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Chart Of The Day: From Pervasive Cheap Credit To Hyperinflation
The topic of the student loan bubble is not new: having crossed $1 trillion recently, student debt is now the biggest consumer debt category, greater even than US credit card debt. We have extensively discussed the implications of the parabolic curve representing outstanding student debt before, and it is no surprise that the issue of student loans has become of one of the key topics of debate in the ongoing presidential mudslinging campaign. As is also known, an increasing portion of student debt is funded by the government at an ever lower rate of interest: after all it is critical to allow the bubble to keep growing with as little interest expense diverting the stream of cash from the end borrower - wide eyed students who increasingly realize they are stuck with tens of thousands in loans and no jobs available to allow them to repay this debt, in effect making an entire generation debt slaves. Finally, as should be known, student debt is non-dischargeable, meaning once a person becomes indentured, they are so for life, and filing bankruptcy will do nothing to resolve debt claims against the individual. After all there is no other collateral by definition that can be confiscated by the creditor - the only thing the debtor "acquires" in exchange for this debt is a skillset, which sadly in the New Normal is increasingly redundant. But there has always been one question outstanding: just what does all this easily accessible and now pervasive student debt fund? The chart below, courtesy of Bloomberg, provides the answer: in the past 3 decades there has been no other cost that comes even remotely close to matching the near hyperinflationary surge in college tuition and costs.
The follow through question then is: where do all these cheap debt funded dollars go? Why to pay the salaries, and lifetime guaranteed pensions of tenured Keynesian professors in "established" universities, who are delighted to keep peddling cheap debt if it means their compensation rises at a rate of 5-10% each year, every year, no matter how the economy performs.
After all they and their "ZIRP is the answer to all" brethren are the immediate beneficiaries of this 1120% cost explosion since 1978.
As to who foots the bill? It is all those young men and women who are indoctrinated day in and day out by every possible legacy media, whose sole interest is also to perpetuate the status quo, that the only way to succeed in this world is through untenable debt. Of course, it is packaged differently: study, get a loan, get a job and pay off the loan. Sadly, this is no longer the case in the New Normal where one is lucky to get a part-time job paying minimum wage, let alone one which allows the repayment of debt principal (this ignores the possibility of interest rates actually rising at some point in the future).
Some more perceptive readers may ask: did the cheap credit allow this explosion in tuition costs, or did soaring costs require the latest debt bubble. The answer in this chicken or egg riddle is unclear, but is also irrelevant: one thing is certain - a 1,100%+ increase in prices in just over 30 years for any "asset class" is way beyond the ordinary course of inflationary business, and may as well be classified with the -hyper- prefix on a long-enough timeline.
Another thing that is also certain is that this kind of price surge in unsustainable, as is the associated exponential increase in student debt. We can only hope both bubbles pop sooner rather than later, if for no other reason than to put the majority of status quo professors, who have been gladly and quality benefiting from this phenomenon for years, out on the streets, and having to take out a loan to see what it means to become an indentured servant for themselves.
Alas, with ZIRP about to be replaced by NIRP, we may have a while to wait.
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I'm long gulags:)!
The answer to the riddle: If there was no money, there would be no sustainable increase in cost. The average house in Liberia do not cost $100K I can assure you!
"..who are delighted to keep peddling cheap debt if it means their compensation rises at a rate of 5-10% each year, every year, no matter how the economy performs."
Tyler,
Most of the time I love your writing and I read your work every day. However, its times like these when you're so off base that I have to wonder if the message is as off base in areas i'm less familiar with. I'm on the faculty of a major university and have been involved in higher education my entire adult life. I have strong libertarian leanings and personally believe that all state funded higher eduction should be privatized. In all my time at major universities, i've not seen the majority of faculty clamoring for pay raises every year. I hear some of them squeel occassionally, but only when the economy is good. Most faculty are paid less than their private company colleagues but stay for the perks, such as the pension programs. I see the best faculty leaving for private industry jobs becuase those jobs pay more and are viewed as being less stressful. In the 15 years i've been a faculty member, i've had 5 pay raises and last year took a pay cut. The university I currently work for is downsizing dramatically especially by lookng for ways to fire faculty. Even tenure does not give security. Tyler, stop making such sweeping statements that are untrue. Your message, which I generally support, will become trivialized if you don't back up your statements with facts.
AH the asymptote of fiat pumping and the law of diminishing returns; no free lunches beyond this line! Wake up new generation to your dystopian future built on debt redemption.
Is it a coincidence that the three areas with the largest Federal subsidies are also the three areas growing the fastest?
http://dareconomics.wordpress.com/2012/08/10/what-do-healthcare-college-...
Those that are loaded with student debt are also paying for those that were granted a free-ride. Illegals which have kids get free meals and healthcare that others pay for. There are Chinese nationals that were in the US that also obtained free rides at the highly rated universities.
Here in MA, the mecca of "education" public and private, the costs to public schooling keeps going up. Here's a pretty good reason as to why:
http://ftpcontent.worldnow.com/wfxt/pdf/State-Pensions-Over-80000.pdf
Not Wall Street, but sure as hell not Main Street either. Of course, this doesn't include all the other benefits post employment. One of them, whom I know personally was a fucking Spanish Teacher with a $100k+ retirement package. Yea, none of this blows up.
When I graduated from law school in 1972, my total cost was $50.00. I got the GI Bill (blood money from soldiering with the 101st in Vietnam) and New York State waived my tuition. Most of the professors had some kind of consulting deal on the side and picked up spare change. Some were full-time lawyers, who taught one class per semister because they were specialist in a narrow field. The profs made out ok. I never head any of them complaining about money.
Now, I have 6 grandchildren - oldest 7. I told my daughters - there has to be another way to get ahead besides going to college.
But, as the graph demonstrates - the college cost scam will implode in less than 5 years - so, I am not going to lose any sleep over this. But, for those, who have kids near college age - this is an enormous problem, for which I have no answer.
You have the answer. Look in the mirror. You spent the (future) money and now you could not compete if you tried.
Teach your kids what prepping is. Teach them what real money (gold, silver, barter, contract agreements that are TRULY consenting) really is. Teach them what real FRAUD really is.
You know as a parent how you're scared when the kids figure out what fire is, how to run with sharp things and so on, all the fucking trouble they'll get into?
You know why you're scared?
BECAUSE YOU KNOW YOUR KIDS ARE SMART and will figure shit out behind your back.
SHOW THEM what you know is wrong and trust THEY WILL FIGURE OUT A WAY. Keep pointing out stuff as you figure it out but have faith they're not dumb fucks. They'll figure things out as long as you keep giving them a chance to & don't depend on the "system" to do it because you already know better or you wouldn't even BE here on zerohedge.
But when you are trying to get hired the employer credits a degree over experience most of the time.
You have an increase in population, an increase in people out for a college degree to compete for whatever lousy jobs are available, and the same amount of brick and mortar universities for the last 50 years. How will the price for education not skyrocket under those circumstances? That situation will get exploited to the hilt.
easy: THOSE WHO CAN NOT AFFORD DO NOT COMPLETE. Problem solved.
Those who are CAPABLE on their own merits WILL FIND A WAY TO PAY. Those who are not WILL NOT. Debt will not need to be a part of that - only working hard, saving and proving by entrance-testing & transcripts that one is worthy of being accepted to a school they deem is of an HONEST price.
I get worked up about this whole debate (as you can tell). It is not just the initial contractual debt obligations nor the future debt slavery or even the bankster bonuses involved. It is the 'value' of what is being bought. To have a Trillion Dollars of debt for what is a bunch of totally useless, non-productive, non-competitive, overly entitled, 23 year olds without any clue about what they are facing out there in the global economy. That is the true crime.
Having been in academics for most of the last decade I can tell you that the escalating costs aren't going to the faculty. At my university the staff to faculty ratio went from 2:1 to 14:1 in 20 years. The campus is not run by the faculty any more but by hoards of bureaucrats, mid-level administrators and extremely highly paid Chancellors and Vice Chancellors. Do we need a Vice Chancellor of Gay and Lesbian student affairs? Do we need a staff of 90 people in the Diversity Affairs Office, including:
1. Commissioner of Diversity Affairs
2. Diversity Affairs Office Chief of Staff
3. Women’s Issues Intern
4. Queer Issues Intern
5. Cross Cultural Center Intern
6. Cultural Unity Month Awareness Intern
7. School Student Outreach Intern
8. Service and Civic Engagement Intern
Meanwhile, in the school of engineering the labs are a shambles. The equipment is broken and twenty or thirty students share a single oscilloscope. I don't have high-hope that any of this will change soon.
Indeed. Let it be the students' choice if it's needed or not and pay for it or not and let the portion of tuition and/or actual dollar price be transparent. Then if students think otherwise of the total price or portions of things they don't want, they can opt out or refuse to attend at all.
School is not doing so hot for jobs, many, now that people should feel afraid to say "no, that school's too expensive" and walk away. A good deal of life experience in money, savings & preparation watching the job market unfold would be well-served by saving while working and NOT going to school, only to use SAVINGS (not loans) to attend a good school based NOT on magazine ads, stats and bought media or the school's own self-recommendations - based on what the market says, what head-hunters say, what students say works out for them instead of getting ripped off and walking away with debt, paper for a nice frame and no job of any consequence.
Even those finding jobs, if it takes you more than 10 years to pay off your school debt - you got hosed. Seriously. Look at your tax-rate with your income level then subtract your debt and see how much you really make per year or week or hour. Ask yourself who's smart when the kid who learned to do video production/editing or who learned to do HVAC has none of that burden and actually makes a higher amount than the math I just suggested.
OK, I've been saying for a while now that fiat currency is inconsistent with democracy. It's axiomatic that the people who are empowered to create false money will rapidly control everything they want to control, and politics foremost.
But this article shows there are other large distorting effects on the society. Groups of people -- whole industries and professions, will grow up to cluster around the wellsprings of false money. One of those wellsprings is now educational debt.
The people who cluster around it will, semi-consciously protect their wellspring. So an overwhelming majority of college faculty will come to believe and profess the policies of false money that support their livelihood, and vote for politicians of like mind.
People in another such group -- government employees -- will semi-consciously enact policies that support groups like college faculty -- for instance enacting licensing and other policies that make it difficult for free-market reforms to come to that protected industry.
I think the only way to fix this is for people who believe in freedom and who want to base their livelihood on voluntary exchange instead of theft to get the philosophy clear in their own minds -- and communicate it.
Communicate it now, so that a nineteen-year-old can understand the difference between one choice of livelihood and another, and be prepared to communicate it when the society based on theft collapses, and people who have never understood what is happening start asking "Why did the world collapse?"
Peter Schiff has long made the case that college and health care are unaffordable because of too much government interference and too much insurance.
To prove his point, Schiff showed in 2009 that the rate of increased costs for insured medical procedures is three times faster than for uninsured procedures. For uninsured procedures, he showed where the cost is falling because competitive cost pressures keep costs down and keep quality up.
In short, insurance causes costs to go ballistic.
The same can be said of college tuition. Tuition costs would collapse without government loans and Big Lobby.
Schiff says educational costs are up because of government interference--subsidies, grants, loans, government-induced parental college savings accounts that are used by universities and financiers as the starting point from which to increase fees--that have saddled young people with $100,000+ debt.
Poet, a ZH blogger, wrote that when he attended college, it "was much more affordable and either you worked your way through college or parents saved enough to cover it." Why, he asks, did college costs rise dramatically, substantially outpacing inflation? And answers, "Is it possibly due to the SLM Corporation (better known as Sallie Mae) starting up in 1973, the GSE that has allowed students to become saddled with government encouraged debt, that has allowed the universities to charge much higher than market prices given the massive subsidy of government guaranteed loans."
Higher Ed is just as greedy as the most corrupt wall street bank. For all their 'greater good' they continue to saddle kids with moutains of debt. Just as the banks took advantage of the insanity of the GSE that backed subprme mortgages and allowed for relaxed qualification rules, colleges have taken advantage of student loans that have no limitations (and even worse, double F their students as this debt can't be forgiven in bankruptcy like a mortgage). All at the same time they build massive endowments.
Higher Ed, through a lack of fiscal discipline (leading to increasing costs) has destroyed a generation of our youth. I am definitely one for personal repsonsibility, but these colleges are preying on 17-18 year old kids, and we are talking six figure costs/debt.
If colleges can't rein in costs, tax payers should not financing their expansion, beautiful dorms, student athletic facilities and alumni centers.
If (and there will be unfortunately) any forgiveness in college loans, we should be penalizing colleges with the biggest student loan losses by reducing or eliminating student loans.
We can fix this, limit student loans to multiple of averge first 10-year career salary (no $150k loans to social workers). And similar to credit card laws and mortgages, require the loans to be stated in monthly payments (a little education for consumers). Require colleges to back a portion of their student loans, some skin in the game.
Colleges will eventuall respond with greater guidance for students, more focused curriculum with even an eye toward 3 year degree programs.
Big Education makes me sick. perhaps the biggest flaw is that they have lowered standards way too much. Just compare todays course load to that of any college 50 or 100 years ago...espeically the allowed electives. they have lowered standards to increase admission (customers).
It is much much worse than you describe above. The knowledge is the same. The Standards are lower. And this is the only future that we have. There is no timeline that goes backward that I know of. These people are our future and they know less than a HS grad from 1955.
agreed. decades of lowest common demoninator education in our middle and high schools, constantly lowered the average intellect. Colleges should have been the check point, weeding out the fluff. But, as they have all become big business and full of egos, the goal was to simply grow admissions.
Less people should be going to college PERIOD. this would drive many people, although technically smart enough to attend college, to pursue a more trade/tech path. Not only reducing student loan demand, but also supplying our need for high tech trades people. As it stands now, manufacturers can't find anyone to operate today's high tech machinery at $60k/year. and college graduates can't afford to service debt on only $60k/year. the answer is that you do not need a full college education to operate today's high tech machinery.
this generation is killed, the next generation will decided to not spend money on over priced colleges, and i think more will want to go into today's high tech trades. We need a remake of our vocational school industry. THAT is how you get American manufacturing back. no student loan, good paying jobs, great work environment (protected by numerous regulations). We will adapt, but our gov't, educational system and irresponsible parents and students have slaughtered and entire generation of people.
may the real education begin
OK, I can fix this with 50 million dollars.
Start a school that charges no tuition. Students sign a contract that says "I will pay you 5% of my wages for the next twenty years, after I leave school."
The college will interview kids carefully. The professors will educate them well. The kids will think hard about what they want to study, and the college will think hard about what it wants to offer.
Im in for 100k. Where do I sign up?
Hey, what if you could staff it entirely with Fourth Turning Gray Champion people who are retired, sick of the way things have gone, and want to change the world? And don't mind investing their time for a heck of a lot better chance of return than CDs, or watching daytime TV.
The initial faculty will of course also be very careful in what new faculty they add. Their philosophy will largely determine our pension.
Then we don't need $50 million to get started.
How small could it start?
Start off by lining up the employers, promising them that you will teach the students the skills the employer is seeking, and have them contribute to its funding and to determining the curriculum.
Why not have the employer(s) do/provide the teaching?
How will you guarantee collection? Is the 5% based on gross or net? Don't get me wrong, I think it's a great idea. Unfortunately we are approaching a "food first" economy where creditors will be ignored regardless of the long term value of the original "loan".
Well, no business can guarantee collection of its debts. So we can do same as all businesses.
But
(1) we interviewed each candidate as well as we could to screen out moochers, morons, and malingerers, and
(2) they will love us. A lot more than I love my mortgage-holder.
(3) The first collection letters we send out will say "You're not paying us. Are you doing OK? Do you need some extra training? We want you to succeed."
Also, all of our professors at ZH University will be called Tyler Durden.
They'll pay.
If they fail to pay, you can bring a lawsuit against them for breach of contract, obtain a judgment, and garnish their wages.
I agree that carefully screened students would pay voluntarily as long as their basic needs were met. As things are going, financially/economically speaking, graduates of this school are 1000 times more likely to end up highly motivated wage slaves getting squeezed from every direction. The few that become wildly successful will end up just like the current crop, hiding income in hard to reach places offshore.
An idea worth due consideration. Five percent (5%), though, sounds just a bit high to me. I think what you have in mind could be accomplished with just 2-3%, which is a lot easier bite on the student, which would in turn prove more enticing? (is that the word I'm looking for?) Or, for that matter, why not, oh, 1% or 0.5% for the rest of the student's life or something like that?
I'm talking off the top of my head. I just don't have the time to crunch numbers, though.
student debt is non-dischargeable, meaning once a person becomes indentured, they are so for life
Another GW Bush legacy product.
Actually, the Feds have been chipping away at it since 1978 - so I suppose you can pin it on Jimmy if you want.
http://www.finaid.org/questions/bankruptcyexception.phtml
Dubya just put-in the final nail.
There are times in this crazy little world of ours where we have to look on the bright side of things. What the phenomenal rise in tuition costs has meant, in part, is a very large number of college coeds are looking for ways to may their life easier........one result of which has been a remarkable surge in membership on sites like Seekingarrangement.com. Companion relationships are often the choice of older, successful men, who tend to view it as an opportunity to personally redistribute some wealty outside of government coercion.
There are times in this crazy little world of ours where we have to look on the bright side of things. What the phenomenal rise in tuition costs has meant, in part, is a very large number of college coeds are looking for ways to may their life easier........one result of which has been a remarkable surge in membership on sites like Seekingarrangement.com. Companion relationships are often the choice of older, successful men, who tend to view it as an opportunity to personally redistribute some wealty outside of government coercion.
The man who formed an anti-prostitution task force while he was AG of New York, Elliott Spitzer, didn't get prosectuted for redistributing some of that wealth to his young dog-faced escort... aka hooker.
Please be serious. Their motivation is clearly not to distribute wealth. Their object is to spend that wealth to get ass.
Dear good sir,
I think you were witnessing the birth of /quasisarc in its long-written form.
Please admire the new creation to our intellectual universe.
The housing bubble and the student loan bubble, intentionally sponsored by the banksters and their government lackeys... so similar that if you squint, you can't even see a difference.
Don't forget... the MASS ARRESTS are coming! Obama, Brenanke, Timmy, and hundreds of other top traitors to the Constitution will be in chains and orange jumpsuits soon... http://tinyurl.com/cd5cyjo/
Uh, does this chart look ridiculously familiar to anyone else?? Via bloomberg you say? This seems to clearly be from the chart series created by Doug Short and featured on Mike Shedlocks GlobalEconomicTrendAnalysis.
http://globaleconomicanalysis.blogspot.com/2012/07/what-role-does-govern...
in 1912 a loaf of bread cost 5 cents. Now, a loaf of bread costs about $4.50.
So, not only is a nickle not worth a dime anymore, it's not worth 9 dimes anymore.
Gotta like Alice Cooper. Brings back memories
That was a great album, Billion Dollar Babies
How much do students have to donate to Obama's reelection campaign to get a bailout?
20 to life ought to be their "fair share"
Ruh roh Raggy
China Launching Gold Backed Worldwide Currency - Now the Americans will have to find a reason to go to war against China !! IndiaVision Latest Breaking News
German WW2 survivor compares Germany hyperinflation, Hitler to Obama & today's collapse-Schiff Moneyshow 2012-MUST LISTEN
The explosion in costs has little to do with faculty salaries. Apart from a few "stars." salaries of full-time, tenure-track faculty have kept pace with general inflation; the salaries of the growing ranks of part-time, underpaid, adjunct faculty are not keeping pace wtih inflation.
The explosion of costs is driven by "everything else" -- the dramatic growth of non-academic professional staff and non-academic mandates (affirmative action, "diversity," "sustainability," money-losing athletic programs), massive capital overhead from franatic overbuilding on campuses, and the transformation of undergraduate services into resort-quality accomodations.
The universities are being destroyed by this transformation of their nature, the dramatic decline in academic standards, and the huge surge of underqualified, over-indebted students. Even compared to 20 years ago, they're unrecognizable.
The higher ed bubble will end some time this decade. There will be calls for bailouts for the massively bloated schools. But no Elizabeth Warren can lash out against evil bankers: government itself is now the main lender, and the main creditor sending collection agencies descending on former students unable to pay back their loans -- which are non-dischargeable in bankruptcy. The politics is simple: academia is overwhelming left-liberal in its political orientation. It's the most reliable institution in US society providing donations, volunteers, and votes for Democratic candidates. Everyone else has been pushed out of academia. It's a deeply corrupt place.
Lots of books are out there now about this issue. Just look on Amazon.