Pages

Saturday, March 10, 2012

Credit Growth Rising: Trade Deficit Soaring: Student Loan Bubble Expanding

Our global economy runs on the expansion of credit. Since 1970, the credit markets have doubled in size every decade. This massive expansion of debt/borrowing created one of the biggest booms in history - seen in the DOW running from under 1000 in 1980 to over 14,000 in the year 2000, and the real estate markets soaring in prices worldwide from 1997 to 2008 (some markets are still expanding today).

The economy is now dependent on this growth of credit in order to expand in size. Why?  Because you need a larger economy tomorrow to pay off the debt you accumulated yesterday. Does this sound like a Ponzi scheme?  Well, it is.

This is why central banks and governments around the world are desperate to pump credit into the system through government spending, which has been paid for with central banks printing money.

Up until 2008, this credit expansion was handled through the consumers around the world ready and willing to take on more credit card debt, a new auto loan, or a home equity line.  Then, we ran into a problem. When the subprime mortgage crisis hit in 2008 and home prices began to contract, the American consumer and engine of global growth hit the wall. Government leaders went to work to get the credit machine growing again and it appears, based on the most recent data, that they have accomplished this goal.

Zero Hedge provided the following chart this week showing that in the most recent quarter, for the first time since 2008, credit (debt) across all classes increased. Household debt (consumers borrowing), corporate debt (businesses borrowing), state and local governments, and the federal governments all grew the size of their debt outstanding.  The chart below shows this incredible feat:


This is excellent news for a global economy modeled around the United States borrowing money and purchasing foreign goods using the debt.  The following chart, based on data released this week, shows that the US trade deficit increased to $52.6 billion in the month of January.  This means the United States imported $52.6 billion more goods than they exported in the month.


Let's take a look at one particular portion of the credit markets discussed in the chart above: household debt, also known as consumer debt.  This debt can be broken down into two parts, revolving credit (credit cards) and non-revolving credit (student loans, auto loans, boat loans, etc).  The following chart shows the sequential change in revolving and non-revolving credit.


Revolving credit (credit cards) showed a decline in the month of January, but there was a surge in the non-revolving credit driven higher by a portion of the debt markets that has mushroomed in size over the past few years...student loans.

The following info graph shows how the recessionary conditions in America have affected the younger generation.  While 24% have moved back in with their parents, 35% have decided to go back to school.


Why are they going back to school?  Because they can approach the government and borrow money to pay for tuition, room, board, books, food, and a little extra for discretionary spending money (partying).  It provides a free way to live while they "wait out the recession."

The following chart shows student loan debt growth vs. household debt growth over the past decade.  You can see where consumers hit the wall in 2008 and passed the baton to student loans.  The rise is extraordinary.


The business of college has never been better.  With an endless amount of federal (tax payer) money available for school it has created a surge in demand which has in return created a surge in college tuition pricing (see 2012 Real Estate Outlook: Demand - Ability for an in depth discussion on how credit availability impacts pricing).  The following chart shows the rise in college tuition prices vs. home prices vs. the standard consumer price index (general cost of living).  You can see the bubble rising and falling in the home price index (red line).  It looks like a minor bump in the road compared to the growing student loan bubble.
As these college students leave school with tens (or hundreds) of thousands of dollars in student loan debt and find that there are no jobs available, what are they going to do?  In Greece, the unemployment rate for the youth is now over 50%.  They spend their time in the afternoon setting buildings on fire and throwing rocks at the police. Hopefully the youth in America will spend time doing charity work for the local church, but I doubt it.

Some people believe that a war can help put this youth to work and get us out of our current economic malaise as it did back in the late 1930's when a world war cured the Great Depression (or at least that's how the history books have been written).  Something to think about as you watch the slow moving developments with the United States and Iran.

For a much more in-depth analysis on the need for an exponential growth in credit, I recommend Chris Martensen's excellent book The Crash Course as well as taking an hour of your time to watch his Crash Course video series.



Sources: Zero Hedge, Calculated Risk, Charles Smith at Of Two Minds

24 comments:

  1. Gail @ LoanTodayMay 14, 2012 at 3:18 AM

    Most parents think its efficient to apply for student loans. Actually, most students may not be able to pay it back after graduation. Some cases are worse. foreclosure attorney

    ReplyDelete
  2. There are tons of student credit cards with high interest, which could give you a hard time in the future. That's why it's better to choose a bank that offer lower rates. In addition, consider student cars with limits so you can overspend it. los angeles probate loan

    ReplyDelete
  3. Good this you provided these tips because I'm planning to get a student loan for my kids. For now, we are currently paying our mortgages in Long Island but soon after, we'll be needing this information for our children's student loan.

    ReplyDelete
  4. This comment has been removed by the author.

    ReplyDelete
  5. The measure of payday loans ranges from $100 to $1000 contingent on the reimbursing limit of the borrower.
    DIRECT PAYDAY LOAN LENDERS

    ReplyDelete
  6. The length can shift from two years to twenty. It is essential to make sense of how rapidly you want to pay it back and the extent of the payments you can make once you are out of school and in the workforce. Do endeavor to spare additional on the off chance that you are not employed instantly after school.tlr

    ReplyDelete
  7. Paysaver Payday Loans gets you the assets you require ASAP. Why sit tight for your loan when you can get it medium-term? personal loans for bad credit nc

    ReplyDelete
  8. And many 'no fee' credit lines have a pre-payment penalty. This is the way broker and lenders make their money detroit cash advance

    ReplyDelete
  9. i read a considerable measure of stuff and i found that the method for composing to clearifing that precisely need to say was great so i am inspired and ilike to come back again in future.. read

    ReplyDelete
  10. Regardless of whether I have additional cash in the home loan finance represent a brief time despite everything it implies a superior "main concern" for me. best site

    ReplyDelete
  11. This bit of blog shows commitment of essayist.
    visit here

    ReplyDelete
  12. I turned into a poor fly got in the payday loan web, particularly since the greater part of my loans were online loans; I was actually in a virtual web. Short term credit claims

    ReplyDelete
  13. I recently came across your blog and have been reading along. I thought I would leave my first comment. I don't know what to say except that I have enjoyed reading. Nice blog. I will keep visiting this blog very often. Maquininha UOL Pag Seguro

    ReplyDelete
  14. However, some states—roughly a third—still use jail as a method to coerce debtors to pay certain debts. Today, you cannot go to prison for failing to pay for a “civil debt” like a credit card, loan, or hospital bill. You can, however, be forced to go to jail if you do not pay your taxes or child support.

    ReplyDelete
  15. This blog is precisely what I was searching for.
    order modafinil online

    ReplyDelete
  16. Listed here you'll learn it is important, them offers the link in an helpful webpage:
    read here

    ReplyDelete
  17. Notwithstanding, for this situation, the vehicle won't have a place with you until the point that you have reimbursed the whole obtained sum to the loan specialist how bad is a 580 credit score

    ReplyDelete
  18. This blog is so stunningly outstanding. Left its readers in the awe.
    www.theloanrepublic.com

    ReplyDelete
  19. Your content is nothing short of brilliant in many ways. I think this is engaging and eye-opening material. Thank you so much for caring about your content and your readers.
    zippyloan review

    ReplyDelete
  20. This comment has been removed by the author.

    ReplyDelete
  21. I need you to ask yourself an inquiry which is, "on the off chance that you don't have enough cash to get by what makes you want to result a loan with 300%-700% premium?" You should sell your first conceived tyke.Same day loan on benefits

    ReplyDelete
  22. Also in an ideal world we can plan for everything that will happen to us, there are no unexpected financial shortfall, expenses or bills. Click here

    ReplyDelete
  23. COLLATERAL-The Administrator of the Small Business Administration may acknowledge any accessible guarantee, including subjected liens, to verify loans made under this area.3monthloanlenders.com

    ReplyDelete