Thoughts About The Education Bubble

As people crow about Pittsburgh's bulletproof economy built around "Eds & Meds", (we are still losing jobs) It might be good to take a hard look at how well these "industries" really are doing and the danger our dependence on them might mean.

Of course, people need to go to school and people need healthcare, but the fact is that people need a lot of things and what matters most in a truly sustainable economy is the balance between current consumption and future investment. The heart is important and so is the brain, liver and stomach but when one grows out of all proportion to all the others---you might have cancer.

An article on The Examiner tells the harsh truth

"As usual, the numbers tell the whole story. According to the College Board in early 2009, total student loan borrowing more than doubled between 1998 and 2008. The numbers are staggering. We're talking about $85 billion in loans, as compared to $41 billion ten years ago.

Privately funded student loans have risen, too, from 7% in 1998 to 23% of all student loans in 2008. It makes for quite a brew for cash-strapped Americans this year, who are already saddled with unemployment and loss of income. Sallie Mae, for example, had a delinquency rate of 9.4% in Q3 2008, as compared to a rate of 8.5% just a year earlier.I'm willing to bet that rate gaps higher as the months go by.

The student loan market has been, is, and will be riddled with trouble. Expect higher default rates, as students can't pay back these loans."

Even more disturbing is that the real explosion of college costs have not been fully felt by people(which is why they exploded in the first place) because of government loans and subsidies. As that well runs dry-the reality will hit like a rock and real hard cost cuts and college closings will begin.

Weimar America 2 : Start The Presses

I want to warn you that there may be a bit of bold type in this post. Even I am still occasionally shocked by the actions of the government, by large numbers and still have the quaint belief that America is still a semi rational nation under the rule of law.

So, in my last Weimar America (yes it looks like a series) post, I warned about the risk of hyperinflation and what might happen if Fed began to "monetise" our ballooning debt by creating money out of thin air. Please tell me they are not doing it, but more and more wise people (the people who predicted this mess, like Peter Schiff, Jim Rogers and many others) are telling me this is what has begun to happen.

"You’ll also find this little snippet in the article, “Most of the money, about $5.5 trillion, comes from the Federal Reserve, which as an independent entity does not need congressional approval to lend money to banks or, in “unusual and exigent circumstances,” to other financial institutions.

Just another reminder that the private, run for profit, Federal Reserve has the printing presses cranked on overdrive in order to bailout Wall Street and the big banks, while the homeowner and the middle class see their savings devalued out of existence.

“If you print money all the time, the money becomes worth less,” warns Diane Lim Rogers, chief economist with the Concord Coalition, but its an empty threat to delirious traders and investors drunk on a record stock market rally after the government pumped more fake liquidity into the bloated bubble.

Veteran investor Jim Rogers echoed the sentiment, predicting the dollar is “going to lose its status as the world’s reserve currency,” adding, “It will be devalued and it will go down a lot. These guys in Washington, they want to debase the currency.”

A website called Prison Planet might be run by kooks you say, but the story's link is to an article in The San Fransisco Chronicle and quotes major investors and other sources like The Concord Coalition which could hardly called fringe.

"A deficit arises when the government's expenditures exceed its revenues in a particular year. Some estimate that the federal deficit will exceed $1 trillion this fiscal year as a result of the economic slowdown and efforts to revive it.

The Fed's activities to shore up the financial system do not show up directly on the federal budget, although they can have an impact. The Fed lends money from its own balance sheet or by essentially creating new money. It has been doing both this year."

The article also points out that these 8.5 Trillion in obligations and promises represent 60% of America's GDP.

Now one other question might come up. It sounds like other countries like England are also deep in a hole and are doing the same thing. Doesn't this mean that we are OK cause the dollar can't fall against anything if other currencies are falling too? The short answer is that all these currencies will fall against any real store of value like gold or any reasonably sound currency like those of Japan, China and other countries we owe money to.

The whole process is accompanied by constant reassurances that this is a temporary thing, and we will act responsibly in the future even though 60 years or more of U.S. history tell you that is very unlikely. The goal as usual is to kick the pain and hard decisions down the road to another administration or generation.