Biden Tuition Forgiveness and it's Effects
Updated: Jun 8
US STUDENT DEBT: $1.7TRILLION
AVERAGE STUDENT DEBT: $35,453
TOTAL CREDIT CARD DEBT: $1TRILLION
As always- this is not a political piece. This is an economic piece. Understanding the difference is key. The beautiful thing about economics is there is always declared a winner and loser when establishing a position. Someone is either on the winning end of an investment or the losing end. There really is no gray area. There are no excuses. Markets are unforgiving and they do not care. There is no pivoting to a different topic to bang the drums for your political allegiance.
Political bias's all too often interfere with sound, rational investment analysis. CNBC reported that only 3% of individual investors have consistently performed better than the market average. This means 97% of the people reading this don't have the rational skills to win. Yet, everyone digs into their political beliefs with 100% certainty. It is one of the dumbest things I have ever seen.
People ought to understand that we live in a country. Furthermore, people ought to understand that we live in a hyper-capitalistic country. A country that functions almost as much as a business as it does a nation. As average Americans, people need to focus on the cause and effect relationship of government decisions in order to better compete for resources for themselves and their family, not whether or not that political party made the righteous decision. Once the decision has been made, there is no point in squabbling over it with neighbors. The average American can certainly have a larger effect on their world through a better understanding of economics, than a devout allegiance to a political ideology.
Whether or not you are in favor of student debt loan forgiveness, free college, or against these measures-- there is a cause and effect relationship. That is all that matters.
Remember, there is just winning and losing in markets. The honesty is beautiful.
WILL PROVIDING STUDENT DEBT RELIEF CAUSE AN ECONOMIC BOOST?
The answer is: depends upon who you are. However, as a nation for the long term--definitely not.
Imagine that a Joe Biden administration relieves an individual of $50,000 of student debt. That individual will obviously experience a tremendous amount of economic relief. But how will that economic relief impact the rest of the economy?
The Federal Government has already loaned $1.7T in student aid. Those loans are an expansion of the money supply. These dollars have already been placed into circulation. These dollars have a caveat that they must be repaid. When people pay back their student loans, money is than extracted from the money supply. Those repayments act as a contraction to the current money in circulation. Therefore, there is a balancing act in this relationship.
What happens if we end the second half of this balancing act? Obviously if people don't have to spend money on students loan debt, than they will have more free cash to spend on resources everyone else is competing for.
The argument for a student debt relief bill is this cash can be used to "drive or stimulate" the economy when those dollars are spent on purchases of new homes or manufactured goods.
It is important to know that freeing up this cash alone to student debtors won't provide more goods and services to the economy. Ultimately we will just be freeing up more dollars to chase after the same existing goods and services that we already have in our current economy. This cause and effect will send prices of housing, oil, food, and manufactured goods even higher.
If someone disagrees with this notion than perhaps they have a political bias blinding a proper investment mindset. Let's remove the political scenario from the equation.
EXAMPLE: Imagine that former President George W. Bush decided it a good idea to federally guarantee all of the credit card debt in the United States. Than the U.S. government decided to forgive all of that credit card debt. This action would free up $1Trillion worth of consumer spending to chase the existing goods and services in existence. All of these competing dollars would simply drive prices higher.
Relieving people of student debt will only socialize the pain those debtors are currently feeling. Whether you agree with socializing that pain or not is the fundamental political difference in America. As in investor you have to ignore that noise and place your current investable dollars on a path that can take advantage of this cause and effect relationship.
WHO WILL WIN OVER THE LONG TERM?
The rich will grow richer and the poorer will grow poorer. These economic measures are always designed to help the poor. They have great intention and sound fantastic to the public. However, all we are doing is freeing up cash that will drive asset prices higher. The current asset owners will reap the reward. The standard of living for the existing rich will increase while the barrier to entry to owning assets becomes more difficult for the poor as asset prices rise.
The original purpose of federally guaranteed student loans began with a great purpose. The intention was to provide equal opportunity to everyone to receive an education. The very act of freeing up all of this cash (in form of government loan) for a specific asset, in this case, education, dramatically drove up the price of the asset (education). In the end, we outpriced the poor's solvent purchasing power from an affordable education. The existing rich are the only people with the ability to afford a college education without taking on any debt.
WHAT IS AN INVESTOR TO DO?
As we look for a Biden administration to continue high government spending via expansion of the money supply in order to pay for past obligations--we have to own assets that are in limited supply. These assets are things like real estate and commodities. These assets will certainly outperform cash and bonds over the next four years.
John Lawrence is an investment advisor and founder of J.A. Lawrence Wealth Management, LLC.
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