Where Does the Global Economy Go From Here?

[Spekulatius]

30 minutes ago, TwoCitiesCapital said:

It's always a little stunning to me that people believe negative real interest rates that imply the erosion/destruction of the capital and savings of a country is a bullish metric...

Why wouldn't it be?  If you can buy a productive asset (like a property) and finance it with a negative real interest rates, how can this not be bullish/ Some for any company trying to borrow.

 

The non-bullish part is that this punch bowl is apparently being taken away right now. That will be the end of the housing boom, imo.

[wabuffo]

That will be the end of the housing boom, imo.

 

I don't think so.   US demographics are a tidal wave of demand that still has not crested, IMHO (45m 25-34 yo - that is prime household & family formation age).  US household sector has the balance sheet and the income to keep buying.   Income (not rates) is the no. 1 determinant of home purchase decision.

 

Also, 95% of US mortgages are 30-year fixed (unlike GFC) - so rate rises cause no stress to existing homeowners.   Housing starts still setting multi-decade records at 1.7m (numbers not seen since early aughts).

 

I am very bullish on US economy (not necessarily on equities - the two can go in different directions).

 

Bill

 

Edited April 5, 2022 by wabuffo

[wabuffo]

BTW - I also believe inflation has crested and will start to fall (regardless of what Fed does - which most of what it does is pretty useless anyway, LOL).

 

My mental model of what is going on with inflation is still the US post WWII.  During the war, the US govt suppressed consumption to divert resources to military production.  In addition, the Fed purchased Treasury securities directly from the US Treasury in order to fix 10-yr yield at 1% as the Federal govt ran deficits = ~ 12-14% of GDP.   Many similarities to the recent pandemic response.

 

After the war, CPI ran up to 10% as consumption resumed and demand outstripped supply.  There was no Federal Reserve response to the burst of inflation since its hands were tied by its agreement to fix the rates on US Treasury debt.  But inflation fell to basically zero by 1949 anyway.   Essentially the free market delivered increased supply to meet demand.

 

I think this is where we are now.   The US economy is ripping.  Household balance sheets are in great shape.  As I said, upthread demographics in the US are creating a tailwind of demand.  Federal tax receipts are booming which indicate strong employment and employment incomes.   Even Fed hikes are bullish because the US household sector is positively positioned to short term rate increases (more money market type assets than consumer debt (which is fixed anyway)).  Even the Fed QT is bullish as the private sector needs more US Treasury securities (and can't use the bank reserves that the Fed created).

 

Very bullish here on US economy.   Equities will have a headwind due to rising rates - but the Fed doesn't care about the stock market.  Its attitude is "we gave you zero rates for two years and you apes bought crypto, NFTs and shitcos and made money.  What more do you animals want?  We are going to take some of that back now, thank you, very much" 

 

Bill

Edited April 5, 2022 by wabuffo

[cubsfan]

^^  You have an uncanning ability to explain the mysterious government fiscal actions/reactions.

Well done.

[Gregmal]

It’s really kind of funny how the market works. 12-18 months ago everyone was convinced it was transitory inflation. And you wanted to position for that to be untrue. And now the masses are all talking about how inflation is here to stay and, well, you probably want to be positioned differently now that everyone is there. Essentially this is why not everyone can make money or outperform. Gotta be ahead of the crowds.

[Spekulatius]

@wabuffo I would agree with your but on inflation receding, but the Ukraine war is inflationary too and we have not really seen the effects of this moving through the "snake" yet.

 

As for housing demand, I believe there is always  a lot of housing demand, it more a matter if people can pay for it. Housing space demand is highly elastic because people can live in 1000 SQFT or 2000 SQFT and it's more a matter what they can afford or not (especially in the US). 

 

That said, I do think the US economy overall will remain in good shape - I just don't think housing will be as strong as many here believe, because high prices and high interest rates will take their toll.

 

Europe is in a much tougher spot because energy prices are absolutely exploding there.

Edited April 5, 2022 by Spekulatius

[Viking]

28 minutes ago, Spekulatius said:

Why wouldn't it be?  If you can buy a productive asset (like a property) and finance it with a negative real interest rates, how can this not be bullish/ Some for any company trying to borrow.

 

The non-bullish part is that this punch bowl is apparently being taken away right now. That will be the end of the housing boom, imo.

@Spekulatius i think housing might be the thing to watch moving forward. Obviously, how high interest rates (and mortgage rates) go is the million dollar question.

Canada’s housing market is flashing red, given:

1.) how insanely high prices have gotten (pretty much straight up for 20 years). House prices - across the country - are up close to another 50% in just the past 2 years.

2.) it appears wicked low mortgage rates are on their way up. 5 year fixed rate mortgage is now 3.7%. But you can still get a 5 year variable mortgage for under 2% today - but as short term rates pop higher this will change. 
 

Having said that, supply of housing is constrained (driven by municipal building restrictions etc). And demand seems insatiable. Canada is bringing in 400,000 immigrants every year. And demand for housing as an inflation hedge appears to be increasing.

 

At the end of the day housing in Canada has been a freight train. So it would not surprise me to see it continue to chug higher…

—————

So when i look at the US i see lots of room for housing to run. Prices are not nearly as frothy as Canada. As Bill mentions, demographics are very favourable. Demand from investors looks solid. It is a great inflation hedge. Covid continues to stoke demand (work from home). And it was under built for almost a decade. 
 

But the US market has MUCH HIGHER mortgage rates than Canada (30 year mortgage at 4.5% and perhaps on its way to 5%) and interest rates are THE KEY VARIABLE from my perspective. 

[Gregmal]

4 minutes ago, Spekulatius said:

Ukraine war is inflationary too and we have not really seen the effects of this moving through the "snake" yet.

I see this getting stomped out soon too. Almost all the negatives are inflicted by our government and fixable. November will be big in terms of removing a lot of the stupid policy related inflation. Sanctions are doing nothing but harming normal people and even now US citizens.

 

I got a laugh this morning out of news how the US was going to block Russian bonds payments. After a month of fake news reports that Russia was going to refuse to pay and thus default turning out to be utter fabrications, now we refuse to let them pay, and make it come true that they “default”. And again who gets fucked? Foreign bond holders….

 

The US government is waging war on its citizens because it needs an excuse to push its agenda. Notice everything that comes out is fear mongering. A few days ago, “we’re going to have a shortage of COVID vaccines if you don’t push your elected officials to pass a new $10b package”….it’s all a scam. Or how Warren is talking about going after big banks for “funding” oil and gas. While going after oil and gas for “gauging”. And it’s like, well, if no one funds them prices going even higher dumbass. 

[Spekulatius]

@Viking Canada has a much higher population growth rate than the US. Canadas current growth rate is ~1.2%, US is basically static at +0.1%. This is mostly because Canada has kept immigration going while the US under Trump throttled it (which remained that way under Biden) and US birth rate have absolutely dropped.

 

There does not seem to be pent up demand for babies either in the US  because so far, the Birth rate remains stubbornly low in 2022. Anyways, these demographic trends don't have as much impact than people think , imo.

[Viking]

34 minutes ago, wabuffo said:

BTW - I also believe inflation has crested and will start to fall (regardless of what Fed does - which most of what it does is pretty useless anyway, LOL).

 

My mental model of what is going on with inflation is still the US post WWII.  During the war, the US govt suppressed consumption to divert resources to military production.  In addition, the Fed purchased Treasury securities directly from the US Treasury in order to fix 10-yr yield at 1% as the Federal govt ran deficits = ~ 12-14% of GDP.   Many similarities to the recent pandemic response.

 

After the war, CPI ran up to 10% as consumption resumed and demand outstripped supply.  There was no Federal Reserve response to the burst of inflation since its hands were tied by its agreement to fix the rates on US Treasury debt.  But inflation fell to basically zero by 1949 anyway.   Essentially the free market delivered increased supply to meet demand.

 

I think this is where we are now.   The US economy is ripping.  Household balance sheets are in great shape.  As I said, upthread demographics in the US are creating a tailwind of demand.  Federal tax receipts are booming which indicate strong employment and employment incomes.   Even Fed hikes are bullish because the US household sector is positively positioned to short term rate increases (more money market type assets than consumer debt (which is fixed anyway)).  Even the Fed QT is bullish as the private sector needs more US Treasury securities (and can't use the bank reserves that the Fed created).

 

Very bullish here on US economy.   Equities will have a headwind due to rising rates - but the Fed doesn't care about the stock market.  Its attitude is "we gave you zero rates for two years and you apes bought crypto, NFTs and shitcos and made money.  What more do you animals want?  We are going to take some of that back now, thank you, very much" 

 

Bill

@wabuffo thanks for taking the time to lay out your thinking…

 

1.) how high do you see interest rates getting in the coming months? Do you think we could see 3% right across the curve (2 year to 10 year)? Is 3.5% possible (likely?) for the 10 year in 2H should inflation remain elevated?

 

2.) when the Fed raises rates, is housing not the main mechanism to slow the economy? So if housing continues to rip in the US does this not suggest the Fed will be forced to raise rates much higher than what is currently ‘priced in’ by the market?

 

3.) balance sheet run off: how do you see this impacting interest rates/the economy? Especially if it happens quickly? I think you posted on this in the past… can you point me to what thread you posted your thoughts in?

 

4.) where do you get your information? Web sites? Podcasts? Your thesis that the current environment most closely resembles the US 1940’s is also shared by Lyn Alden. 

 

 

Edited April 5, 2022 by Viking

[TwoCitiesCapital]

1 hour ago, Spekulatius said:

Why wouldn't it be?  If you can buy a productive asset (like a property) and finance it with a negative real interest rates, how can this not be bullish/ Some for any company trying to borrow.

 

The non-bullish part is that this punch bowl is apparently being taken away right now. That will be the end of the housing boom, imo.

 

A negative real rates implies negative real growth. Will there be SOME opportunities that provide positive returns? Sure - but collectively asset returns will be negative. Particularly for financial assets. 

 

In reality, negative real rates stifles lending (who lends for long term capital projects at a guaranteed loss?) and stunts the borrowing capacity of a country (who buys incremental new issuance of bonds for a guaranteed loss?) while encouraging the hoarding of real asset inventories which is unproductive money. 

 

I'm sure there are other perverse side effects, but I dont think guaranteeing a negative return on trillions of financial assets is a positive for any country. 

Edited April 5, 2022 by TwoCitiesCapital

[wabuffo]

1.) how high do you see interest rates getting in the coming months? Do you think we could see 3% right across the curve (2 year to 10 year)? Is 3.5% possible (likely?) for the 10 year in 2H should inflation remain elevated?

 

I think the 10-yr yield will go over 5% by end of 2022.  I predicted this on another forum in January of this year.  I say that because short-term rates will be ~ 3% and the yield curve will uninvert/unflatten as the year progresses.

 

2.) when the Fed raises rates, is housing not the main mechanism to slow the economy? So if housing continues to rip in the US does this not suggest the Fed will be forced to raise rates much higher than what is currently ‘priced in’ by the market?

 

I think the Fed believes this but I don't.  I have said before I think a lot of what the Fed does makes very little difference - except when they go to extremes (zero rates, rates >12% where it makes sense to liquidate productive assets that earn 10% ROEs).  

 

3.) balance sheet run off: how do you see this impacting interest rates/the economy? Especially if it happens quickly? I think you posted on this in the past… can you point me to what thread you posted your thoughts in?

 

I think people way overstate in negative ways the effect of the balance sheet run-off.  The Fed does nothing but asset swaps.  When it does QT, in effect, it is removing reserves (useless assets) in exchange for Tsy securities (productive assets).  The private sector benefits from QT - it loses from QE.

 

4.) where do you get your information? Web sites? Podcasts? Your thesis that the current environment most closely resembles the US 1940’s is also shared by Lyn Alden. 

 

I've been reading about this stuff (monetary plumbing) for 20 years.  Only just starting to make sense.  I don't read anything from Lyn Alden after I initially read some of her stuff in late 2019.  I thought that she didn't understand how the Fed works when she claimed "the Fed was pumping liquidity into the stock market".   Not many worth reading anymore, IMHO (not just Lyn).

 

Bill

 

 

 

Edited April 5, 2022 by wabuffo

[maplevalue]

5 hours ago, wabuffo said:

Also, 95% of US mortgages are 30-year fixed (unlike GFC) - so rate rises cause no stress to existing homeowners.   Housing starts still setting multi-decade records at 1.7m (numbers not seen since early aughts).

 

One thing I think about, and can't wrap my head around, is the economic sensitivity to higher rates in Canada.

 

Canada has 5yr mortgages so payments more closely track where short-term rates go than US.  However I suspect when all is said and done, and you account for the fact many mortgages are partially paid off, or based on mortgages taken out many years ago (i.e. lower prices), or that mortgages over last two years will not reset for another ~3 years (either because they are fixed, or the fact variable payments remain the same until end of term just the amount interest vs principal changes) the dollar amount that mortgage payments change with higher rates is not very high. Also for credit card debt nobody notices a difference between 20% rates and 22% rates, and for HELOC debt people are sitting on massive MTM gains on their houses so a small change in rates doesn't matter.

 

So do we get a situation where the Canadian economy is on fire (reopening from crazy stringent lockdowns + commodity sector + Libs/NDP spending like crazy until 2024), rates are going up, but the economy doesn't respond? That is a really scary situation for asset prices if the BoC is 'pushing on a string' with its rate increases necessitating they raise rates even higher.

[Spekulatius]

@maplevalue you can’t look at this from an homeowners perspective, you need to look at it from a first time homeowners perspective  that’s trying to buy a house the first time. They don’t homeowners equity, they need to acquire the downpayment (or get it gifted from parents) and be able to shoulder the mortgage payment. For them it’s may become impossible to become homeowners unless something gives here - either prices or mortgage rates or both.

[Viking]

1 hour ago, maplevalue said:

 

One thing I think about, and can't wrap my head around, is the economic sensitivity to higher rates in Canada.

 

Canada has 5yr mortgages so payments more closely track where short-term rates go than US.  However I suspect when all is said and done, and you account for the fact many mortgages are partially paid off, or based on mortgages taken out many years ago (i.e. lower prices), or that mortgages over last two years will not reset for another ~3 years (either because they are fixed, or the fact variable payments remain the same until end of term just the amount interest vs principal changes) the dollar amount that mortgage payments change with higher rates is not very high. Also for credit card debt nobody notices a difference between 20% rates and 22% rates, and for HELOC debt people are sitting on massive MTM gains on their houses so a small change in rates doesn't matter.

 

So do we get a situation where the Canadian economy is on fire (reopening from crazy stringent lockdowns + commodity sector + Libs/NDP spending like crazy until 2024), rates are going up, but the economy doesn't respond? That is a really scary situation for asset prices if the BoC is 'pushing on a string' with its rate increases necessitating they raise rates even higher.

@maplevalue i think the key is how high rates go and how fast. The move in interest rates the past month HAS BEEN breathtaking. But with inflation raging at 6-8% (or more) interest rates are still HIGHLY ACCOMMODATIVE.  So i do not expect the current level of interest rates to be a problem for the economy. 
 

However, if @wabuffo - Bill - is correct and we see the yield on the 10 year US treasury over 5% by year end then i think we will likely see a significant impact on the US and Canadian economies. CONSENSUS OPINION in Canada (i think) is that interest rates here CANNOT and WILL NOT go up meaningfully from current levels because ‘THEY CANNOT’. And people feel they CANNOT  because of the high levels of consumer debt. Consumers in Canada do not have 30 mortgages (like in the US). The majority used to have 5 year fixed  - so 20% of these will re-set EVERY YEAR. However, today i think most people are taking out variable rate mortgages and have been for a while (to be able to afford the 50% increase in prices the past 2 years). Rising interest rates will be hitting these borrowers immediately. (Canada’s mortgage system - with short term mortgages - works wonderfully in a disinflationary environment with ever falling interest rates - like we have seen the past 40 years - but could be catastrophic in a multi-year spiking interest rate environment.)
 

The consensus opinion is high rates would pop the housing bubble and no central bank will want (or be stupid enough) to go there. 
 

I think what consensus opinion is missing is how hot the labour market is (both in Canada and the US). And in Canada, the labour situation is going to get much, much tighter the next few months… we are a massive producer of commodities (oil and gas, mining, agriculture - just look at how the economy in Alberta is heating up) and these industries will be hiring and paying up to do so. And we are in a massive housing bubble - new home construction is booming and there is a severe shortage of housing. And with covid ending the services part of the economy (restaurants, travel etc) - which is the largest part of the economy (in terms of employment) - will be doing major hiring moving forward. Government is ramping spending (and hiring). 
 

All of this suggests to me that inflation, and wage inflation, is going to continue to gather steam. Commodity price increases (like oil) will be driving inflation higher. Severe labour shortages and run away inflation will likely force the Bank of Canada to raise interest rates much higher and more quickly than consensus currently expects. We will see. The move in rates the past month has been a complete shocker. I am starting to think rates will go much higher… closer to what Bill is thinking (+5% on the 10 year by YE).

—————

i wonder if we are not seeing a paradigm shift. From disinflation (past 40 years) to high single digit inflation for the next few years. If so, the obvious thing to do from an investment perspective is to punt fixed income. In terms of where to put money commodities might be at the top of the list. Stocks will likely have big winners and big losers (so owning an index fund might not work out so great). I still like US real estate; Canada not so much. And in terms of currencies, like the Canadian $ because of commodities and immigration (with housing a big watchout). US$ would be second choice. Euro does not look good (due to war/economic outlook and demographics).

Edited April 5, 2022 by Viking

[Viking]

45 minutes ago, Spekulatius said:

@maplevalue you can’t look at this from an homeowners perspective, you need to look at it from a first time homeowners perspective  that’s trying to buy a house the first time. They don’t homeowners equity, they need to acquire the downpayment (or get it gifted from parents) and be able to shoulder the mortgage payment. For them it’s may become impossible to become homeowners unless something gives here - either prices or mortgage rates or both.

@Spekulatius the mortgage market in Canada is completely different than in the US. My understanding is the majority of mortgages being taken out today in Canada are VARIABLE RATE. The 5 year fixed rate used to be the norm (but even then was only about 60% of all mortgages). So a pretty high number of total borrowers are on variable rate mortgages so short term rates are what matter to them. Also, 20% of those on 5 year fixed reset every year so this is also significant. 
 

MY GUESS is most new home buyers today in Canada are getting the majority of the down payment from their parents. And where are the parents getting the money from? Lots probably by dipping into their own equity via home equity line of credit. More debt exposed to short term rates. Where monthly payments will spike when short term interest rates spike. 
 

This is all just conjecture on my part… but i have started following the housing/mortgage market here in Canada the past couple of weeks (as interest rates have spiked) and it is super interesting. I used to think the Bank of Canada 5 year bond was the the key variable… but now i am thinking short term rates might be more important today.

[maplevalue]

1 hour ago, Viking said:

@Spekulatius the mortgage market in Canada is completely different than in the US. My understanding is the majority of mortgages being taken out today in Canada are VARIABLE RATE. The 5 year fixed rate used to be the norm (but even then was only about 60% of all mortgages). So a pretty high number of total borrowers are on variable rate mortgages so short term rates are what matter to them. Also, 20% of those on 5 year fixed reset every year so this is also significant. 

 

For variable rate mortgages my understanding (see here https://www.canadalife.com/investing-saving/mortgages/fixed-vs-variable-mortgages.html#variable-rate) is that if rates go up your payment stays the same its just the interest vs. principal ratio changes over the course the 5 year term. At the end of the 5yr term that is when you could face higher monthly payments. My original point being higher rates are not immediately leading to higher payments for those with variable rate mortgages.

[maplevalue]

2 hours ago, Spekulatius said:

@maplevalue you can’t look at this from an homeowners perspective, you need to look at it from a first time homeowners perspective  that’s trying to buy a house the first time. They don’t homeowners equity, they need to acquire the downpayment (or get it gifted from parents) and be able to shoulder the mortgage payment. For them it’s may become impossible to become homeowners unless something gives here - either prices or mortgage rates or both.

 

I guess what I am wondering is how much first time homebuyers having a hard time buying their first house is really going to drag on the economy. Inflation is an economy wide phenomenon, and I feel the factors driving inflation (supply chain, govt spending, etc.) are going to far overwhelm the economic impact of some millennials having to continue renting instead of buying a house.

[Gregmal]

Its overrated. People dont understand anything more than basic academic concepts like RE is a bond substitute so if bonds go down RE has to as well. Its woefully wrong. Thats why cap rates haven't really moved much. You still want to own real estate. 

 

Oh look, a friggin Dutch Bros in AZ....4 cap. Isnt retail dead or something? Only Chick-fil-a gets 4 caps! Actually no, theyre still getting 3s even with 2-3% 10 years. Imagine that?

 

https://www.crexi.com/properties/779033/arizona-nec-of-avondale-blvd-and-dale-earnhardt-dr-avondale

[Viking]

3 hours ago, maplevalue said:

 

For variable rate mortgages my understanding (see here https://www.canadalife.com/investing-saving/mortgages/fixed-vs-variable-mortgages.html#variable-rate) is that if rates go up your payment stays the same its just the interest vs. principal ratio changes over the course the 5 year term. At the end of the 5yr term that is when you could face higher monthly payments. My original point being higher rates are not immediately leading to higher payments for those with variable rate mortgages.

@maplevalue i did not realize there was a ‘cap rate’ option available when picking a variable rate mortgage at the traditional big banks. So it looks like buyers can go with a traditional variable rate mortgage (payments fluctuate with prime rate) or a ‘cap rate’ mortgage where the payment is fixed (interest amount fluctuates). I think the ‘cap rate’ products have a higher mortgage rate (than a traditional variable rate mortgage). And i think ‘cap rate’ also have a max cap (if the prime rate goes up beyond a certain amount like 1.25% or 1.5%) the borrower will see a higher payment.

 

I will do some snooping to try and understand what the split is between regular variable and cap rate variable. Thanks for pointing this out. 
—————

What does a potential rate hike mean for your mortgage?

- https://www.scotiabank.com/ca/en/personal/advice-plus/features/posts.what-interest-rate-hikes-mean-for-your-mortgage.html
 

A potential rate hike will affect you in different ways depending on if you're a first-time homebuyer or if you already own.

 

For first-time homebuyers, any increase in interest rates will reduce how much home you can afford. That's because your carrying costs (a.k.a. your costs for owning a property) will increase.

 

For example, let's say you need a $500,000 mortgage and the interest rate is 3%. Your monthly payment would be $2,366 on a 25-year amortization. However, if the interest rate was 4%, your monthly payment would be $2,630. That would mean you would have to pay an additional $264 each month.

 

Current homeowners that have a variable rate mortgage would also be affected. At Scotiabank, you can either have an adjustable variable rate that fluctuates as BoC rates rise or you could have a variable rate with Cap Rate Protection. A Cap Rate Protection mortgage has fixed payments for the term of the mortgage that are calculated based on a cap rate rather than the current variable rate; as rates rise more of your payments would go towards interest, and less to the principal. However, if you have an adjustable variable rate, the amount you're paying would change as interest rates rise.

 

A fixed rate mortgage customer would see no impact from a BoC rate increase during the term of their mortgage.  

 

Edited April 6, 2022 by Viking

[Gamecock-YT]

5 hours ago, Spekulatius said:

@maplevalue you can’t look at this from an homeowners perspective, you need to look at it from a first time homeowners perspective  that’s trying to buy a house the first time. They don’t homeowners equity, they need to acquire the downpayment (or get it gifted from parents) and be able to shoulder the mortgage payment. For them it’s may become impossible to become homeowners unless something gives here - either prices or mortgage rates or both.

 

Was thinking about this last night with the news of another round of student loan pause extension. What's the odds millennials are going to end up overextending themselves like their parents did in 2006-2008 (buying as much/more house than they can afford) not factoring in the average student loan debt of ~$40,000 that still needs to be paid and budgeting the $400 per person ($800 a household) monthly payment due in short order. (Probably after the election)

 

• Average student loan debt: $39,351
• Median student loan debt: $19,281
• Average student loan monthly payment: $393
• Median monthly payment on student loan debt: $222
• Percentage of borrowers with growing loan balances: 47.5%
• Percentage of borrowers who are more than 90 days delinquent: 4.67%
• Average debt load for 2021 graduates: $30,600

 

 

 

[SharperDingaan]

7 hours ago, Gamecock-YT said:

 

Was thinking about this last night with the news of another round of student loan pause extension. What's the odds millennials are going to end up overextending themselves like their parents did in 2006-2008 (buying as much/more house than they can afford) not factoring in the average student loan debt of ~$40,000 that still needs to be paid and budgeting the $400 per person ($800 a household) monthly payment due in short order. (Probably after the election)

 

• Average student loan debt: $39,351
• Median student loan debt: $19,281
• Average student loan monthly payment: $393
• Median monthly payment on student loan debt: $222
• Percentage of borrowers with growing loan balances: 47.5%
• Percentage of borrowers who are more than 90 days delinquent: 4.67%
• Average debt load for 2021 graduates: $30,600

 

 

 

 

Yet the median (dividing line) balance is 1/2 that of the average loan balance. 

IE: There are a lot of whining people with 50-60K balances, dragging the average up, looking for a bail out.

 

The median $19,281 is no big deal over a working lifetime. It is just the $ investment you made in yourself; everybody around you also made $ investments in you, and have no problem with your expected future ability to pay it back. So .. either the student has no confidence in his/her future self (school was a free party!), or is just trying it on.

 

Mommy/daddy might have given the student the money, but they've chosen not to pay the loan off - either because they're tapped out, or they are sending a message. Either way, a brush with the most unwashed debt collector possible, is a good outcome!

 

The students good start in life is NOT GRADUATING DEBT FREE.

It is the degree in his/her head, that results in better than a minimum wage job.

You consistently make bad choices, you wear them - welcome to life!

 

SD 

[Spekulatius]

Well, Germany had Bafoeg, which was a loan as well. I had 45k DM  ($22k in USD) Bafoeg debt in the 90's and paid it back in less than 2 years.

With college degree in a subject where you can get a decent paying  job, anything below $75K in debt should not really be a big deal. If you get a degree in something that makes you a Barista with a Masters degree, you probably should regard your college time as an long vacation

[TwoCitiesCapital]

12 minutes ago, Spekulatius said:

Well, Germany had Bafoeg, which was a loan as well. I had 45k DM  ($22k in USD) Bafoeg debt in the 90's and paid it back in less than 2 years.

With college degree in a subject where you can get a decent paying  job, anything below $75K in debt should not really be a big deal. If you get a degree in something that makes you a Barista with a Masters degree, you probably should regard your college time as an long vacation

 

That's the primary problem in the US though. For 20+ years, trades were villified and everyone was told they NEEDED to go to college and get a degree to be successful. 

 

So they tried. But they found when everyone has a degree, the degree itself doesn't do anything for you in being competitive in the workforce and the work they were best suited doing like auto mechanic, or HVAC repair, or customer service, etc. don't require degrees nor the 20k in debt and the 3-4 years it took you to realize it. 

 

It's not a total disaster, but a waste of time measured in years and debt used to finance it. 

 

I'm someone who has been very successful with a degree. I had several very intelligent friends in college who would've been far better served by trade schools and not wasting the time/money on university

[Ross812]

27 minutes ago, TwoCitiesCapital said:

 

That's the primary problem in the US though. For 20+ years, trades were villified and everyone was told they NEEDED to go to college and get a degree to be successful. 

 

So they tried. But they found when everyone has a degree, the degree itself doesn't do anything for you in being competitive in the workforce and the work they were best suited doing like auto mechanic, or HVAC repair, or customer service, etc. don't require degrees nor the 20k in debt and the 3-4 years it took you to realize it. 

 

It's not a total disaster, but a waste of time measured in years and debt used to finance it. 

 

I'm someone who has been very successful with a degree. I had several very intelligent friends in college who would've been far better served by trade schools and not wasting the time/money on university

What do you advise to high school aged kids then? I am all for someone going into the trades if they are interested. Pushing those kids who want to be an electrician or plumber into college is indeed a waste. As for liberal arts degrees? My wife has a degree held by many baristas and has worked her way into a very well compensated director level position at a fortune 50 company. She has a friend with a masters in psychology who is in the c-block for a large hospital group. My wife and her friend would never have gotten a seat at the table without a college degree. You could argue the liberal arts degree probably served my wife better than a business degree with a concentration in marketing as she is a natural sales person and was never taught to conform; she was instead how to communicate her natural talent.