, I got one $1500 per year scholarship, and that paid for tuition and books at U.C. Berkely (I bought used books). Essentially, that was a full-ride scholarship. Nowadays, $1500 wouldn't even pay for books for one year, and I'm guessing the quality of education is pretty much the same.

kumquatsunite's picture

There are two problems with contemporary universities:

1. We once thought that university professors would teach until their doddering years. Now we have university professors who "retire" at 20 years, add in the sabbatical they take at least twice during those twenty years (once every 7 years) and the huge amounts of free time with summers and all the vacations, and they actually teach about 14 years. Because of the "retirement" at 20 years, our students now pay for 2 professors where we once paid for one. Never Ever has this country allowed anyone to "retire" before 40 years of work

2. The university system has become a communist graft system, self-awarding benefits unheard of in past decades. Perhaps, at one time, there was a discounted rate for the professor's children and the administrative personel's children, now they are All given a complete free ride. This costs the university huge amounts of money that students must pay for. But the worst of the lot is the benefits of the university administration staff; most often university presidents are being given half-million dollar yearly contracts accompanied by "delayed' payments, free housing, all their medical, club dues, free cars, and travel paid for for themselves and their wives (wives weren't hired, right?). This equals to one million dollars a year for most university presidents. Also, in the hiring process, the universities play round robin whereby they Only choose from other universities, creating an ever increasing pay acceleration by insisting on choosing from the small pool who are shuffled about from university to university. This, then, demands "benefits" that in previous days would have been considered a disgrace for those serving our young, and who-purportedly-cared about their educations. University presidents once stayed to retirement, a commitment of life.

Ultimately, unless the administrative personnel and the professors are returned to the pre-false boom standards, our children will pay and pay and pay.

boiltherich's picture

I am ready to die for freedom. Ah, we all die someday, let me rephrase that, I am ready to go to class war as a citizen and kill enemies of the state for equality. Anyone else interested in forming a citizens militia?

unnamed enemy's picture

hmm . . .being killed by the feds waco style or being trown in jail sounds tempting.

but i would rather be a slave, alive and out of jail.

don't underestimate the people you are dealing with.

 

boiltherich's picture

Oh yeah, and the big story on the evening news tonight about the student loans was in the shadow of another bit aabout income. Low income Americans have seen an 18% rise in income since 1979. Middle class income earners have seen a rise in their take home of 40%. The wealthy then and now have had an increase of 276%.

Class war? Today motherfuckers, today. Any new constitution will have a minimum wage and a maximum wage, don't like it move away, the end! ASSHOLES.

jonan's picture

careful, that sword you are swinging around has two edges and both are just as sharp...

GeezerGeek's picture

I assume that the increases mentioned were inflation-adjusted, although it says nothing about people migrating from one income class to another. Since people today, including low income workers, have many neat gadgets that were unavailable in 1979, I also assume that they are enjoying a higher standard of living. Wanting to be 276% better instead of only 18% is therefore nothing more than greed and envy. I'm certain that will not be a popular statement, but how many in any income class enjoyed an iPhone, cable or satellite TV, flatscreen TVs, personal computers, broadband internet, etc. Technology has made the life of just about everyone much better in absolute terms. Why worry about what 'the rich' make? 

That said, one big thing that has not gotten better is the size of government. We, the people of this nation, are far less free today and the government's plans to spy on us  everywhere is indicative. We don't need a new constitution calling for minimum and maximum wages, we need absolute adherence to the existing one. What boiltherich suggests is the sort of thing was tried in the old Soviet Union, RIP, and its eastern European slave states. Look at the economic differences between West Germany and East Germany circa 1988. Besides, the pigs in charge (reference Animal Farm) will always figure out how to be more equal, and better rewarded, that the rest of the animals. I'd go so far as to say that a significant portion of the increase in inequality is due to big government getting bigger and rewarding its cronies via the public treasury.

It is natural that the liberals/progressives/collectivists in government would promulgate a scheme like student loans. It is a way of ensuring that the libersl/progressive/collectivist education industry continues to prosper and brainwash its students. Anyone care to bet that if academia were seriously conservative instead of seriously leftist that the collectivists in Congress and the White House would continue to support student loans? I doubt they would. I suggest that we let the free market infiltrate education at all levels.

catch edge ghost's picture

With one of the three end-runs around congress that occured this week, the executive branch expanded the preemptive student loan bubble bail out program.

As I understand it, a maximum of 10% of the borrower's income will have to be paid annualy to service the debt, that's down from 15%. The maximum life of the loan to the borrower will be shortened from 25 years to 20 years. I'll expect the terms to keep falling as time goes by, shifting progressively more of the burden to taxpayers.

The start date has been moved up from 2014 to 2012.

merchantratereview's picture

Work is a scam. By now we could all be living lives of automated leisure. But the 1% would not "get off" on that/

GoldBricker's picture

Yes, hooray for you!

Most of us could indeed live in leisure, though perhaps not with a McMansion, a garage full of SUVs, etc., but quite well by world standards.

This was set out in the 70s in 2 books by one Gunther Stent: "The Coming of the Golden Age", and "Paradoxes of Progress".

Instead, we destroy wealth (war, expanding govt employment, farcical education, negative-return alternate energy programs, you name it) so that ordinary folks don't become too uppity. (You can't have class struggle if there's no struggle.)

Here in Europe we almost ran out of poor people, but then had the bright idea of importing them from the Third World; now all has returned to historical norms.

Barry Freed's picture

So long as they continued to work and breed, their other activities were without importance. Left to themselves, like cattle turned loose upon the plains of Argentina, they had reverted to a style of life that appeared to be natural to them, a sort of ancestral pattern. They were born, they grew up in the gutters, they went to work at twelve, they passed through a brief blossoming-period of beauty and sexual desire, they married at twenty, they were middle-aged at thirty, they died, for the most part, at sixty. Heavy physical work, the care of home and children, petty quarrels with neighbours, films, football, beer, and above all, gambling, filled up the horizon of their minds. To keep them in control was not difficult.

ElvisDog's picture

You need to cite your source or people will think you wrote that piece. It is from "1984", correct?

Barry Freed's picture

So long as they continued to work and breed, their other activities were without importance. Left to themselves, like cattle turned loose upon the plains of Argentina, they had reverted to a style of life that appeared to be natural to them, a sort of ancestral pattern. They were born, they grew up in the gutters, they went to work at twelve, they passed through a brief blossoming-period of beauty and sexual desire, they married at twenty, they were middle-aged at thirty, they died, for the most part, at sixty. Heavy physical work, the care of home and children, petty quarrels with neighbours, films, football, beer, and above all, gambling, filled up the horizon of their minds. To keep them in control was not difficult.

sellstop's picture

Tuition is high in part because people are lazy. Instead of going to a junior college, working while they do it, then move up to a better paying job and then continuing their education as they can pay for it, they go for the fulltime 4-10 yrs of college to get a big degree while they party. Then when they get out of college they expect to be made CEO of some company. 'Cause they don't like real work.

in other words it is the same old credit-based society and the inflation that goes with it. Don't blame anyone but the participants.
gh

mjk0259's picture

Lot of brainwashing by the education establishment as well. People who never had real jobs lead kids to believe they should follow their dreams and it will all work out somehow. When it doesn't, they tell them to continue in grad school. I did what you suggest a long time ago. Except for the community college part, it's a lot harder to do now especially the jobs part.

GoldBricker's picture

When I was growing up in the 60s, my parents firmly believed in a college education and owning a house. The problem is that when everyone has these things, they're less valuable on a relative basis.

Now the house is a highly-mortgaged particle-board shell, the degree is a non-productive farce which, at best, substitutes for an inadequate high-school education.

Try looking at a real artifact from the past. You can get a McGuffey's Reader on the web for a few dollars. Read a few essays and reflect that these were aimed at high school students of a century ago, few of whom would ever go to college. Then ask yourself how many recent college grads you know who could even read one of those essays out loud, much less understand it.

It was a different country then.

GeezerGeek's picture

I'm pretty sure that Obama could read it if it were on a teleprompter. His cadence would still be off, but he must have learned all those words while at Harvard, right?

I grew up as a leading-edge baby boomer, along with Slick Willie. I and my friends used to wander around the neighborhood with one or two Colt .45 revolvers strapped to our hips. Replicas, of course. No one blinked an eye. Try that now and some wuss neighbor will call the cops, who will shoot first and ask questions later (not that I blame them for that attitude). Times have changed. Some things have gotten better - technology, racial integration. Some have gotten worse. Such is life under the sun.

blindman's picture

http://www.youtube.com/watch?v=pLwh9eMvcuc
MONEY: Before Ron Paul, was Merrill M.E. Jenkins Sr. (M.R.)
.
http://www.youtube.com/watch?v=ff0dcR1_ZeE&feature=related
MONEY: Before Ron Paul, was Merrill Jenkins (M.R.) 2
.
http://www.youtube.com/watch?NR=1&v=3Ha8HKSUxgk
MONEY: Before Ron Paul, was Merrill Jenkins (M.R.) 3
.
http://www.youtube.com/watch?v=0yrSHMn_CZo&feature=related
MONEY: Before Ron Paul, was Merrill Jenkins (M.R.) 4
.
...etc.

UP4Liberty's picture

Thank you for posting these links.  Quite educational and alarming all at the same time!  Merril Jenkins is a modern day HERO!

Freddie's picture

"As a consequence, university budgets have become huge. Administrator salaries, bonuses, benefits, golden parachutes, and pensions have shocked the public when they're exposed in the media."

Yeah it is called liberalism and teachers unions. Pushing worthless degrees on these clueless kids with clueless left of center helicopter parents.

mjk0259's picture

Same thing with medical...But banks are still the uber-leeches.

Henry Chinaski's picture

Banks and academia profit while naive young people are driven into debt servitude.  Why expand this program?  Look at the top contributors to President Obama's 2008 campaign: University of California, $1,648,685; Goldman Sachs, $1,013,091; Harvard University,$878,164; Microsoft Corp, $852,167; Google Inc,  $814,540; JPMorgan Chase & Co, $808,799; Citigroup Inc, $736,771; Time Warner, $624,618; Sidley Austin LLP, $600,298; Stanford University, $595,716 http://www.opensecrets.org/pres08/contrib.php?cycle=2008&cid=N00009638

Wall Street buys off both sides of the aisle.  Student loans are just one of the rackets being run by Wall St and Washington.  The principle is the same whether it is weaponry, food, medical, mortgages, car companies, energy, green industry, public safety, prisons... you name it - everything government touches. 

The arrogance is mind numbing.  It's enough to make you a libertarian.

GoldBricker's picture

That's the problem with our society: you're either a leech or a victim.

blindman's picture

http://home.earthlink.net/~cadman777/treadmill-Jenkins.htm
TREADMILL
TO
OBLIVION
(BUY NOW -- PAY NEVER )
By

Merrill M. E. Jenkins Sr., M.R.

.."When I finally discovered the truth, it boggled my mind. No wonder our trained and learned Nobel­Prize winning economists could not discover it. Their minds could never conceive that a condition like this could develop. The answer is accurate but thoroughly unbelievable.

The only thing growing at the same prodigious rate at which "currency" is being printed is DEBT. The "currency" is being printed to represent DEBT. When a borrower accepts the liability of a loan he receives "money." The deeper in debt he goes the more "money" he receives. The "currency" (paper tokens) looks the same as the old gold and/or silver certificates that were issued when gold and/or silver coin was deposited. The new Federal Reserve "notes" are paper and are issued, not upon deposits being made (coins coming into the bank), BUT upon loans being taken out! "Currency" for which there is nothing on deposit cannot represent anything but DEBT ITSELF, therefore anyone accepting a liability is entitled to the "currency" representing their debt. The amount of "currency" received is commensurate with the volume of their loan

No self­respecting economist could possibly accept a concept that "boils­down" to: THE DEEPER IN DEBT YOU GO THE RICHER YOU BECOME. It is too fantastic and unbelievable. But the evidence of its BEING is irrefutable. The debt volume and "money" volume are both growing at prodigious and respective amounts. The very fact that "currency" can be spent, and the "currency" is given to those going into debt gives the system its name. The Modern "Money" system is called the MONETIZATION OF DEBT.

Making DEBT 'SPENDABLE' is quite an invention and it is in full operation, though how to justify it, DEFIES ME. There is proof that some recognition of this condition does exist.

"Expansion of Central Bank holdings of Government debt provides the Treasury with funds just as certainly as increased output of its engraving and printing facilities."

Page 17 Federal Reserve Bank
of St. Louis Review February 1975

Debt is spendable, but the paper tokens issued to represent it and make it spendable, are not 'collectable' from the issuer. The issuers of the paper tokens are not producers of goods. The issuers can never be called upon to give up anything for "currency The debt represented by the "currency" is used by the issuer to obtain production without any fear of ever having to 'pay' for it; BUY NOW! -- PAY NEVER' The issuers of "currency" get everything IT "buys" for nothing. The producers never get wise to their loss because they never suspect the truth. The PRODUCERS all exchange the "currency" with ONE ANOTHER, giving and receiving in turn, using the "currency" as a medium of exchange. It never occurs to the producers that the ISSUERS get the currency for nothing and will not give anything for it.

How could any self­respecting economist admit to being a part of a system like that if he truly understood it? There is a possible touch of remorse in the words of Darryl R. Francis then President of the Federal Reserve Bank of St. Louis before the Committee on Banking & Currency, House of Representatives, July 18, 1974:

"I doubt that monetization of debt has been a conscious act on the part of the Government or on the part of the Federal Reserve System. Rather, I believe the reason it has occurred lies in the relative visibility of the three methods of financing Government expenditures -- taxes, borrowing from the public, and indirect debt monetization . . . . in the case of debt monetization, the immediate and even the short­run impact is neither an increase in taxes, nor an increase in interest rates. And yet, real resources still are being transferred from private to Government use."

The above quote points out that through DEBT MONETIZATION it is possible to STEAL without being found out. Stealing is what debt monetization really is when it is analyzed from any objective viewpoint. How can an economist, trained in these matters, be around it so long without seeing a truth so obvious? " ...

ElvisDog's picture

Based on the above, it would seem that the best course of action would be to take on as much debt as possible, convert the debt-money into tangible, non-confiscatible goods, and then reneg on the debt.

dirtbagger's picture

Elvis Dog -

This exactly what the bank executives did. 

TrulyBelieving's picture

That is what the inventers of this system do, either buying goods or buying power, using the taxpayer as a backstop. END THE FED 

Beancounter's picture

What do you call it again when cheap subisidized credit is chasing a modestly constrained resource (a degree) produced by a tax subsidized entity?  a bubble?   hell yeah.   time to eliminate the exemptions for nonprofits education...

sun tzu's picture

The non-profit universities were doing fine before pell grants and student loans. Tuition was affordable and the education was good. There were no bullshit degrees like ethnic and gender studies and other social science crap. Why not just get the fed loans and grants out of it?