Student Loans

What is happening in the luxury US housing segment has spilled over beyond the simply bizarre and has now openly entered surreal territory...

Another month, another confirmation that when it comes to the US consumer, it is all about student debt (and to a lesser extent, car loans). Moments ago the Fed reported that consumer credit number for March: at $17.5 billion, it not only blew out the expectation of a $15.5 billion increase (although when one adds last month's $3.5 billion downward revision to $13.0 billion the two month total actually missed), but was the highest monthly increase since February 2013. That's the good news. The bad news was once again in the composition: of this $17.5 billion $16.4 billion was non-revolving debt, or about 94% of total. The "good", or revolving, credit card debt? Only $1.1 billion.

The last time the intellectual titans of the San Fran Fed, which have made a living out of asking probing, kindergarten-level questions and then spending tens of thousands of taxpayer funds to answer them, performed in depth inquiry into a topic was about a month ago when it asked "How Important Are Hedge Funds In A Crisis." To its dismay, it found the answer to be "very." Today, the intellectual titanism continues when the regional Fed, which Janet Yellen called her home for so many years, asks (and answers), "Is It Still Worth Going to College?"

6 Years After the Financial Crisis Hit, The Big Banks Are Still Committing Massive Crimes

The real problem with Piketty's taxation/social welfare solution to wealth inequality is that it does nothing to change the source of systemic inequality, debt-based neofeudalism and neocolonialism.

This week's compilation of things to ponder is a veritable smorgasbord of topics that caught our attention this past week. From "The Limits of Growth" to "Peak Profits" and "The Next Bailout", plenty to ponder this weekend.

Combine diminishing returns with the political dominance of vested interests and you get a system incapable of reforming itself and incapable of stopping the slide off the cliff. Vested interests have no concern for the unintended consequences of their self-aggrandizement; the entire poilitical structure is based on the faith that there is always more money to feed the insatiable hunger of entrenched interests for more funding, more protection and more power. And so the only possible "solution" left is collapse.

They’re not even trying to blame the weather this time.

To paraphrase Donald Rumsfeld, we work in the economy we have, not the economy we might want or wish to have at a later time. And what characterizes the economy we have? It's bewildering because nothing works like it's supposed to. For example, getting a college degree was supposed to guarantee a good job and an 80% lifetime wage premium over people without college degrees. But in the economy we have, getting a college degree no longer guarantees a good job, or indeed, a job of any kind: 53% of recent college graduates under the age of 25 are unemployed or doing work they could have done without going to college. The payoff for getting a college degree is declining while the risks of becoming a debt-serf due to crushing student loans is rising.

We live in a pretend economy. It is important to recognize this condition, especially if you are an investor. Current market behavior is concerning.  Bonds and stocks remain volatile and near record levels. Markets ignore the continuing stagnation in the pretend economy, buoyed apparently by government liquidity injections. To justify investing today in these markets, one must anticipate one or both of the following: economic growth is about to surge; and/or market values can continue to rise from here, potentially further widening the already large gap between valuations and fundamental economics. No reading of the economic tea leaves suggests a surge in economic growth is coming. Indeed, a critical analysis of the data makes one question whether there has been a recovery at all. Certainly any recovery has to be labeled as abnormal. Playing these markets in any conventional manner is akin to writing insurance policies for suicide bombers.

Putting this in context, in the past 12 months, a record 98% of all credit - $162 billion - has gone into non-revolving debt, i.e., student and car loans. How much has been added to credit card balances? An absolutely meaningless $4 billion, or 2% of total. Shown below, the "consumer recovery" is the bar chart on the left.

How much has the average cost of attending college at four-year degree-granting institution in the U.S. risen since the 1969-1970 school year?

One has to wonder why we are dodging this truth about what we've become: a nation that turns a blind eye to skimmers, scammers and legal looting. As in the story of the Emperor's new clothes, the onlooker who declares the obvious - in this case, that the stock market is rigged - shatters the consensus lie.

While we have covered the various ways in which Americans are scraping by in the current feudal economy, from food stamps and disability fraud, to student loans and living in mom and pop’s basement, this reverse mortgage thing is a piece of the puzzle we have been missing. These mortgages are not insignificant either. According to Inside Mortgage Finance, originations were up 20% in 2013, hitting $15.3 billion. So when you see that older guy working the cashier at Wal-Mart and wonder to yourself how he is surviving, the answer may increasingly be a reverse mortgage. Oh, and since the FHA is originating many of these loans, you the taxpayer will be on the hook!

Are you thinking of going to college?  If so, please consider that decision very carefully.  You probably have lots of people telling you that an "education" is the key to your future and that you will never be able to get a "good job" unless you go to college.  And it is true that those that go to college do earn more on average than those that do not.  However, there is also a downside.