Student loan forgiveness, an economic boom or an economic bust. I think this is one of the first things the biden administration may do. We’Ve been hearing about it, a lot lately in the news they’re going to wipe the slate clean with student loan debt. There’S going to be some pros, there’s definitely going to be some cons and for you to be fully prepared in the future, you need to understand how this may play out not only the intended consequences, but probably, more importantly, the unintended consequences. As always, i’m gon na explain this to you in three simple, fast steps: step number one: let’s go over wages rates and debt in the american economy; it always starts with debt. Since 1981, we have seen a significant increase in the standard of living and the wealth, especially for the baby boomers. Their 401k has gone parabolic. Their home equity has gone parabolic, but how has this happened check this out? We start with this chart going back to 1964. All the way to 2004, these are real average wages on the left from 16 an hour up to twenty dollars an hour going into the 1970s. Real wages were really going up. The standard of living in the purchasing power for the average american was increasing significantly right. Around 1974, it really starts to unravel when we start getting high rates of inflation, because that inflation exceeded the rate of the wage growth. So, in real terms, wages go down. This continued all the way through the 1980s. The beginning of the 1990s down to 1994, then with the internet boom, starts to go back up. We have some upward pressure on wages. Jeff snyder would also argue because they most likely got really aggressive in the euro dollar market. It’S a completely separate video goes up to 2000. We have the bust and then wages flatline, where they are today. Real wages today are under where they were in 1974.
For more insights on why real wages have stayed so low for so long, let’s go to my recent interview with real vision, ceo raul, paul. By the way, if you haven’t checked out this interview, it is amazing, i’ll put a link in the description below editor. Let’S cut to the clip world war ii after world war ii finished, the record number of people came into the labor force, so 76 million baby boomers into the u.s okay. So, by the time they were all getting into their 30s. Much like the millennials are now i’ll come into that in a sec. These people were competing against each other like wages. At the same time, we we abandoned um bretton woods. So that was another marker in this, but what happened was is when he put 76 million people into the labor force and at the time the population was much smaller. So this was gigantic, as a percentage wages never went up again ever in real terms, so wages stopped going up in about 1974 in real terms, then, if you then wind forward a bit, so that was nobody’s fault apart from the silent generations, for having too many Kids – and that was a function of world war ii, so then the next phase of this is cut to the credit boom that came out the reagan thatcher years. What was that all about? Well interesting enough credit growth offset the lack of wage growth. It’S almost perfect when you measure all assets against it, so people did what they thought was the logical thing. I’M earning less money in real terms, therefore i’ll borrow to make the difference. The next phase of this came with the rise of technology, the pc. Obviously, in the 80s, but really by the 90s and the internet. Okay, this was technological change that we hadn’t really witnessed before it was. It was feeding on itself. It was becoming exponential um, so that was becoming deflationary as well, because you could use you’d, get more productivity out of computers than you could out of a person and then from 96 to 2000. We had that whole period of the wto and the wto basically opened the playing field that everybody can compete on labor price and when china came in, that was it done. The europe us manufacturing industry completely hold out unless you were the best in class, which was germany and japan, because they had great high quality, so they didn’t compete on price. Everybody else got killed and wages just didn’t go up. So then the question becomes: how on earth did baby boomers accumulate so much wealth during this time, and this takes us not to a doom vortex today, oh no, no! No today we have a boom vortex and that’s when the increased amount of debt increases the amount of spending which increases the amount of asset prices which increases the amount of debt available. It’S a positive feedback loop that sends asset prices higher and higher and higher, and we can really see this playing out on our next chart. That starts in 1950 goes all the way to 2015
On the left, we have the amount of household debt from 0 trillion dollars, believe it or not at one time it was almost that low up to 16 trillion it really flatlines until we get to 1990, then starts to go up significantly. When we add the housing bubble in the early 2000s, it comes back a little when the balance sheet of the average consumer is being rebuilt during the gfc. But since then it’s gone to all-time highs. This would explain how the baby boomers have such a large 401k and have so much home equity. They have so much wealth, it really isn’t a result of them producing more goods and services. It’S just a result of more and more debt in higher and higher asset prices. I also want to point out that consumer debt on almost every metric has gone buzz, lightyear to infinity and beyond. [ Music. ] editor. Let’S go ahead and throw up some more charts. We can see that debt to income has gone straight up, also the debt per capita. I even made some calculations of my own using an inflation calculator with the numbers represented in the debt per capita chart. So, even when you adjust for inflation and the size of the population or the population increase debt in the united states has gone parabolic since 1981.
So how can they take on this much debt if their wages are pretty much going down or at best flatlining, because interest rates have gone down since 1981. brings us to our next chart, and this is interest rates, the fed funds, i believe in 1981 – all the Way up close to 20 percent, can you imagine we know what’s happened since then? Come all the way down to where we are today at zero percent. So if interest rates go down, that means the amount of the monthly payment for a mortgage. Let’S say goes down as well, so you can afford more and more house. You have more and more purchasing power, although your wages haven’t increased at all and right about now, this guy steps in and says wait a minute, george. I think you’re missing something very important. Well, who is this? You may be asking yourself: it’s none other than baby boomer bob could be moody’s dad who knows, and he is really angry at the government – he’s got this shirt that says, don’t tread on me. Government. I’Ve got my gun my rifle right here and i have my sign that says i hate passports because i’m a patriot and if anything happens here in the united states, i’m going to stay here and fight. That is right and, of course, he’s got his blue. I’M not sure if there’s sunglasses, maybe they’re blue blockers, not quite sure but bob is saying george. You are wrong. If all this financial engineering from the government has helped me get rich in the greatest country in all of the world, why can’t they just continue doing it for the next 20 30 40 years to make asset prices go up forever? Well, because what brought asset prices? This high had a lot to do with interest rates going down by 20 percent right now, we’re at the zero lower bound meaning interest rates are at zero. So if we want to create the same financial engineering, we had from 1981 to now, we’d have to take interest rates from zero down to negative 20
I don’t think that’s likely, although if we go to a fed coin in a central bank, digital currency who knows – and one more thing, i’d like to point out about baby boomer bob is, although he talks a big game, he’s going to stand up and fight tyranny. He owns 486 guns, they’ll. Take my lead before they’ll. Take my gold is what he always says, but what was baby boomer bob doing to fight tyranny back in march of 2020, when the government, quite literally locked him in his own house, the only fighting he was doing was locking the front door polishing his guns and Sitting down every day and watching eight hours of fox news, so my point is not to make fun of baby boomer bob. But it’s to point out that bob you’re most likely not going to fight any government or police state at the age of 70.
So go out there and get yourself a darn passport. There’S no downside to it! That’S the best way, the most realistic way that you and every one of us as far as americans can increase our personal freedom and liberty in the future. But the main takeaway from step number one is to remember what i always say: the united states economy, and especially the balance sheet of baby boomers, is dependent upon asset prices, debt and confidence more on this in step. Number two step number two: now: let’s look at the balance sheets for the two demographics and we can start to see how student loan forgiveness may result in an economic boom. We’Ve got boomer bob. He is here again with his blue blockers, his gun and his sign. That says i hate passports and, of course, we have good ol moody, the millennial. They are really pissed at boomer bob, giving bob the finger the entire time, but let’s focus on the balance sheets. That’S far more important than the animosity between the boomers and the millennials bob’s balance sheet has a lot of debt like we talked about in step number one we’ll say a hundred thousand dollars, but he also has several assets and they’re worth a lot of money. His home and his 401k, let’s say, are worth 500 000, so bob is doing extremely well where moody, on the other hand, has the same amount of debt, a hundred thousand dollars in student loans, but their balance sheet on the asset side only has a bicycle, and This thing most likely a backpack and between their bicycle and their backpack. They only have fifty dollars in assets compared to a hundred thousand dollars in student loan debt, and these two groups represent a huge percentage of the overall population with baby boomers. There’S 68 million men and women with millennials there’s 82 million thems, because of course i don’t know the millennials preferred pronouns, so there’s 82 million thems and thems. So you can see how, if we extinguished all of this debt, we could see a boom in an economy where 70 of gdp is a result of consumption. To illustrate this further, let’s go to a couple charts that i found online. The first chart really illustrates the balance sheet problem. The millennials have extremely well percentage of total household wealth. Baby boomers have 54 versus millennials, who only have four percent and, as you would expect, when you look at groups who are more affluent, the percentage of household wealth represented by the millennials goes down significantly by 50 percent. But let’s remember that young people have a higher propensity to consume. This chart shows us exactly what i’m referring to annual consumer spending by generation. Gen z, which is the youngest generation, spends a lot more than the silence, which is the oldest generation. So moody has a mortgage and a mortgage payment, but they don’t have a house. This is a great point that my good buddy jason hartman at jasonhartman.com, made when i was on a conference call with him the other day. That really puts things into perspective and gives you a good visual as to what the balance sheet problem here is with the millennials and as we saw, they have a much higher propensity to spend. So if we were to give them a we’ll call it a moody jubilee instead of a dead jubilee, where we wipe out all of the student loan debt, what are they going to do? They’Re going to go right out, they’re going to buy their first house they’re going to buy a car instead of this bicycle they’re going to go out to restaurants, to bars, and especially right now, when we’re getting crushed by the cerveza sickness and all of the lockdowns. The businesses who are being most affected are most likely the businesses where moody would spend the most money if we were to wipe out the student loan debt, so this definitely could result in an economic boom. But, as you guys know from watching my channel, there is no free lunch. These are the intended consequences, but now we need to go over the unintended consequences. Step number three to answer. The question is student loan forgiveness going to be an economic boom or an economic bust. We have to remember what henry hazlitt and frederick bastiat taught us in economics. What differentiates a good economist and a bad economist is the good economist, not only recognizes what is seen at surface level, but also recognizes the unseen. So what is the second third and fourth layer effects to a certain policy to illustrate this further, let’s go right to the internet. What distinguishes a good economist from a bad economist! We may invoke hazlitt’s question: why is it that economics is haunted by more fallacies than any other study known to men? To explain this? We have to refer to two prominent figures in the world of economics to frederick bastiat and to already mentioned henry hazlitt. Bastiat explains that in economics, every event or law entails a multitude of consequences. Some of these consequences are apparent at the first glance. Others are more remote and thus harder to spot. According to bastiat, the only difference between a bad and a good economist is that a bad economist will only pay attention to the immediate and most apparent effects. While a good economist will take into account not only those short-run, visible effects, but also those hidden from sight and realize at a more distant point in time, has it adds in turn that a bad economist will concentrate on the short run effects of policies on special Groups, while the good economist will also pay attention to the long run effects of such policies on the community as a whole, so let’s go through this process with student loan forgiveness and see if we can come to some conclusions. First, i want to point out what makes a society rich. Let’S pretend we have our average joe on an island. We’Ve got the water all around. The only thing he has is a palm tree with a couple coconuts and a chest full of a billion dollars. I want you to ask yourself a question: is joe rich or is he poor see? Most of you would argue that joe is actually poor, because, regardless of how much money he has, he only has access to three coconuts, maybe some sand and some salt water. It’S the exact same for the united states or for any country the amount of wealth that the country has over the long term, isn’t represented by how much currency units or how many currency units it can produce. But it’s represented by the amount of goods and services that it can produce the productivity of society at large and right about now. Your friend and family member fred is probably saying yeah george, i get it, but the whole reason we don’t produce that many goods and services is because we don’t have any quote: unquote good jobs, okay, but it goes right back to what hazlitt and bastiant taught us. Let’S think through this one of the main reasons we don’t have any good jobs is because we have a huge trade deficit. That’S hollowed out our manufacturing base. That was a result of triffen’s paradox, which was a result of bretton woods in 1944. So the reason moody can’t find – or one of the reasons, moody can’t find a good job – goes all the way back to 1944 in an agreement between 44 countries and governments that never would have imagined that pegging the dollar to gold and then pegging other currencies to The dollar would result in moody not being able to get a job to where they can afford to pay back their student loan in 2020.
This beautifully illustrates what hazlitt and bostyat are trying to tell us. We’Ve got to think through things from a to z. It’S not just about the scene, it’s about the unseen. So, let’s take it another step and think about what the millennial generation, what their productive capacity is right now, based on the education they’ve received and therefore the debt they want to extinguish for this, let’s go right to the internet: let’s go over an article from rancor.com That shows us the top 10 or 15 most useless degrees and the way they’re defining useless is when you get done with college, it’s extremely difficult to get a job where you can actually pay back your student debt and the reason i associate this with a younger Generation or the generation that has the most amount of student debt right now, because when i was considering college back in the early 90s, i don’t think they even had these majors, at least not that i can remember so. Let’S go through the list here. Number one useless degree: gender studies, peace studies, disruption, dance, golf management, renaissance studies, religious studies, african american studies, fine art, feminist theory. You get the idea, and i’m not here to say that no one has a degree that will help them produce more goods and services. Therefore, creating a wealthier society, i am saying that a much higher percentage today have these degrees that are quote-unquote useless, so degrees that don’t involve any science or math. It might make us feel good, but it’s not going to make our society as a whole any richer. It’S going to make us poorer in the long run, so my point is: even if we wipe out all the student loan debt, it doesn’t make our society any more productive. The only thing we can do is spend more money, so even if we see a boom, the boom is only going to be temporary. At the end of the day, the structural flaws with our economy still exist. Now, let’s go ahead and think through the next step. If we go through a process of forgiving all student loan debt, most likely in the future, we’ll go to a society that has free college. Of course nothing is free, but that’s what they’ll be calling it and if we go to mmt, we most likely have a jobs guarantee program. Well, if all young people can go to college free, so they’ll never have student loan debt and when they get out of college they’re, guaranteed a job in, let’s say, feminist studies or dance or golf maintenance at topgolf, whatever it is, we’re going to have fewer and Fewer young people studying things like math and science that will actually allow our society to produce more goods and services, making us more and more wealthy. So, although the short-term effect of student loan forgiveness may be a boost in spending, so we get higher nominal gdp over the long run we produce less stuff. Therefore, our society becomes poorer and, let’s remember, if we’re producing less, that means our trade deficit will increase, which means the amount of good high, paying jobs that we have again will decrease. It comes full circle. So to answer the question: would student loan forgiveness be an economic boom or an economic bust? If we’re thinking about this like hazlitt and bastiat, the conclusion i think you have to come to and again they’re no certainty’s only probabilities is that short term. We would have a boom, but long term. We would definitely have a bust for more content. That’Ll help you build wealth and thrive in one of out-of-control central banks and big governments check out this playlist right here, and i will see you on the next video
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