The rampant availability of money and credit frequently results in price distortions. When individuals borrow against the future to make purchases today, it creates a spike in demand. Consequently, prices must rise to balance out this increased demand.
However, steady expansion of money and credit means that prices can never fully stabilize. Additionally, the growing debt underpinning these rising prices tends to escalate continuously. Before long, cash transactions for even the most basic goods become nearly impossible.
Take the housing market as an example. In many urban centers, it has become virtually unfeasible to purchase even a subpar house in a respectable neighborhood using cash alone. The influx of credit has driven housing prices far beyond what a middle-class income earner can realistically save through diligent effort.
For prospective homeowners, the only alternative is often to secure a loan, which can result in decades of debt. However, a small consolation exists: if the Federal Reserve continues its pattern of credit expansion as it has for the past 40 years, this long-term burden may lessen over time. After about a decade or so, a fixed mortgage payment can become substantially less than rent for a comparable property.
Yet, there are times when asset prices propped up by cheap credit take a nosedive, as seen in 2007. Even with accessible credit, the housing payments were still too high for most incomes in the economy. Nonetheless, the Fed made significant efforts to prevent housing prices from plummeting, leading to prices that remain inflated today.
A Good Story
For prices to spiral out of control, it takes more than just cheap credit; there must also be a compelling narrative. An abundance of affordable credit alone is insufficient to ignite such price explosions; it requires something exceptionally fascinating for people to rally around.
Without a doubt, the stories that inflated housing prices in the past decade were persuasive, yet they pale in comparison to an even broader narrative.
In fact, the convergence of strong belief, instilled in citizens since childhood, along with lax lending practices and accessible credit, has led to unprecedented price distortions. This combination has also paved the way for an imminent debt crisis that threatens to stifle economic growth for many years to come—perhaps even generations.
What we are witnessing is the student loan crisis. You may already be familiar with the narrative. In summary, borrowing substantial sums to finance a college education has been marketed as one of the best investments one can ever make. It’s seen as an investment in oneself and one’s future. The belief is that with a college degree, job security, decent pay, and benefits will follow.
Peddling Loans and Lies to Kids
Unfortunately, this misleading promise, combined with the availability of cheap credit, has driven tuition rates into the stratosphere, leading an entire generation into a labyrinth of debt from which they may never escape. Moreover, major banks and the government—including former President Obama—colluded to market these loans, continually repeating this enticing story since childhood. The reality, however, has proven to be a harsh deception.
The long-sought college degree has often turned out to be less than beneficial. Many of the jobs once promised vanished around 2007 and show little sign of returning. For numerous individuals, earnings from that degree have become an albatross when tethered to overwhelming debt. Yet, for every issue stemming from government actions, the proposed solutions often seem to worsen the situation.
“Enrollment in federal student loan debt forgiveness programs surged nearly 40 percent in the last six months,” the U.S. Education Department reports.
“These programs—particularly the one revamped by President Obama in 2011, Pay As You Go—offer forgiveness of federal student loans after borrowers have paid a percentage of their income for a specified number of years. They aim to prevent people from being constrained in public sector jobs by substantial debt, but they could cost the federal government up to $14 billion annually.
“Currently, over 1.3 million Americans are enrolled in this program, holding a collective $72 billion in debt, prompting officials to seek ways to rein in the program’s expenses.
“The Obama administration has recently proposed capping debt forgiveness at $57,500 per student in an effort to manage costs and to discourage colleges from escalating tuition rates and encouraging students to incur unmanageable debt.”
Indeed, debt forgiveness programs can incentivize universities to hike tuition even further—borrowers are often willing to accumulate heavy debt when taxpayers are expected to cover the costs.
In conclusion, economic distortions serve as a striking glimpse into absurd reality. The emergence of the student loan crisis, along with the misguided solutions proposed, highlights this absurdity. Wouldn’t you agree?
Sincerely,
MN Gordon
for Economic Prism
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