25 years old and deep in debt

[garbon]

Apparently Stanford's acceptance has dropped to 5%!

[Martinus]

Apparently Stanford's acceptance has dropped to 5%!

Why are people not accepting Stanford? Too gay?

[garbon]

Too Californian

[grumbler]

I don't think there's a single cause, but the increased demand which has been enabled by student loans is almost certainly part of it.

I think that the increased demand is a result of increased costs, not a cause of increased costs.

If you look at the statistics, you will see that, from 1960 through 1985, about 50% of US high school graduates attended some college.  In 1985, that number started to climb to about two-thirds, a point it reached in around 2000, and where the number has remained since. 

If student loans caused this, then we would expect to see the numbers change radically when the 1965 federal law establishing the student loan program was established, but we don't.  Similarly, we would expect to see major changes in the law around 1985 and 200, the two (very rough) inflection points.  there are no such changes.

Tuition costs start to escalate in 1980 (averaging 17% increase between 1980 and 1985), but really escalate starting in about 1990 (averaging 34% increase between 1990 and 1995) and kind of bounce around in the 20-30% range until the end of the naughties, when it declined to under 20% 2010-2015.   I don't see any correlation with student loan terms.

[Darth Wagtaros]

Too Californian

Understandable then.

[citizen k]

http://www.bloombergview.com/articles/2015-04-17/washington-may-not-want-to-get-out-of-student-debt

Student debt now comprises 45 percent of federally owned financial assets. Of course, that doesn't include assets owned by the Federal Reserve, and it doesn't include real assets like land. Still, it's a startling figure.

    This trend worries me. Why? Because when the government owns student loans, it has every incentive not to fix the country's student-debt problem. 

    Consider the sheer size of the revenue that the government earns from student-loan interest payments. In 2013, it was $51 billion -- almost 2 percent of total federal revenue for that year. That's more than two-thirds of the lifetime cost of the entire F-22 fighter jet program!   

    With that kind of money on the table, it's going to be hard to get the government to take strong action for debt relief. A whole generation of millennials has been economically scarred by the financial crisis -- they borrowed to pay for school just like their older siblings did, but the capricious power of the business cycle left them with fewer jobs and lower wages even as they were saddled with record amounts of debt. It's no wonder that delinquency rates on student loans havesoared.
   
    One way to bring that unlucky generation some relief would be to permit student debt to be expunged in bankruptcy. Democrats in the Senate are trying to allow that. But with Republicans in control of both chambers of Congress, this probably won't happen.     

    Instead, what we've gotten is President Barack Obama's "Student Aid Bill of Rights." The list of "rights" emphasizes students' right to go to college, to take out loans and to pay those loans back quickly and easily. In other words, it's exactly what you'd expect from a government interested in maximizing the revenue it collects from indebted college graduates.

    If you think this sounds unencouraging, you're not alone.

    So what would happen if the Senate Democrats' plan were to become law? Well, a lot of young people would file for bankruptcy. The federal government would lose some of its revenue, but not so much that it would appreciably change the long-term ratio of debt to gross domestic product. The gap would be made up with future tax hikes and/or cuts in spending. Those future taxes would be paid by successful millennials and their descendants, letting unsuccessful millennials off the hook. So it would have a redistributive effect, part of which would go toward canceling out bad macroeconomic luck.

[grumbler]

http://www.bloombergview.com/articles/2015-04-17/washington-may-not-want-to-get-out-of-student-debt

Wow.

[citizen k]

Since there's no specific thread on economics it was either here or the sovereign debt bubble thread:

The Essence Of Modern Economics: Garbage In, Garbage Out

Submitted by MN Gordon via EconomicPrism.com,

   "On two occasions I have been asked, "Pray, Mr. Babbage, if you put into the machine the wrong figures, will the right answers come out? ...I am not able rightly to apprehend the kind of confusion of ideas that could provoke such a question." – Charles Babbage, Passages from the Life of a Philosopher.

Crunching Data to Fix Prices

The fundamental problem facing today's economy is the flagrant contempt by governments the world over for the free exchange of goods and services and private stewardship of property.  Perhaps it is power and control governments are after.  Maybe they believe they are improving the economy and making the world a better place for all.

No one really knows for sure.  But what is lucidly clear is the muddled disorder modern day economic policies have wrought upon us.  You can hardly enter into a transaction without a cluster of intervention mucking with the price of payment.

Taxes, tariffs, wage laws, and subsidies.  These all impact prices.  But the main culprit affecting prices and trade are central bank interventions into money and credit markets.  Relentless actions to control the economy by manipulating money and credit stand the price of everything else on end.

Certainly, government intervention into the U.S. economy is much looser than a Soviet style command and control system.  But it does share a common refrain.  Price fixing is central to its operation.

The Soviets, armed with their Five-Year Plans and the Theory of Productive Forces, deliberately directed how much wheat should be planted and how much a potato should cost.  Conversely, the U.S. approach is mostly hidden from the short sighted view of the average lay person.  The Federal Reserve allows the government to bypass the nuisance of tinkering with individual prices...though they still do it through subsidies and appropriations.

In short, the Federal Reserve, an unelected board of appointments, crunches economic data each month and draws a conclusion as to what price to fix the economy's most important commodity – its money.  By doing so all other prices in the economy must change – and distort – to adjust to the Fed's market intervention.
Guided By Garbage

The Fed believes that by fixing the price of money artificially low, they'll increase something they call 'aggregate demand.'  The thesis is that cheap credit will compel individuals and businesses to borrow more and consume more.  Before you know it, the good times will be here again.  Profits will increase.  Jobs will be created.  Wages will rise.  A new cycle of expansion will take root.  Sounds great, doesn't it?

In practice, however, the results are destructive.  While cheap credit may have a stimulative influence on an economy with moderate debt levels, once an economy has reached total debt saturation, where the economy can no longer support its debt overhang, the cheap credit trick no longer works to stimulate the economy.  Like applying additional fertilizer to an already overstimulated crop field, the marginal return of each unit of additional credit in terms of new growth diminishes to nothing.  In fact, the additional credit, and its counterpart debt, actually strangles future growth.

The experience following the Great Recession is that the abundance of cheap credit floods not into the economy, but into asset prices...grossly distorting them in the process.  The simple fact is solving the problem of too much debt by pushing more debt doesn't solve the problem at all.  It makes it worse.

What's more, the approach of using data to identify apparent aggregate demand insufficiencies and perceived supply gluts is flawed.  Unemployment.  Gross domestic product.  Price inflation.  These data points are all fabricated up and fudged out to the government number crunchers liking.

For each headline number there are a list of footnotes and qualifiers.  Hedonic price adjustments.  Price deflators.  Seasonal adjustments.  Discouraged worker disappearances.  These subjective adjustments greatly affect the results.  So what good are they?

Computer programmers are familiar with the term garbage in garbage out.  Meaning, computer outputs are only as good as the data that are input.  If garbage data is input the resulting outputs are garbage.  The point is the radical monetary policy interventions being employed by the Fed to somehow improve the economy are being guided by garbage.
Garbage In Garbage Out Economics

The classical economists recognized that economics, as a field of study, is not a stationary system to be engineered and improved upon.  Rather they understood it is a natural and dynamic system that can flourish when given the proper conditions.  Generally, these conditions include private property rights, a stable money supply, and minimal government interference including free trade, low taxes, and balanced budgets.

Thus the goal of economists should not be to influence the economy by policies of market intervention.  The goal should be to get out of the way; to minimize market hindrances and promote policies that allow the economy to function most efficiently.

No doubt, the present price fixing system of garbage in garbage out economics has reached a critical mass of absurdity...

 

"In determining whether it will be appropriate to raise the target range at its next meeting, the Committee will assess progress–both realized and expected–toward its objectives of maximum employment and 2 percent inflation," reads the recent FOMC statement.

 
    "This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.  The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term."

Pure garbage indeed.

[Admiral Yi]

Dude throws away most of his credibility when he calls price deflators and seasonal adjustment subjective.

[Monoriu]

I don't understand.  What is the alternative to the Federal Reserve controling interest rate and money supply?  If not the Federal Reserve, how can these be determined?

[Admiral Yi]

I don't understand.  What is the alternative to the Federal Reserve controling interest rate and money supply?  If not the Federal Reserve, how can these be determined?

I didn't see any call to abolish the Fed.  More like an attempted critique of Fed policies and methodologies.

[MadImmortalMan]

If not the Federal Reserve, how can these be determined?

Presumably that would lead to interest rates reflecting solely the risk inherent in the loans.

[The Minsky Moment]

Dude throws away most of his credibility when he calls price deflators and seasonal adjustment subjective.

Also when he refers to open market or quantitative operations as price fixing.

[citizen k]

Peter Schiff On QE's Creeping Communism: Washington Joins Tokyo On The Road To Leningrad



Most economists and investors readily acknowledge that the current period of central bank activism, characterized by extended bouts of quantitative easing and zero percent interest rates, is a newly-blazed trail in economic history. And while these policies strike some as counterintuitive, open-ended, and unimaginably expensive, most express comfort that our extremely educated, data-dependent, central bankers have a pretty good idea as to where the trail is going and how to keep the wagons together during the journey.

But as it turns out, there really isn't much need for guesswork. As the United States enters its eighth year of zero percent interest rates, we should all be looking at a conveniently available tour guide along the path of perpetual easing. Japan has been doing what we are doing now for at least 15 years longer. Unfortunately, no one seems to care, or be surprised, that they are just as incapable as we have been in finding a workable exit. When Virgil guided Dante through Hell, he at least knew how to get out. Japan doesn't have a clue.

Despite its much longer experience with monetary stimulus, Japan's economy remains listless and has continuously flirted with recession. In spite of this failure, Japanese leaders, especially Prime Minister Shinzo Abe (and his ally at the Bank of Japan (BoJ), Haruhiko Kuroda), have recently doubled down on all prior bets. This has meant that the Japanese stimulus is now taking on some ominous dimensions that have yet to be seen here in the U.S. In particular, the Bank of Japan is considering using its Quantitative Easing budget to buy large quantities of shares of publicly traded Japanese corporations.

So for those who remain in doubt, Japan is telling us where this giant monetary experiment leads to: Debt, stagnation and nationalization of industry. This is not a destination that any of us, with the possible exception of Bernie Sanders, should be happy about.

The gospel that unites central bankers around the world is that the cure for economic contraction is the creation of demand. Traditionally, they believed that this could be accomplished by simply lowering interest rates, which would then spur borrowing, spending and investment. But when that proved insufficient to pull Japan out of its recession in the early 1990s, the concept of Quantitative Easing (QE) was born. By actively entering the bond market through purchases of longer-dated securities, QE was able to lower interest rates across the entire duration spectrum, an outcome that conventional monetary policy could not do.

But since that time, the QE in Japan has been virtually permanent. Unfortunately, Japan's economy has been unable to recover anything resembling its former economic health. The experiment has been going on so long that the BoJ already owns more than 30% of outstanding government debt securities. It has also increased its monthly QE expenditures to the point where it now exceeds the Japanese government's new issuance of debt. (Like most artificial stimulants, QE programs need to get continually larger in order to produce any desirable effects). This has left the BoJ in dire need of something else to buy. Inevitably, it cast its eyes on the Japanese stock market.

In 2010 the BoJ began buying positions in Japanese equity Exchange Traded Funds (ETFs). These securities, which track the underlying performance of the broader Japanese stock market, are one step removed from ownership of companies themselves. After five years of the policy, the BoJ now owns more than half the entire nation's ETF market. But that hasn't stopped it from expanding the program. In 2014, it tripled its ETF purchases to $3 trillion yen per year ($25 billion), and  the program may be tripled again in the near term. In just another example of how QE is a boon to the financial services industry, Japanese investment firms are currently issuing new ETFs just to give the BoJ something to buy.

However, these purchases have not proven to be particularly effective in doing much of anything, except possibly pushing up ETF share prices. But even that has been a mixed blessing. ETFs are supposed to be the cart that is pulled along by stocks (which function as horses). But trying to move the market by buying ETFs creates a whole other level of potential price distortions. It also tends to limit the impact to those holders of financial assets, rather than the broader economy. For this reason the BoJ is now contemplating the more direct action of buying shares in individual Japanese companies.

Such purchases would allow the Japanese government to accumulate sizable voting interests in some of Japan's biggest companies. Equity ownership would then allow, according to an economist quoted in Bloomberg, the Abe administration to demand that Japanese corporations adhere to the government's priorities for wage increases and heightened corporate spending. The same economist suggested, this "micro" stimulus provided by government controlled corporations may be more effective in spurring the economy than "macro" purchases of government bonds.

These possibilities should horrify anyone who still retains any faith in free markets. The more than four trillion dollars of government bonds purchased through the Federal Reserve's QE program since 2008 now sit on account at the Fed. Although these purchases may have distorted the bond market, created false signals to the economy, and may loom as a danger for the future (when the bonds need to be sold), they are primarily a means of debt monetization, whereby the government sells debt to itself. But purchases of equities would involve a stealth nationalization of industry, and would represent a hard turn towards communism.

Many American observers will take comfort in their belief that the United States has already concluded its QE experiment and that we are heading in the opposite direction, toward an era of monetary tightening. This greatly misjudges the current situation.

The U.S. economy is slowing remarkably, and despite the continuous assertions by the Fed that rate hikes are likely in the very near future, I believe we are stuck just as firmly in the stimulus trap as Japan. The main difference between the U.S. and Japan is that Japan began this "experiment" from a much stronger economic position. Japan was a creditor nation, with ample domestic savings and large trade surpluses. In contrast, the U.S. started as the world's largest debtor nation, with minimal savings, and enormous trade deficits. So if Japan, with its superior economic position, could not extricate itself from this trap, what hope does the United States have?

If the Fed is unable to raise rates from zero, it will also be have no ability to cut them to fight the next recession. So the next time an economic downturn occurs (one may already be underway), the Fed will have to immediately launch the next round of QE. When QE4 proves just as ineffective as the last three rounds to create real economic growth, the Fed may have to consider the radical ideas now being contemplated by the Bank of Japan.

So this is the endgame of QE: Exploding debt, financial distortion, prolonged stagnation, recurring recession, and the eventual government takeover of industry and the economy. This appears to be the preferred alternative of politicians and bankers who simply refuse to let the free markets function the way they are supposed to.

If interest rates were never manipulated by central banks and QE had never been invented, the markets could have purged themselves years ago of the speculative bubbles and mal-investments. Sure we could have had a deeper recession, but it also could have been much shorter, and it could have been followed by a far more robust and sustainable recovery.

Instead Washington has joined Tokyo on the road to Leningrad.

[crazy canuck]

Is this more garbage in?