"Experience should teach us to be most on guard to protect liberty when the goverments' purposes are beneficent. Men born to freedom are naturally alert to repel invasion of their liberty by evil-minded rulers. The greatest dangers to liberty lurk in insidious encroachments by men of zeal, well meaning but without understanding." --Justice Louis Brandeis
Despite their incompetence, our government and the Federal Reserve have been great at one thing -- promoting asset and credit bubbles. These could not come to pass without massive deficit spending (false, unsustainable demand) and easy money policies (encouraging debt). So we've had the Nasdaq bubble (still down over 40% from the peak 12 years ago) followed by the more painful housing bust. And now we are on to yet another. This one won't be as widely damaging as the housing bubble, but there will be about as many victims.
The answer? Student loans.
The figure will almost certainly hit $1 trillion this year. After adjusting for inflation, students are borrowing twice what they did a decade ago. Total outstanding debt has doubled in the past five years. What explains this insatiable demand for this kind of debt? Well, it's cheap, it's easily accessible, and it is fungible - a student can take out a loan, yet use part or all of the balance for tangential purchases like an iPad. Unfortunately, student loans are the only debts that cannot be discharged in bankruptcy, so we are creating an entire generation of debt slaves.
To further the point, here is a great video by Peter Schiff (head of Euro Pacific Capital and former Senatorial candidate in Connecticut) discussing the good intentions of student loans gone awry:
QE or Not QE. Is That the Question?
Scene: Princeton University economics class taught by Ben Bernanke. After a late night of studying, a student falls asleep in class. This sent Bernanke into a tizzy and he came over and pounded on the desk, demanding an answer to a question he had just posed. The student, shaken but now awake says "I'm sorry Professor, I missed the question -- but the answer is increase the money supply..."
Despite all the models, the white papers, the academic credentials, and the sophisticated talk, all the Federal Reserve really does is print money. That is the sum total of "quantitative easing", or QE. Lots of people think that alone can create economic wealth, but I think that defies logic and common sense. Didn't the Soviet Union prove that economic top-down control by a handful of elites doesn't work? We do like our illusions.
As economic figures recently have been coming in generally weaker than expected, the calls from Wall Street for more manna from heaven have been heating up. But does money printing work? Can it be our economic salvation? John Hussman writes one of the most worthwhile reads in his weekly missive, and a couple weeks ago he had this to say about QE:
That same speculation that has been driving the financial markets higher is also influencing the commodities market, including driving oil prices higher. But don't expect any Presidential news conferences decrying stock speculators.
April 23, 2012 in Current News Commentary, Economy, Personal Finance & Investments | Permalink | Comments (0) | TrackBack (0)