Student loans: the new bubble? (chart)
from Merijn Knibbe
At this moment I’m using the work of Reinhart and Rogoff, “This time is different. Eight centuries of financial folly”.
1. To avoid a common misunderstanding: this book is not just about government debt – it is about how all kinds of debt again and again destabilized entire countries. And about the endemic vulnerability of monetary, debt based economies (no single emerging economy ever escaped a phase of default. Not one.). To quote Reinhart:
“You can’t just focus on a single indicator, you have to look in conjunction. Our book is not about a bubble in housing or a bubble in the equity market. You look at pricing in these markets in conjunction with what is happening with capital inflows and the current account deficit. What is happening in conjunction with indebtedness. When several of these indicators start running off the charts simultaneously, you have a vulnerable situation.”
2. Which gave rise to the next thought: at this moment quite some governments are tinkering with ideas to fund higher education by, in the end, higher student loans. This will add another layer of debt to households, on top of existing layers of mortgages and credit card debts. Might this be the next bubble, as having a degree is not as profitable anymore as it used to be? Can we state that in countries like the UK and the USA investments in education are or will be financed by deficits on the current account? Is a policy which, as in the case of the UK, tries to swap government debt for private debt a ‘bubble in the making’? Should we have a ‘graduate tax’ instead? P.S. – the Dutch experience indicates that students who have a side job up to one day a week actually do better than students who do not have a side job. Which might fund their education (and diminish their loans) in two ways, as they also graduate faster.
Kash Mansori has, by the way, produced a nice graph which shows the relation between housing price inflation and deflation and the USA current account: