Best of the Week
Most Popular
1. Market Decline Will Lead To Pension Collapse, USD Devaluation, And NWO - Raymond_Matison
2.Uber’s Nightmare Has Just Started - Stephen_McBride
3.Stock Market Crash Black Swan Event Set Up Sept 12th? - Brad_Gudgeon
4.GDow Stock Market Trend Forecast Update - Nadeem_Walayat
5.Gold Significant Correction Has Started - Clive_Maund
6.British Pound GBP vs Brexit Chaos Timeline - Nadeem_Walayat
7.Cameco Crash, Uranium Sector Won’t Catch a break - Richard_Mills
8.Recession 2020 Forecast : The New Risks & New Profits Of A Grand Experiment - Dan_Amerman
9.Gold When Global Insanity Prevails - Michael Ballanger
10.UK General Election Forecast 2019 - Betting Market Odds - Nadeem_Walayat
Last 7 days
FOMC Minutes Reveal an Important Shift That’s Key for Gold, Too - 22nd Nov 19
Adaptive Predictive Modeling Suggests Stock Market Weakness Into 2020 - 22nd Nov 19
Why You Should “Follow the Money” on The Yellow (and Silver) Brick Road - 22nd Nov 19
This Invisible Tech Stock Threatens Amazon with 800,000+ Online Stores - 21st Nov 19
Crude Oil Price Begins To Move Lower - 21st Nov 19
Cracks Spread in the Precious Metals Bullion Banks’ Price Management System - 21st Nov 19
Why Record-High Stock Prices Mean You Should Buy More - 20th Nov 19
This Invisible Company Powers Almost the Entire Finance Industry - 20th Nov 19
Zig-Zagging Gold Is Not Necessarily Bearish Gold - 20th Nov 19
Legal Status of Cannabis Seeds in the UK - 20th Nov 19
The Next Gold Rush Could Be About To Happen Here - 20th Nov 19
China's Grand Plan to Take Over the World - 19th Nov 19
Interest Rates Heading Zero or Negative to Prop Up Debt Bubble - 19th Nov 19
Plethora of Potential Financial Crisis Triggers - 19th Nov 19
Trade News Still Relevant? - 19th Nov 19
Comments on Catena Media Q3 Report 2019 - 19th Nov 19
Venezuela’s Hyperinflation Drags On For A Near Record—36 Months - 18th Nov 19
Intellectual Property as the New Guild System - 18th Nov 19
Gold Mining Stocks Q3’ 2019 Fundamentals - 18th Nov 19
The Best Way To Play The Coming Gold Boom - 18th Nov 19
What ECB’s Tiering Means for Gold - 17th Nov 19
DOJ Asked to Examine New Systemic Risk in Gold & Silver Markets - 17th Nov 19
Dow Jones Stock Market Cycle Update and are we there yet? - 17th Nov 19
When the Crude Oil Price Collapses Below $40 What Happens? PART III - 17th Nov 19
If History Repeats, Gold is Headed to $8,000 - 17th Nov 19
All You Need To Know About Cryptocurrency - 17th Nov 19
What happens To The Global Economy If Oil Collapses Below $40 – Part II - 15th Nov 19
America’s Exceptionalism’s Non-intervention Slide to Conquest, Empire - and Socialism - 15th Nov 19
Five Gold Charts to Contemplate as We Prepare for the New Year - 15th Nov 19
Best Gaming CPU Nov 2019 - Budget, Mid and High End PC System Processors - 15th Nov 19
Lend Money Without A Credit Check — Is That Possible? - 15th Nov 19

Market Oracle FREE Newsletter

$4 Billion Golden Oppoerunity

What Comes After a Trillion in Student Debt?

Interest-Rates / Student Finances Mar 07, 2019 - 01:05 PM GMT

By: Jared_Dillian

Interest-Rates Headline in Bloomberg the other day:

“Millennials Are Facing $1 Trillion in Debt.”

A trillion always sounds like a lot. It is a lot. But while the absolute number is large, that is not the issue.

The issue is what makes up this millennial debt. It’s mostly student loans, and a staggeringly high amount of these loans are in delinquency.

And this is at the top of an economic expansion!

On a societal level, imagine what happens if the economy takes a wrong turn and these student loans—which are already 10% delinquent—go to 40% delinquent?



Revolution.

Not to get all “Book of Revelation” on you, but debt has historically led to war and inflation and autocracy.

Once you know that, you develop a healthy respect for debt and the destruction it can cause.

Wall Street folks often view debt as a numerical abstraction. Like, if the default rate rises to 6%, then high-yield spreads over Treasuries will go from 300 to 700 over.

That’s the kind of gearhead stuff most analysts talk about.

I recognize the investment opportunities, but I’m also conscious of the impact on human beings when people apply too much leverage.

Debt kills.

Millennials and Debt

If you are in debt, in most cases it’s your fault.

But in the case of millennials, they made decisions to take out student loans when they were too young to make these decisions.

Someone in the Bursar’s Office stuck a form in front of them and said “sign here.” And without a second thought, these 18-year-olds signed their future right down the drain.

Borrowing money to go to school is shockingly easy. Borrowing money to buy a house is very hard. That probably explains the difference in the delinquency rate.



Source: Bloomberg

So when millennials say that it isn’t their fault and the debt should be forgiven, they’re half right.

They’re guilty of having a high agreeableness score and shocking levels of innumeracy. Even so, they’re not deadbeats any more than any other generation are deadbeats.

And they’re not any more prone to extravagance.

In fact, student loan debt has crowded out other kinds of debt, notably, mortgage debt. They can’t get a mortgage, which means they can’t build equity, which means they can’t take part in the greatest savings program known to mankind.

Nobody does this deliberately.

If I were to take out six figures in student debt, I would build a spreadsheet to figure out how long it would take me to pay it back. 99.9% of these people do not do this.

Are they wrong? Or do we just need to lower expectations?

Lending Standards

This talk about forgiving student-loan debt is dumb. Because remember, you have to respect the rights and property of the lender.

If I were running this hamburger stand, I would work to compel student lenders to enforce the same credit standards that banks do when they issue mortgages.

Naturally, that would result in fewer people going to college—or, at least, to expensive colleges. And that is okay!

It would force colleges and universities to think a little harder on the sprawling bureaucracies they’ve built for themselves, along with the 5-star accommodations.

The University of Michigan famously employs 93 full-time diversity staff, the top 26 of which make six figures.

Yes, college could be cheaper.

The Way Out

I have been focusing on debt from a micro perspective.

My colleague John Mauldin talks a lot about debt from a macro perspective.

The national debt is huge and growing and is a problem. Unless we take corrective action, we will also be in checkmate.

Having said that, there may not be tangible economic effects for a while. Deficits do matter, but with a very long lag.

If a household goes into debt, the effects are immediate.

Even if a recession doesn’t happen, the absolute best-case scenario is that people limp along with crushing debt service, crowding out consumption and investment.

People live in poverty, retire in poverty, and die in poverty.

This is a personal mission of mine. I talk to people and I hear stories about how debt constrains behavior. It sucks up all the free cash flow.

I bet if people had an extra $1,000 a month in free cash flow, they’d at least find something fun to do with it.

I paid off what was left of my debt two months ago. Tomorrow is the first of the month—no mortgage payment! Sublime.

I hope one day everyone gets to experience the same feeling of liberation.

Free Report: 5 Key ETF Trading Strategies Every Investor Should Know About

From Jared Dillian, former head of ETF trading at Lehman Brothers and renowned contrarian analyst, comes this exclusive special report. If you’re invested in ETFs, or thinking about taking the plunge into the investment vehicle everyone’s talking about, then this report is a clever—and necessary—first step. Get it now.

By Jared Dillian

© 2019 Copyright Jared Dillian - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules