US student loans, feel very much like a US problem.
Something that has nothing to do with Aussies, right?
More so, when you consider that there is a total of $55 billion in Australian HELP loans, compared to the US’ US$1.7 trillion in outstanding student debt.
The thing is, all these US student loans are beginning to crimp US growth.
Stalling growth in the world’s largest economy will filter through around the world.
Especially when that US$1.7 trillion in outstanding student loans is more than household credit card and car loan debt combined.
The US — and Australia — are just two of many economies around the world that rely on credit expansion to grow.
As Forbes pointed out recently, the size of American college debt has increased eight times faster than wages.
The debt is becoming so large, that perhaps it might not even be repaid. Something US officials are keenly aware of.
See, a recent US government initiative saw that the repayment of outstanding student loans in the US be tied to income earnt.
Similar to what Aussie students have with their HELP debts.
Those in the US that became part of this initiative saw their loan repayments fall.
Which is good news for individuals, but bad news for some of the issuers of US student loan bonds.
So much so, that fearing some of the bonds would be downgraded, one issuer extended the maturity of the bonds by 54 years.
In other words, a student who took out a loan in 2015, is probably going to be 114 when the bonds expire.
It’s becoming clear that the enormous pile of student loan debt is becoming a damper on the US economy, which relies on more credit creation in order to grow.
The rapid growth of the loans and the slow wage growth risks these loans never being repaid.
And as Jim points out today, a ‘debt jubilee’ may be the only way forward for the US economy.
Read on for more.
World’s Oldest Debt Relief Plan Is Coming Back
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There’s nothing new about debt. It has been around as long as money has been around, possibly longer.
Some research shows that before money became widely used (usually in the form of gold or silver coins), merchants would exchange goods and services for promises to pay at a future date.
A caravan participant might deliver goods for such a promise and then return a year later, expecting to be repaid in some mutually agreed manner possibly consisting of other goods, food and water, or money.
A ‘credit society’ existed as long ago as the money society; growth of the two went hand in hand dating to the dawn of civilisation 5,000 years ago.
Of course, along with credit came bad debts when debtors found themselves overextended or illiquid…
Ancient solution for a modern problem?
At times, exuberance led to excessive debt creation not just by some individuals, but by a society as a whole.
A debt panic could result with the same dynamics as the global financial crisis of 2008. The result could be ruined enterprises, deflation, and lost wealth.
We face the same prospect today with student loans, auto loans, credit cards, junk bonds, and emerging market debt as society did 5,000 years ago.
But ancient societies had a solution called the ‘jubilee’.
In a jubilee, a ruler or high priest simply decreed that all debts were wiped out.
This enabled debtors to get back on their feet, wiped the slate clean, and enabled the economy to grow again without the debt overhang.
Jubilees were practiced in ancient Sumer and Babylon and are specifically referred to in the Old Testament.
One obvious objection to a jubilee is that it helps debtors and the economy, but it seems unfair to creditors. But this ignores the fact that creditors could see the jubilee coming. If a jubilee were coming every 50 years, creditors would stop making 10-year loans in year 40 and stop making two-year loans in year 48 or sooner.
In effect, the system was self-regulating with creditors pulling in their horns ahead of the jubilee to minimise losses. There was still some friction, but on the whole it was a much better system than the panics we seem to have every 10 years or so.
Some kind of jubilee is probably coming in the US with respect to the US$1.7 trillion in student loans outstanding.
Losses will fall on the taxpayers (that’s you and me).
But the results could be beneficial as student debtors might be able to buy houses, get married, and purchase consumer non-durables.
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The gold standard will return, but there’ll be a panic first
I’ve written and spoken publicly for years about the prospects for a new gold standard.
My analysis is straightforward. International monetary figures have a choice.
They can reintroduce gold into the monetary system either on a strict or loose basis (such as a ‘reference price’ in monetary policy decision-making).
This can be done as the result of a new monetary conference organised by some convening power, probably the US working with China.
Or they can ignore the problem, let a debt crisis materialise (that will play out in interest rates and foreign exchange markets), and watch gold soar to US$14,000 per ounce or higher, not because they wanted it to, but because the system is out of control.
I’ve also said that the former course (a conference) is more desirable, but the latter course (chaos) is more likely. Either way, the price of gold soars.
In a recent Forbes article, analyst Nathan Lewis takes a similar view.
He agrees that gold prices are going much higher, but he also points out that it will take time for the existing system to break down before that happens in a dramatic way. Lewis also suggests a new international monetary conference.
In effect, he asks why not avoid the train wreck rather than clear up the wreckage?
This is a thoughtful article with helpful references (including a reference to my most recent book, Aftermath).
It’s a good suggestion, but will probably be ignored until it’s too late.
Get ready for the train wreck.
| All the best, |
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| Jim Rickards, |
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