Why is the cost of college education so ridiculously high? Is the current cost of pursuing higher education justified or are we witnessing another bubble?
Last week I had the chance to visit a large and prestigious public university. While walking through the massive football field, one of the tour guides mentioned that they were planning on building another one close by. “What is wrong with this one?” I asked and the tour guide responded that they were looking to modernize the stadium. Beyond this a new gym included an Olympic sized pool and all the amenities you could want. Brand new stores, buildings, and the feel of a new city being built. This is the situation of the modern college. In essence, many institutions are operating as premiere cities luring in top students with goodies you would expect from a selective gated community. These things are not cheap and the cost of tuition is rising to support this growth. Then you have on the other side of the spectrum for-profit “colleges” that exploit the poor and rely on government loans to basically provide subprime education to anyone they can lure in. Why is the cost of education so high in the US and is the cost truly justified?
Blue pill of debt exchanges temporary increase in debt for inflation: Taking the blue pill of a fabricated world addicted on debt as US standard of living hits 10-month low.
Most of you have seen The Matrix where Neo is given the choice between taking the blue or red pill. The red pill would allow Neo to escape The Matrix and enter reality whereas the blue pill would allow him to stay wandering in the fabricated world of the Matrix. The US government in essence swallowed the blue pill for the moment using duct tape to smooth us over the debt ceiling. Reality is being avoided. This isn’t to say that the default should have been allowed to happen. Yet to call this a solution is laughable. We will be back at this in early 2014. Can’t ruin the holidays with reality. That is the grand solution that was achieved by our millionaire Congress. The problem is that with $17 trillion in total debt we are entering a situation where low rates are a must to retain solvency. Yet what if rates are unable to stay this low? Since this calculus is now set, you can bet that the Fed will do everything in its power to inflate our way into the next level of the Matrix.
The US cannot avoid a soft default even if a hard default is avoided: Debt ceiling already breached and US Treasury operating in emergency mode while US is paying $415 billion in annual interest expenses.
All the talk has shifted from the government shutdown to the US actually defaulting on outstanding debts. The markets were in deep fear but the last couple of days rumors that the debt ceiling would be raised put the rocket boosters on the stock market. Of course, the majority of Americans have little money in stocks so this was more of a spectacle. Yet what isn’t discussed is the US is already in a long-term soft default on outstanding debts. That is, through various financial wizardry, the US is going to devalue the amount it owes through inflation by digitally printing enormous amounts of money. The Fed already has a balance sheet above $3.6 trillion when prior to the recession, it was below $800 billion. The end result of course is that debt based purchases like housing, college, and cars have soared in the amount they cost even though the typical household makes what they once did in 1987 adjusting for inflation. A soft default simply means that debts will be paid but with inflated money.
Nothing left to financially lose: Biggest drop in confidence since Lehman Brothers and why some are unmoved by government shutdown.
The government isn’t the only thing that shutdown. Economic confidence in the US has also apparently shutdown as well. Many people, in particular those in the media, seem perplexed as to why and how this can happen. Unfortunately the current financial system has disenfranchised a large number of Americans. Enough to the point that politics are fully dysfunctional in Washington. What do you expect from a Congress run by millionaires? Some in the media seem to think that all Americans have giant stock portfolios and have mega wealth to lose. Sadly, one out of three Americans has nothing to their name. 47 million Americans are on food stamps. Those 25 to 34 have a median net worth of zero. The fact that the stock market has taken a hit since the shutdown has no impact on most Americans (or that it has rallied by 100+ percent since the lows in 2009 for that matter). However, Economic confidence which is more important has take a major hit falling at the fastest pace since the collapse of Lehman Brothers. When you have nothing to lose, that is when things get volatile like a cornered tiger.
The grand financial shift: Rich own assets while poor and working class deep in debt. 70 percent of wealth for the bottom 80 percent locked up in principal residence.
A core reason for the financial crisis was because too much debt was given to those with very little ability to pay it back. From the wealthiest banks to those scrimping by on minimum wage. The irony of this is that many for-profit colleges for example use government aid to finance the education of those that least can pay it back (plus the value of the degrees are virtually worthless in many cases). One distinct factor between the rich and poor is that the rich own assets while the poor and working class are owned by whatever little assets they have (most have relatively little). A new report shows this dramatic divide in wealth. What is also problematic is the recent rise in real estate values spurred by Wall Street buying because most of the gains are now going to those with an already large portion of US wealth. For Americans with stagnant incomes, this means more money is going to be consumed on real estate and less on other spending. Not a positive trend in an economy that depends on over 70 percent consumption. The big shift that has occurred in the last couple of decades is that poor and working class Americans are deep in debt while the wealthy are able to control a larger portion of assets in the country.
The Rise of a Semi-employed America: Amazon to hire 70,000 part-time workers while Merck will fire 8,500 full-time employees. Before recession 4 million part-time workers today over 8 million.
The US is seeing a dramatic rise in the number of part-time workers. The reason many employers are going with part-time hiring is that they usually forgo any benefit payments but also have more flexibility in firing these workers when they no longer need them. This may also explain the rise in renting households as more Americans are unwilling to buy a long-term asset when their own future is tenuous. This trend is hitting young Americans particularly hard. We can see this shift by analyzing those working part-time for economic reasons. Prior to the recession, roughly 4 million Americans fit this category. Today the figure is above 8 million although at the height of the recession it was at 9 million. This trend demonstrates a shift to less secure employment for many American families. It also highlights a deeper trend of just-in-time (JIT) hiring for US companies. For example, at the same time that Amazon announces seasonal hiring of 70,000 part-time workers Merck announces it will be letting go of 8,500 employees. This trend is only going to accelerate as the government battles mountains of debt and companies look for ways to cut costs.
Debt serfdom via student loans: A new class of indentured servants now carry the $1.1 trillion student loan bubble and cracks are already plaguing the system.
$1.1 trillion. That is the amount of student debt being carried on the backs of millions of Americans. Student debt has become a rite of passage for many young Americans. In fact, many Americans establish their first credit line with student debt as they enter college. The crisis is large and has a direct connection to the abysmal savings that younger Americans have. The press has tried to downplay this debt sector because students continue to carry the burden making minimum payments on the debt. Yet even with this, student debt is the most delinquent household debt sector in the United States. There are deeper trends at hand yet the amount of debt floating around in the student debt markets continues to expand. Disposable income of younger Americans already ravaged by the recession continues to be sucked away into this gigantic burden. Are we creating student debt serfs via higher education?