the student loan bubble

[RTPMarine]

like i was saying earlier, when there is a default that debt does not disappear. even a "strategic" default could create a recession, when the default is OVER 1 TRILLION DOLLARS.

The debt gets paid by the US government in the case of a default. The only option is a bailout, as these loans originate with the government itself.

[John_doe]

like i was saying earlier, when there is a default that debt does not disappear. even a "strategic" default could create a recession, when the default is OVER 1 TRILLION DOLLARS.

The debt gets paid by the US government in the case of a default. The only option is a bailout, as these loans originate with the government itself.

ok so they assume the debt and have to float the yuan to offset the debt.

what has me beside myself, is the fact that the chinese continue to facilitate this. if they stopped, it is end game for our government. (which is only hanging on by a thread at this point anyways due to these type of ventures.)

[RTPMarine]

They need buyers for their cheap products. Nobody likes cheap products as much as Americans do.

I believe the saying goes "I am too poor to buy cheap things."

[John_doe]

wealth and debt does not just appear and disappear.

[John_doe]

They need buyers for their cheap products. Nobody likes cheap products as much as Americans do.

I believe the saying goes "I am too poor to buy cheap things."

so let me get this right.

a. we (and by we i mean other people, i try to avoid this) borrow money from our government who in turn borrows money from china in order to keep from defaulting. (wether it is through currency floats or directly borrowing it is beside the point.)
b. china needs us to consume their goods and services.


and to fix this cycle, we continue in this direction.......


and the bubble is not going to burst.

[RTPMarine]

They need buyers for their cheap products. Nobody likes cheap products as much as Americans do.

I believe the saying goes "I am too poor to buy cheap things."

so let me get this right.

a. we (and by we i mean other people, i try to avoid this) borrow money from our government who in turn borrows money from china in order to keep from defaulting.
b. china needs us to consume their goods and services.


and to fix this cycle, we continue in this direction.......


maybe this is why china is dumping us assets.........

This is all just my take on the situation, so grain of salt yada yada...

a. Americans don't borrow money from the government. We borrow from banks, and ultimately from each other. Reserves are often backed by the government, but at the end of the day our debt is paid to the banks. And it's not like the US gov't borrows from just China--they just make good deals for us. It seems to me that we offer our debt up to the highest (or lowest) bidder

b. China is just positioning themselves for continual GDP growth. Even if they continue growing at 9%, and we continuing growing at the snail's pace of 1.5%, it will take 10 years for their GDP to eclipse ours. I think we will hit a political debt-wall long before they decide to dump our debt.

Yikes we're getting off track

[John_doe]

They need buyers for their cheap products. Nobody likes cheap products as much as Americans do.

I believe the saying goes "I am too poor to buy cheap things."

so let me get this right.

a. we (and by we i mean other people, i try to avoid this) borrow money from our government who in turn borrows money from china in order to keep from defaulting.
b. china needs us to consume their goods and services.


and to fix this cycle, we continue in this direction.......


maybe this is why china is dumping us assets.........

This is all just my take on the situation, so grain of salt yada yada...

a. Americans don't borrow money from the government. We borrow from banks, and ultimately from each other. Reserves are often backed by the government, but at the end of the day our debt is paid to the banks. And it's not like the US gov't borrows from just China--they just make good deals for us. It seems to me that we offer our debt up to the highest (or lowest) bidder

b. China is just positioning themselves for continual GDP growth. Even if they continue growing at 9%, and we continuing growing at the snail's pace of 1.5%, it will take 10 years for their GDP to eclipse ours. I think we will hit a political debt-wall long before they decide to dump our debt.

Yikes we're getting off track

we have very little gdp growth in regards to our debt. so we solve it with more consumption and debt to cover our debts. I hope your right about this whole thing, but my gut is telling me to prepare for the opposite.

it is impossible to be the problem and the solution to the problem.

[RTPMarine]

I definitely agree with you that we are overspending and that our national debt is unsustainable. I just don't think that student debt is going to cause a recession or anything like that. Maybe it is causing the current recession (because people are so strapped with student loan debt that they aren't spending on consumer goods). Who knows...

[John_doe]

when china comes to collect im just glad it isn't my name tied to the other end of that.


i want to create a plausible solution instead of making the problem worse. (ex. austerity and not spending money we do not have.)

[John_doe]

im forced out of the dollar to protect my buying power. this is exactly what i am talking about.

this is why people are running from the dollar. every dollar racked up by these debt positions is buying power lost. where there is buying power lost there is monetary gain. china for example.

the disposition that money is created out of thin air, is ridiculous. in a sense yes, but there is a debt created or physical backing for it somewhere.


if they were creating money out of thin air, there would be governments somewhere taking a loss. you bet your bottom dollar this is not the case. (hence the detrement of a fiat monetary system. it is a race to the bottom. keynesian economics have a serious flaw, that even keynesian economists will admit to.)

[John_doe]

i can't preach fiscal responsibility enough. if you have to take on a debt, make sure it is an emergency (things needed to survive), and pay it off quickly.

[John_doe]

I definitely agree with you that we are overspending and that our national debt is unsustainable. I just don't think that student debt is going to cause a recession or anything like that. Maybe it is causing the current recession (because people are so strapped with student loan debt that they aren't spending on consumer goods). Who knows...

digging holes to fill holes. it is not logical.

if people just saved up money for college (put away 10 bucks a week if you have to), we would not have this problem to begin with.

[RTPMarine]

I definitely agree with you that we are overspending and that our national debt is unsustainable. I just don't think that student debt is going to cause a recession or anything like that. Maybe it is causing the current recession (because people are so strapped with student loan debt that they aren't spending on consumer goods). Who knows...

digging holes to fill holes. it is not logical.

if people just saved up money for college (put away 10 bucks a week if you have to), we would not have this problem to begin with.

With the average cost of public universities being $18k per year, $10 per week would take 7200 weeks, or 138.5 years to save up enough.

[John_doe]

I definitely agree with you that we are overspending and that our national debt is unsustainable. I just don't think that student debt is going to cause a recession or anything like that. Maybe it is causing the current recession (because people are so strapped with student loan debt that they aren't spending on consumer goods). Who knows...

digging holes to fill holes. it is not logical.

if people just saved up money for college (put away 10 bucks a week if you have to), we would not have this problem to begin with.

With the average cost of public universities being $18k per year, $10 per week would take 7200 weeks, or 138.5 years to save up enough.

if enough people choose the right path, they will have no choice but to lower tuition.

there would be no one to take the classes. resulting in tuition decreases in order to gain demographics.

simple economics. with overwhelming demand expect nothing more than price hikes etc.


college is a business, don't be fooled. they are out to make a buck just like you or I.

i'm not trying to tell anyone what to do, just making observations like i said.

[DebtFreeMe]

Some of the economic misunderstanding I was seeing in this made we want to poke my eyes out...

The difference is that there is no "burst" that can happen. There will always be demand for college degrees, so the worst that can happen is a default/bailout which would lead to increased spending elsewhere.

In the event of a default there is no additional money to be spent, thus no spend, spend, spend. In the event of a bailout (with money that is created out of the Feds printing press) the value of the dollar drops thus purchasing power drops, thus no new purchasing power (real money assets) are created, thus no, spend, spend, spend… In the event taxes are used to bailout the default, this is simply moving money from one persons pocket to another, thus no real economic growth will take place, one person will spend, spend, spend while the other will be taxed rather than being able to spend the money they actually worked for.

The United States does not create credit. The banks create credit. And they can do so as long as they have reserves of something valuable (USD, gold, diamonds, flying pigs, etc). I'd even go as far as to argue that we can create credit indefinitely so long as the Fed has the power to print money so the banks can pay debts with cheaper dollars.

This statement alone shows that you have no understanding of money, credit, debt, reserves, or any other concept associated with them, or the foundation by which any of them are created, destroyed, or dreamed up (fiat money)... It would take too long to correct this here, but you could look at this book Ludwig von Mises, The Theory of Money and Credit [1912] http://files.libertyfund.org/files/1061/Mises_0070_EBk_v6.0.pdf and it will get you going in the right direction.

So even if the cost of tuition is suddenly cut in half, college degrees will still be valued the same. A Computer Science degree will still be a Computer Science degree. A Humanities degree will still be a Humanities degree. So the value underlining the loan (i.e. the degree) will not change the way that the value underlining a mortgage changes with the price of the home.

You are incorrect on this, the value of a degree will move with the market demand, I have little doubt that there was a time that a person with a degree in culinary arts could get a good job working up to be a chef, today that will probably get you a job at olive garden, right next to the high school kid… The market will decide the value of the degree, just as it did for houses, and where there are too many for the need that the market has, the value will only go one direction, and folks with Bachelors Degree’s are already seeing the value of there degrees dropping…

But default is not the same as a bubble pop. Will there be a default on US student debt? Probably. Is it going to be that bad? No.

Trillions of dollars where lost when home owners defaulted on their mortgage payments… That’s not the same as a bubble pop?

And the debt that would be defaulted on is probably less than $100 billion or so.

We find that 27 percent of the borrowers have past due balances, while the adjusted proportion of outstanding student loan balances that is delinquent is 21 percent.

That alone show it will be well over $100 billion, by about 2.5 times, and even that is probably a low ball estimate if things were to start rolling like the home mortgage market did. That report can be seen here: [url] http://libertystreeteconomics.newyorkfe ... loans.html
[/url]

The debt gets paid by the US government in the case of a default. The only option is a bailout, as these loans originate with the government itself.

The US government has no function by which it creates wealth (money), therefore it cannot pay the debts. Those debts are paid by other people, (through taxes, devaluation, confiscation, or many other means of wealth destruction) thus no benefit will come on a Macro scale, only a misallocation of assets will take place through a forced redistribution of wealth.

[shinnosuke]

+1 DebtFreeMe. Thanks for schooling the young man before you scratched your eyes out.

[John_doe]

"You are incorrect on this, the value of a degree will move with the market demand, I have little doubt that there was a time that a person with a degree in culinary arts could get a good job working up to be a chef, today that will probably get you a job at olive garden, right next to the high school kid… The market will decide the value of the degree, just as it did for houses, and where there are too many for the need that the market has, the value will only go one direction, and folks with Bachelors Degree’s are already seeing the value of there degrees dropping…"


law of diminishing returns. people should ask themselves, is it even worth getting a degree at this point? let alone assuming 100,000K+ worth of debt to achieve said degree.

[aloneibreak]

this article was in my last issue of Imprimis....

http://www.hillsdale.edu/news/imprimis/ ... 2&month=05

[shinnosuke]

this article was in my last issue of Imprimis....

http://www.hillsdale.edu/news/imprimis/ ... 2&month=05

Excellent article. Thanks for posting. Hillsdale always puts out good info.

[RTPMarine]

DebtFreeMe,

I recognize that American fiscal policy means a lot to you, but please tell me that you are up to date on economic principles past 1912. Too many metalbugs choose to stack because they are spooked by their government (which they have full control of, they just don't know it). Don't be a dinosaur--learn how the world is working around you in the present day.

In the event of a default there is no additional money to be spent, thus no spend, spend, spend. In the event of a bailout (with money that is created out of the Feds printing press) the value of the dollar drops thus purchasing power drops, thus no new purchasing power (real money assets) are created, thus no, spend, spend, spend… In the event taxes are used to bailout the default, this is simply moving money from one persons pocket to another, thus no real economic growth will take place, one person will spend, spend, spend while the other will be taxed rather than being able to spend the money they actually worked for.

What the hell do you mean default won't cause more spending? When has any default ever not caused more spending?? The government is going to bailout the bad debt, so those who borrowed more than they could afford are going to continue to borrow more than they can afford. Spending habits will be reinforced, because those paying their debt responsibly will have a heavy load to carry. Those borrowing irresponsibly will get a free ride to just borrow and spend more.

Also, bailouts have no effect on the value of the dollar. Did the dollar collapse because we bailed out the automakers? No.

This statement alone shows that you have no understanding of money, credit, debt, reserves, or any other concept associated with them, or the foundation by which any of them are created, destroyed, or dreamed up (fiat money)... It would take too long to correct this here, but you could look at this book Ludwig von Mises, The Theory of Money and Credit [1912] http://files.libertyfund.org/files/1061 ... k_v6.0.pdf and it will get you going in the right direction.

Your statement shows that you are a dinosaur. I'm impressed that you have picked up on the computer. I sure hope you believe in fiat enough to invest in your 401(k) or other money market accounts. I don't care how much conviction you have in your beliefs--putting your eggs in one basket is unsound.

You are incorrect on this, the value of a degree will move with the market demand, I have little doubt that there was a time that a person with a degree in culinary arts could get a good job working up to be a chef, today that will probably get you a job at olive garden, right next to the high school kid… The market will decide the value of the degree, just as it did for houses, and where there are too many for the need that the market has, the value will only go one direction, and folks with Bachelors Degree’s are already seeing the value of there degrees dropping…

You didn't understand the point. I'll rephrase: student loans by definition cannot go "underwater". Even if potential employers would rather hire highschoolers than college graduates, the underlying value of the loan is not represented as collateral to the banks. When homes were suddenly worth less than what the bank was owed, what happened to the shortfall? A student loan does not have the same underlying value implied in the loan. There can be no "pinch", even if we continue towards default.

Trillions of dollars where lost when home owners defaulted on their mortgage payments… That’s not the same as a bubble pop?

The housing bubble was based on inflated prices. The prices were the bubble. Once that bubble popped and prices came down, then defaults became a lucrative option to many. The bubble isn't in the bad debt, but in the inflated prices that lead people to accept that bad debt. And this is my point about the educational bubble--is tuition really going to come down any time soon? I don't think so. I think a college-degree has almost become a requirement to be in the middle class.

That alone show it will be well over $100 billion, by about 2.5 times, and even that is probably a low ball estimate if things were to start rolling like the home mortgage market did.

Nobody knows how big the bailout will have to be. But you can rest assured that it is not going to sink the ship. We are currently running a $16 Trillion debt and still experiencing GDP growth and job recovery. (Disclaimer: please do not take this as me advocating our national debt. Just think for a minute and evaluate whether or not our economy can withstand a few hundred billion in student loan bailouts. I think it obviously can.).

The US government has no function by which it creates wealth (money), therefore it cannot pay the debts. Those debts are paid by other people, (through taxes, devaluation, confiscation, or many other means of wealth destruction) thus no benefit will come on a Macro scale, only a misallocation of assets will take place through a forced redistribution of wealth.

You can't have it both ways. I agree with you that the government doesn't create wealth, but I also realize that the government doesn't destroy wealth. They just spread it somewhere else (often into their own bureaucratic inefficiencies).


Final Note: You guys all seem hell-bent on not hearing any line of economic thought that doesn't agree with your own. That is fine. But I would strongly urge you to reconsider your portfolio and strategy if the best financial argument you have is that "fiat will always collapse!!!". While I agree with you 100% in wishing we were on a gold standard, I am not going to ignore all of the ways to make money in the current day and age. My 401(k) gets matched out each paycheck, my savings get dumped into money market accounts, I buy silver and gold every chance I get, and I am working away at my mortgage--an investment in my home. No matter what happens in the next 20 years, I will be prepared. Will you?

[John_doe]

[John_doe]

tell you what. go borrow 100,000 dollars and let your professors tell you the same thing we are trying to tell you.

[RTPMarine]

In the event of a default there is no additional money to be spent, thus no spend, spend, spend. In the event of a bailout (with money that is created out of the Feds printing press) the value of the dollar drops thus purchasing power drops, thus no new purchasing power (real money assets) are created, thus no, spend, spend, spend… In the event taxes are used to bailout the default, this is simply moving money from one persons pocket to another, thus no real economic growth will take place, one person will spend, spend, spend while the other will be taxed rather than being able to spend the money they actually worked for.

After re-reading this, I see more clearly what you are getting at. And you're absolutely right. I wasn't implying that new wealth would be created from anywhere. Just that the government would be subsidizing crappy spending habits. Those who live within their means, pay taxes, and in turn pay for the bailouts, will be forced to have their money spent in the form of the bailout. And once the bad-borrowers get their sanctuary, they will just continue the spending until they default again, and the cycle continues. I think the degradation of the system comes from our collective spending problem.

Also, in the particular situation of student loans, I think economic growth via investment does occur, to an extent. Remember these loans represent college degrees, which can reasonably be expected to lead to increased productivity. It might not be fair that the bill falls on the taxpayer, but it's still plausible to expect a return on that investment via increased production.

[RTPMarine]

tell you what. go borrow 100,000 dollars and let your professors tell you the same thing we are trying to tell you.

I got through my B.S. Mechanical Engineering only having taken $16,500 in student loans. Military benefits are extremely helpful.

BTW, I know from experience that econ professors are almost always Keynesian. So you might not want to take your beliefs onto a college campus...

[John_doe]

you can't blame the institutions for trying to make a profit, and you can't blame the people that are bailing out of the dollar to avoid being robbed.