Tito's Blog

US Student Loans Pass $1 Trillion Mark

Total government-guaranteed student loans outstanding grew past $1 trillion.

It’s really hard to pick which credit bubble will pop next among student loans, municipal bonds and prime mortgages.

The Time Machine

Debt is the greatest time machine, it allows politicians to postpone problems and everybody else to anticipate consumption and investments. It is sustainable only as long as expected growth is on average in line with actual growth.

However, the time machine is apparently most powerful under high growth assumptions, creating incentives for everyone involved to be overly optimistic and to pass on the bill to the future or to someone else next in line at an ever higher cost.

Final diabolic feature of the time machine is compounding interest that tricks the human mind used to linear behaviors with exponential dynamics.

Credit Expansion As Tool To Limit Social Unrest

Albert Edwards, chief strategy of Societe Generale backs up my theory of credit expansion used purposely to reduce tensions in an unequal society …

Hence, while governments preside over economic policies which make the very rich even richer, national consumption needs to be boosted in some way to avoid underconsumption ending in outright deflation. In addition, the middle classes also need to be thrown a sop to disguise the fact they are not benefiting at all from economic growth. This is where central banks have played their pernicious part.

Money Supply Is Indeed Just Going Down

Even looking at money supply figures, there’s nothing else than signals of deflation ahead. As Ambrose Evans-Pritchard points out in his article, money supply is decreasing rapidly.

M3 money has been falling at a 5pc rate; M2 fell by 12pc in August; the Commercial Paper market has shrunk from $1.6 trillion to $1.2 trillion since late May; the Monetary Multiplier at the St Louis Fed is below zero (0.925). In Europe, M3 money has been contracting at a 1pc rate since April.

If one adds declining credit to the collapse in the securitization machine, that was the real liquidity fire hose, it seems that there is no limit to the amount of money central banks should print to counter such strong deflation forces.

Until of course the bond market reaches a tipping point and there will be no buyers for government bonds, except central banks themselves. I wonder what it takes to get there since the Fed is already monetizing half of treasury issues and 80% of mortage-backed securities.