In the last decade alone, total student loans outstanding have nearly tripled, rising from $500 billion in 2006 to $1.34 trillion at present. And for reasons laid out below, a disproportionate brunt of this massive student loan burden is being shouldered by Flyover America
That’s mainly because the preponderant share of the nation’s 25 million higher education students comes from the flyover zones. Those precincts still had a semblance of a birth rate 25 years ago, unlike the culturally advanced households of the bicoastal meccas.
Stated differently, these staggering debt obligations were not incurred by Wellesley College art history majors or even needs-based diversity students at Harvard Law School. They are owed by the inhabitants of mom and pop’s basements scattered over the less advantaged expanse of the land.
After all, the Ivy League schools including all of their graduate departments account for only 140,000 students or 0.5% of the nation’s total. Even if you add in the likes of MIT, Stanford, Caltech, Northwestern, Duke, Vanderbilt and the rest of the top 20 universities you get less than 250,000 or 1% of the student population.
The other 24 million are victims of the feckless Washington and Wall Street ideology of debt and finance. To wit, tuition, fees, room and board and other living expenses have erupted skyward over the last two decades because Washington has poured in loans and grants with reckless abandon and Wall Street has fueled the madcap expansion of for-profit tuition mills.
Even setting aside the minimum $50,000 annual price tag at private institutions, the tab has soared to $20,000 annually at public 4-year schools and nearly $30,000 per year at the tuition mills.
These figures represent semi-criminal rip-offs. They were enabled by the preternaturally bloated levels of debt and finance showered upon the student population by the denizens of the Acela Corridor.
So the former now tread water in an economic doom loop. Average earnings for 35 year-olds with a bachelor’s degree or higher are $50,000 annually, compared to $30,000 for high school graduates and $24,000 for dropouts.
Thus, the sons and daughters of the flyover zones feel compelled to strap-on a heavy vest of debt in order to finance the insanely bloated costs of higher education. But once “educated,” the overwhelming majority end up with $30,000 to $100,000 of debt or more.
In this regard, the so-called for-profit colleges like Phoenix University, Strayer Education and dozens of imitators deserve a special place in the halls of higher-education infamy. At their peak a few years ago, enrollments at these schools totaled 3.5 million.
But overwhelmingly, these “students” were recruited by tuition harvesting machines that make the all-volunteer U.S. Army look like a piker in comparison. To wit, typically 90% of the revenues of these colleges are derived from student grants and especially loans—hundreds of billions of them—but less than one-third of that money went to the cost of education, including teachers, classrooms, books and other instructional costs.
At the same time, well over 33% went to SG&A and the overwhelming share of that was in the “S” part. That is, prodigious expenditures for salesmen, recruiters, commissions and giant bonuses and other incentives and perks.
Needless to say, this made for good growth and margin metrics that could be hyped in the stock market. In fact, after the cost of education and all of the massive selling expense to turbocharge enrollment growth was absorbed, there was still upwards of 35–40% of revenue left for operating profits.
That’s right. For a decade until the Obama administration finally lowered the boom after 2011, the fastest growing and most profitable companies in America were the for-profit colleges.
In short order they became a hedge fund hotel, meaning that the fast money piled into the for-profit college space like there was no tomorrow. So doing, they often drove PE ratios to 60X or higher, bringing instant riches to start-up entrepreneurs and top company executives, who, in turn, were motivated to drive their growth and profit “metrics” even harder.
At length, they became tuition mills and Wall Street speculations that were incidentally in the higher education business—or not. The combined market cap of the six largest public companies went from less than $2 billion to upwards of $30 billion in a decade.
The poster boy for this scam is surely Strayer Education. Between 2002 and the 2011 peak, its sales and net income grew at 25% per year and operating profit margins clocked in at nearly 40%.
Not surprisingly, Strayer was peddled as the second coming of “growth” among the hedge funds. The momo chasers thus pushed its PE ratio into the60-70X range in its initial growth phase, and it remained in the 30-40Xrange thereafter.
Accordingly, its market cap soared by 7X from $500 million to $3.5 billion at the peak. The hedge funds made a killing.
Then the Federal regulators threw on the brakes, and it was all over except the shouting. Total market cap of more than $27 billion disappeared from the segment within three years after 2011 and the hedge fund hotel experienced a mass stampede for the exits.
What was left were millions of thirty-something’s in Flyover America stuck with crushing unpaid loans, educations of dubious value and a lot more years in mom and pop’s basement.
Should any of these tuition mills have even existed, let alone been valued at 60X earnings—earnings that did not derive from real economic value added and that were totally at the whims of the U.S. Department of Education?
Of course not.
But then again, after 20 years of radical financial repression, Wall Street has been turned into a casino that scalps the flyover zone whenever it gets half the chance.
PART 2
BUBBLE FINANCE AND ITS RUINS
CHAPTER 8
Government Entitlements: The World’s Sixth-Biggest Economy and the Coming Insolvency of Social Security
BECAUSE THE MAIN STREET ECONOMY IS FAILING, THE NATION’S entitlement rolls have exploded. About 110 million citizens now live in households that receive some form of means tested benefits. When Social Security is included, more than 160 million citizens get checks from Washington.
The total cost is nearly $3 trillion per year and rising rapidly. America’s entitlements sector, in fact, is the sixth biggest economy in the world.
Yet in a society that is rapidly aging to the tune of 10,000 baby boom retirees per day, this 50% dependency ratio is not even remotely sustainable. As we show later in this chapter, Social Security itself will be bankrupt within 10 years.
Still, there is another even more important aspect of the mainstream narrative’s absolute radio silence about the monumental entitlements problem. Like in the case of the nation’s 30-year LBO, the transfer payments crisis is obfuscated by the economic blind spots of our Keynesian central banking regime.
Greenspan, Bernanke, Yellen and their posse of paint-by-the-numbers economic plumbers have deified the great aggregates of consumer, business and government spending as the motor force of economic life. As we have repeatedly insisted, however, this derives from their primitive notion of bathtub economics.
In the present instance, this bogus model assumes that the supply-side of the economy is always fully endowed or even over-provided. By contrast, the perennial problem is purportedly a shortfall of that theoretical ether called “aggregate demand”.
So the job of the central bank is to pump reserves and credit into the macroeconomy until the resulting incremental spending—including by government—has caused “full employment GDP” to be filled to the brim.
That’s especially true when government borrowing is used to fund transfer payments. Almost without exception transfer payment recipients live hand-to-mouth. Consequently, virtually 100% of the proceeds go into the spending stream (PCE) with little leakage or lag.
It’s an altogether different matter, of course, when transfer payments are funded out of current taxation. That’s purely a zero-sum game in which income producers have less to spend or save and recipients have more. So borrowing to fund the nations massive flow
of transfer payments is actually some kind of Keynesian nirvana.
At the same time, the ruling elite’s vestigial Keynesian fetish about “aggregate demand” means that ideas of quality, sustainability, efficiency, discipline, and prudence or, for that matter, even economic justice and equity, never enter the narrative. Likewise, the possibility that current spending bloated by debt and transfer payments isn’t sustainable has simply been defined out of existence.
It matters not a whit to the Keynesian policymakers, for example, whether the considerable expansion of household consumption spending (PCE) depicted below originated in disability checks, second mortgages or car loans at 120% loan-to-value. All spending is good, apparently, even if it was deposited by a passing comet.
What counts is the incremental gains in GDP compared to last quarter and in proxies for demand such as job counts and housing starts versus prior month. That’s what fuels bullish spasms in the Wall Street casino. And when the business cycle eventually ends, there is always a scapegoat to blame, such as an oil price shock or a financial market meltdown.
HOW THE ESTABLISHMENT’S ‘GROWTH’ SWINDLE WORKS
The following graph depicts how the establishment’s “growth” swindle actually works. There are currently 126 million prime working age persons in the US between 25 and 54 years of age. That’s up from 121 million at the beginning of 2000.
Yet even as the current business cycle is rolling over, the 77.1 million persons employed full-time from that pool is still 1.2 million below its turn of the century level!
That’s right. Only 61% of the prime working age population has full-time jobs. That compares to 65% as recently as the year 2000.
So it might be wondered: How is it possible that real consumption expenditures rose by a whopping $3.1 trillion or 38% during the same 16-year period that the number of full-time prime age workers was actually dropping?
Yes, the employment shown in the chart below is supplemented by part time workers, where the ranks have grown modestly, and also by the steadily rising participation rate of Wal-Mart greeters among the over 65 cohort. But the fact remains that on the margin the 38% real gain in consumer spending since the year 2000 was funded from sources other than pay envelopes.
Among the alternative sources, which played a major role in funding the nation’s shopping cart, of course, was the explosion of government transfer payment. In fact, during the last 16 years government transfer payments have grown at 6.2% annually or by nearly 2X the 3.3% growth of nominal wage and salary disbursements.
Accordingly, as shown in the next chart, transfer payments soared by $1.7 trillion during the period. This means the gain in transfer payments amounted to nearly 50% of the entire gain in wage and salary disbursements to the nation 150 million employed persons.
Needless to say, that astonishing and unsustainable trend has been completely ignored by the Wall Street and Washington peddlers of consumption based economics.
The Fed has never once mentioned the rapidly deteriorating quality of household income and spending during the last 15 years. And in crowing about all the part-time and “born again” jobs it has purportedly created, the Obama White House has never remotely acknowledged that its vaunted “recovery” has been largely built on transfer payments and debt.
TRANSFER PAYMENTS NOW EQUAL 40% OF PRIVATE WAGE AND SALARY DISBURSEMENTS
So “deterioration” is not an inappropriate word. As a matter of public policy, nearly $3 trillion per year of transfer payments may represent a bargain that society has chosen to make for reasons of equity and social welfare. But that doesn’t gainsay the fact that the underlying economics are an altogether different matter.
To wit, in May 2016 total transfer payments amounted to fully one-third of all the wage and salaries disbursed to the entire work force of the United States. And if you grant the old-fashioned assumption the government salaries are funded by taxation rather than production, then transfers amount to nearly 40% of wage and salary disbursements to private sectors employees.
So let’s put the chart below in plain English. Sixteen years is not a blip; it’s an embedded trend. When the transfer payment flows to “takers” over that span have fast approached the earnings of “producers”, you have a system that will, at length, go tilt.
The practical point, of course, is that continued full funding of this huge fiscal burden—and giant prop under household consumption—will require higher taxes today or increased public debt, which amounts to higher taxes tomorrow.
As we will see later, in fact, either course would only aggravate the coming crisis. Yet the Washington and Wall Street consensus in behalf of consumption based GDP growth—no matter how it is funded—is deafening. Even self-proclaimed fiscal conservatives like Paul Ryan are in complete denial.
Speaker Ryan’s budgets in the House have always given the core of the entitlement-spending monster—Social Security and Medicare—a ten-year free pass. In the politics of American governance, of course, that’s the same thing as forever because Congress never gets to the so-called “long-run” fiscal equation.
So at its recent convention, the GOP’s present-day version of Mr. Conservative told the voters an absolute lie when he assured them that no one within a decade of retirement, plus the 55 million already on the rolls, will face even a dime of cutbacks. Donald Trump’s know-nothing posture on entitlements was made to look only slightly more implausible by comparison.
In fact, there is no alternative to subjecting affluent retirees to a severe means-tested cutback of their Social Security and Medicare benefits. And it must start right now, not two decades down the road.
That much is patently clear and statistically baked into the cake. But the mainstream narrative blithely ignores the coming transfer payments crisis because of a wholly misplaced confidence in central banking.
Notwithstanding the blatant failure of 93-months of ZIRP and $3.5 trillion of bond buying to produce anything except a tepid, deeply subpar recovery, and one that is now running out of steam, establishment policy-makers—and scorekeepers like the CBO—assume that the Fed will keep the GDP expanding to the brim of full employment for the indefinite future, world without end.
That’s convenient, of course, because it essentially defines the crisis away. If you project high economic growth long enough, the modeled GDP will always outrun the projected expansion of the transfer payment burden.
Except it won’t happen. The ticking time bomb shown in the chart below, in fact, is anchored in the giant social insurance programs. But as we show in the next section, even those vaunted “trust funds” will be empty within the next decade after you set aside of utterly implausible rosy scenario economic assumptions on which both the Federal budget and trust fund projections are based.
SOCIAL SECURITY—TRUST FUND CONFETTI AND THE COMING INSOLVENCY
Here follows a deconstruction of rosy scenario. It underscores why the nation’s entitlement based consumption spending will hit the shoals in the decade ahead.
In their most recent report, the so-called “trustees” of the Social Security system said that the funds near-term outlook had improved. So the stenographers of the financial press dutifully reported that the day of reckoning when the trust funds run dry has been put off another year—until 2034.
The message was essentially: “Take a breath and kick the can.”—“That’s five Presidential elections away!”
Except that is not what the report really says. On a cash basis, the OASDI (retirement and disability) funds spent $859 billion during 2014 but took in only $786 billion in tax revenues, thereby generating $73 billion in red ink.
By the trustees’ own reckoning, in fact, the OASDI funds will spew a cumulative cash deficit of $1.6 trillion during the 12-years covering 2015–2016.
So measured by the only thing that matters—hard cash income and outgo—the social security system has already gone bust. What’s more, even under the White House’s rosy scenario budget forecasts, general fund
outlays will exceed general revenues (excluding payroll taxes) by $8 trillion over the next twelve years.
Needless to say, this means there will be no general fund surplus to pay the OASDI shortfall.
Uncle Sam will finance the entire $1.6 trillion cash deficit by adding to the public debt. That is, Washington plans to make Social Security ends meet by burying unborn taxpayers even deeper in public debt in order to fund unaffordable entitlements for the current generation of retirees.
The question thus recurs. How did the “untrustworthies” led by Treasury Secretary Jacob Lew, who signed the 2015 report, manage to turn today’s river of red ink into another 20 years of respite for our cowardly beltway politicians?
They did it, in a word, by redeeming phony assets; booking phony interest income on those non-existent assets; and projecting implausible GDP growth and phantom payroll tax revenues.
And that’s only the half of it!
The fact is, the whole rigmarole of trust fund accounting enables these phony assumptions to compound one another, thereby obfuscating the fast approaching bankruptcy of the system. And, as we will demonstrate later on, that’s what’s really happening—even if you give credit to the $2.79 trillion of so-called “assets” which were in the OASDI funds at the end of 2014.
Stated differently, the OASDI trust funds could be empty as soon as 2026, thereby triggering a devastating 33% across the board cut in benefits to affluent duffers living on Florida golf courses and destitute widows alike.
Needless to say, the army of beneficiaries projected for the middle of the next decade—what will amount to the 8th largest nation on the planet—would not take that lying down.
Trumped! A Nation on the Brink of Ruin... And How to Bring It Back Page 15
