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Biden forgives half a trillion of student debt – a macroeconomic deep dive

Last week, US President Joe Biden made the watershed announcement that up to $10,000 of student debt would be forgiven for qualifying borrowers. This decision…

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Last week, US President Joe Biden made the watershed announcement that up to $10,000 of student debt would be forgiven for qualifying borrowers.

This decision has massive implications across the board. In this deep dive, I’ll analyse what it all means.

Inflation

One of the concerns being floated around is the knock-on effect that forgiving this debt will have on inflation – obviously a massive concern in the current climate as the Federal Reserve fights tooth and nail to rein in rising prices. Accordingly, markets across the board have plummeted this year as interest rates have been hiked to curtail this cost-of-living crisis.

The total student debt forgiven is expected to be approximately half a trillion dollars (although estimates are wide ranging). In one respect, this is a drop in the ocean compared to the stimulus packages released during COVID, which totalled $6 trillion.

Not only will the half a trillion pale in comparison to the COVID relief, but it will also be spread out over a longer time period of 10 years. The unique thing about the COVID relief was the sheer quantity of money that was injected in a such a short space of time. I graphed the M2 money supply over the last 65 years to show quite how historical the jump was.

The above graph is all you need to ascertain why people are currently struggling to pay for bread and toilet paper, as inflation spirals. So, is this initiative prudent in the wake of all this? After all, the announcement of student debt relief came only two weeks after the Inflation Reduction Act was signed into law.

What needs to be mentioned in the analysis of the inflationary effect here is that there are two aspects to Biden’s plan. The first is, as we say, to cancel the half a trillion of debt. This will increase disposable income, demand and inflation – that is a fact, the part that is up for discussion is how much inflation will be affected.

But the second change has the opposite effect of reining in inflation, and that is confirming that the moratorium on repayments will cease at the end of the year. Proponents of Biden’s move use this as the biggest point to defend the policy against critics who cite it will spark inflation.

Chief Economist at Moody’s analytics, Mark Zandi, asserted that the opposing effects of the repayment resumption and the debt cancellation would largely be a “wash”.

But on the flipside, what baseline should we be comparing to? Should we not be viewing each effect in isolation? The decision to forgive loan debt is separate from the decision to resume debt repayments, which obviously had to happen eventually in any case.

Bloomberg columnist Matthew Yglesias was one of a disappointingly small number of people making this point. The below chart he posted on Twitter is excellent at showing this – while the payments will jump they will be below the pre-pandemic trend. So, in coming to a conclusion about the inflationary fallout of Biden’s plan, it’s really a question of which baseline is used.  

In truth, the inflationary effect of the forgiveness will be marginal – no matter what way you swing it – and likely hit only in 2023. Nonetheless, coming amid the current climate when the Fed is gung-ho to curtail the spiralling cost of living is certainly curious timing. A drop in the ocean of stimulus packages is still a drop, after all. But this is far from the only shortcoming of this plan.

Debt forgiveness is a moral hazard

No matter what angle I come at this from, I can’t help but conclude that this is a populous and naïve solution to what is a bigger problem. The problem of overpriced tuition in the USA is a very big one. Forgiving $10,000 of tuition debt will do nothing to solve this problem. Let me repeat that – the debt forgiveness does absolutely nothing to solve what is the actual problem here.

In fact, this is a great example of what economists refer to as a “moral hazard”, which is a situation where an economic actor has an incentive to increase its exposure to risk because it does not bear the full costs of that risk – the classic example being the reduced incentive one has to exercise care after purchasing insurance.

This is because students who see this episode of debt forgiveness now may be more inclined to take out more loans in future in the hope that the government will again cancel them. Ultimately, this will in turn push the cost of college tuition up – ironically, causing the underlying cause of this whole mess to worsen. The student loan forgiveness precedent has been set and Pandora’s box is now open. All economic theory points towards this being a very dangerous decision.  

Inequity

Perhaps the biggest point of contention here is that this is a regressive policy. That means it has a greater effect on lower income people than the wealthy and it’s the factor I really struggle to look past in coming to a verdict on whether this is ultimately a wise move for the US.

It’s a fact that those attending college in the US, while burdened with debt that a lot cannot afford, are still in a position that lower class subsets can’t be in to begin with. In other words, richer people go to college.

While this debt does hamper their livelihoods and put great strain on many young people, which is obviously a terrible problem, in the long-term those who go to college still significantly outearn those who don’t. Even with the debt, it’s not particularly close.

Using data from a New York Fed study from February I plotted salaries back to 1990 to highlight the difference.

The median income of a high-school graduate is $30,000. Median income for a bachelor’s degree is 73% higher at $52,000. Even the 25th percentile of college graduates outearn the median non-college graduate, with an income of $38,000 a 27% increase. There really is no comparison.

Startingly, the delta is widening – with the difference in median incomes ($22,000 / 73%) at an all-time high. These are also full-time workers aged between 22 and 27; stretching out the time horizon further exacerbates the divergence.

If the analysis widens to look at professional degrees, which are the costliest to obtain, the income disparity jumps to 138%. This is a stunning gap.

Inequality

Announcing such a regressive policy may seem egregious, but unfortunately it is the way society is heading. COVID policy to pump up the money supply, thereby spiking financial assets across the board to all-time highs only to trigger 40-year inflation highs thereafter, is a perfect example of this.

While I have written about this extensively and won’t go into detail here, the fact that 2020 saw the greatest jump in billionaires’ wealth since Forbes started tracking their rich list speaks volumes. This was also a year where lower income workers struggled to survive, millions across the globe died and many paycheque to paycheque employees no longer had a paycheque.

On the other hand, those of lucky to have white collar jobs (which college degrees certainly help obtain), simply pull on a pair of sweatpants, roll out of bed and fire up Zoom from our bedrooms. I plotted the shrinking size of the middle class compared to the rocketing wealth of the top 1% – I’ll let the graph speak for itself. 

Politics

So why is the US implementing a regressive policy at a time when two of the biggest issues with the economy – inequality and inflation – will be negatively affected by that very policy?

Like a lot of things in today’s world, it comes down to politics. The promise was repeatedly uttered in Biden’s campaign. And while the torrid inflation situation is far from the fault of Biden’s administration alone – I wrote in July about how both Trump and Biden were equally to blame, alongside stock market-whisperer Jerome Powell – Biden needs a victory quickly.

The below excerpt from a piece I wrote three months ago summarises how desperate things have become – and in the intervening time period, things have only got worse.

I trawled through political history to find quite how bad (Biden’s popularity is). Remember Donald Trump – the previous President of the United States with notoriously weak approval ratings? Biden is now less popular compared to Trump at this stage of the Presidency (507 days), as the green line on the below graph from FiveThirtyEight shows. Meanwhile, comparing to Obama at the same stage of his presidency is not even a fair fight. In fact, Biden is the least popular President at this stage of his term (507 days) than anyone since Gerald Ford back in 1974. Yikes.

With midterm elections around the corner, this is seen in many quarters as a last-gasp attempt to win over voters, primarily in the form of young people – one of the biggest demographics who are underwhelmed with Biden’s presidency.

Long-term solving of the college tuition problem in the US will require congressional action, a difficult process that will not be done overnight. This route is easier, but presents as populous and counter-productive when assessed in a macroeconomic framework.

Those left out

Before we finish up, there are more than those without degrees who will be affected. The debt forgiveness only applies to those holding federal debt. Any private loans are omitted from the process.

What’s worse is that a number of loans were sold – without prior knowledge of the student – and hence changed from federal to private. It can’t have been fun to wake up to the news Biden was forgiving student debt only to discover you didn’t qualify because your loan was securitised, bundled together and sold to Deutsche Bank.

Conclusion

From an economic perspective, this is about as disappointing as it gets. Short-term relief for a select few will be dwarfed by the long-term issues this causes. While the inflationary impact will likely be minimal, the moral hazard this will create going forward and the potential higher tuition costs as a result down the line are concerning.

Throw in the fact that inequality is widening like never before, and a policy which forgives debt to those fortunate enough to be able to go to college in the first place seems wrong. Of course, many students are crippled with the financial pressure of paying off these loans, and there is no easy solution here.

But the one Biden has chosen is short-sighted and will in no way solve the very big problem of tuition costs in the United States. The college tuition model needs life-saving surgery. Biden’s idea is to pop a painkiller and get back in the game.

The post Biden forgives half a trillion of student debt – a macroeconomic deep dive appeared first on Invezz.

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Spread & Containment

Decrease in Japanese children’s ability to balance during movement related to COVID-19 activity restrictions

A team of researchers from Nagoya University in central Japan investigated how restrictions on children’s activities during the COVID-19 pandemic affected…

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A team of researchers from Nagoya University in central Japan investigated how restrictions on children’s activities during the COVID-19 pandemic affected their life habits and their abilities to perform physical activities. By comparing medical examination data before and after the onset of the pandemic, they found that physical functions among adolescents deteriorated, including their dynamic balance. They also found that the children had higher body fat levels and worse life habits. Rather than a lack of exercise time, this may have been because of a lack of quality exercise due to activity restrictions.  

Credit: Credit must be given when image is used

A team of researchers from Nagoya University in central Japan investigated how restrictions on children’s activities during the COVID-19 pandemic affected their life habits and their abilities to perform physical activities. By comparing medical examination data before and after the onset of the pandemic, they found that physical functions among adolescents deteriorated, including their dynamic balance. They also found that the children had higher body fat levels and worse life habits. Rather than a lack of exercise time, this may have been because of a lack of quality exercise due to activity restrictions.  

During the COVID-19 pandemic, in Japan, as in other countries, schools and sports clubs tried to prevent the spread of infection by reducing physical education and restricting outdoor physical activities, club activities, and sports. However, children who are denied opportunities for physical activity with social elements may develop bad habits. During the pandemic, children, like adults, increased the time they spent looking at television, smartphone, and computer screens, exercised less, and slept less. Such changes in lifestyle can harm adolescent bodies, leading to weight gain and health problems. 

Visiting Researcher Tadashi Ito and Professor Hideshi Sugiura from the Department of Biological Functional Science at the Nagoya University Graduate School of Medicine, together with Dr. Yuji Ito from the Department of Pediatrics at Nagoya University Hospital, and  Dr. Nobuhiko Ochi and Dr. Koji Noritake from Aichi Prefectural Mikawa Aoitori Medical and Rehabilitation Center for Developmental Disabilities, conducted a study of Japanese children and students in elementary and junior high schools, aged 9-15, by analyzing data from physical examinations before and during the COVID-19 pandemic. They evaluated the children’s muscle strength, dynamic balance functions, walking speed, body fat percentage, screen time, sleep time, quality of life, and physical activity time.  

The researchers found that after the onset of the pandemic, children were more likely to have decreased balance ability when moving, larger body fat percentage, report spending more time looking at TV, computers or smartphones, and sleep less. Since there were no changes in the time spent on physical activity or the number of meals eaten, Sugiura and his colleagues suggest that the worsening of physical functions was related to the quality of exercise of the children. The researchers reported their findings in the International Journal of Environmental Research and Public Health.  

“Since the outbreak of the novel coronavirus in Japan after April 2020, children have not been able to engage in sufficient physical education, sports activities, and outdoor play at school. It became clear that balance ability during movement was easily affected, lifestyle habits were disrupted, and the percentage of body fat was likely to increase,” explained Ito. “This may have been because of shorter outdoor playtime and club activities, which impeded children’s ability to learn the motor skills necessary to balance during movement.” 

“Limitations on children’s opportunities for physical activity because of the outbreak of the novel coronavirus have had a significant impact on the development of physical function and lifestyle and may cause physical deterioration and health problems in the future,” warned Ito. “Especially, the risk of injury to children may increase because of a reduced dynamic balance function.” 

The results suggest that even after the novel coronavirus becomes endemic, it is important to consider the effects of social restrictions on the body composition of adolescents. Since physical activities with a social element may be important for health, authorities should prioritize preventing the reduction of children’s physical inactivity and actively encourage them to play outdoors and exercise. The group has some recommendations for families worried about the effects of school closings and other coronavirus measures on their children. “It is important for children to practice dynamic balance ability, maintaining balance to avoid falling over while performing movements,” Ito advised. “To improve balance function in children, it is important to incorporate enhanced content, such as short-term exercise programs specifically designed to improve balance functions.” 


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Government

Contradictions, Lies, And “I Don’t Recalls”: The Fauci Deposition

Contradictions, Lies, And "I Don’t Recalls": The Fauci Deposition

Authored by Techno Fog via The Reactionary,

Today, Missouri Attoney General…

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Contradictions, Lies, And "I Don't Recalls": The Fauci Deposition

Authored by Techno Fog via The Reactionary,

Today, Missouri Attoney General Eric Schmitt released the transcript of the testimony of Dr. Anthony Fauci. As you might recall, Fauci was deposed as part of an ongoing federal lawsuit challenging the Biden Administration’s violations of the First Amendment in targeting and suppressing the speech of Americans who challenged the government’s narrative on COVID-19.

Here is the Fauci deposition transcript.

And here are the highlights…

EcoHealth Alliance - the Peter Daszak group - is knee-deep in the Wuhan controversy, having been funded by the Fauci’s NIH for coronavirus and gain of function research in China (and having worked with the Chinese team in Wuhan). What does Fauci say about EcoHealth Alliance? Over two years after the COVID-19 pandemic began, and after millions dead worldwide, he’s “vaguely familiar” with their work.

In early 2020, Fauci was put on notice that his group - NIAID - had funded EcoHealth alliance on bat coronavirus research for the past five years.

This coincided with early reports - directly to Fauci, from Jeremy Ferrar and Christian Anderson - “of the possibility of there being a manipulation of the virus” based on the fact that “it was an unusual virus.”

Fauci conceded that he was specifically made aware by Anderson that “the unusual features of the virus” make it look “potentially engineered.”

Fauci couldn’t recall why he sent an article discussing gain of function research in China to his deputy, Hugh Auchincloss, telling him it was essential that they speak on the phone. He couldn’t recall speaking with Auchincloss via phone that day. But remarkably, Fauci did remember assigning research tasks to Auchincloss

Fauci was evasive on conversations with Francis Collins about whether NIAID may have funded coronavirus-related research in China, eventually stating “I don’t recall.”

The phrase “I don’t recall” was prominent in Fauci’s deposition. He said it a total of 174 times:

For example, Fauci couldn’t remember what anyone said on a call discussing whether the virus originated in a lab:

During that same call, Fauci couldn’t recall whether anyone expressed concern that the lab leak “might discredit scientific funding projects.” He also couldn’t recall whether there was a discussion about a lab leak distracting from the virus response. Fauci did remember, however, that they agreed there needed to be more time to investigate the virus origins - including the lab leak theory.

What else couldn’t Fauci remember? Whether, early into the pandemic, his confidants raised concerns about social media posts about the origins of COVID-19.

Yet Fauci did admit he was concerned about social media posts blaming China for the pandemic. He even admitted the accidental lab leak “certainly is a possibility,” contradicting his prior claims to National Geographic where he said the virus “could not have been artificially or deliberately manipulated.”

Fauci also couldn’t recall whether he had any conversations with Daszak about the origins of COVID-19 in February 2020, but admitted those conversations might have happened: “I told you before that I did not remember any direct conversations with him about the origin, and I said I very well might have had conversations but I don't specifically remember conversations.” And he couldn’t recall telling the media early on during the pandemic that the virus was consistent with a jump “from an animal to a human.”

Fauci said he was in the dark on social media actions to curb speech and suspend accounts that posted COVID-19 information that didn’t fit the mainstream narrative: “I’m not aware of suppression of speech on social media.” Yet it was Fauci’s proclamations of the truth, whether about the origins of COVID-19 to the effectiveness of hydroxychloroquine, that led to social media companies banning discussions of contrary information.

Regarding those removals of content, Fauci had no personal knowledge of a US Government/Social Media effort to curb “misinformation.” But he conceded the possibility numerous times.

Then there’s the issue of masks. In February 2020, Fauci informed an acquaintance that was traveling: “I do not recommend that you wear a mask.” Fauci would later become a vocal proponent of masks only two months later.

I’m near my Substack length limit - posting the excerpts does that - but you can see from Fauci’s testimony that his public statements about COVID-19 origins and the necessity to wear a mask didn’t match his private conversations. This has been known for some time, but it’s finally nice to get him on record.

Again, read it all and subscribe here.

Tyler Durden Mon, 12/05/2022 - 21:40

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International

Global Wages Take A Hit As Inflation Eats Into Paychecks

Global Wages Take A Hit As Inflation Eats Into Paychecks

The global inflation crisis paired with lackluster economic growth and an outlook…

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Global Wages Take A Hit As Inflation Eats Into Paychecks

The global inflation crisis paired with lackluster economic growth and an outlook clouded by uncertainties have led to a decline in real wages around the world, a new report published by the International Labour Organization (ILO) has found.

As Statista's Felix Richter reports, according to the 2022-23 Global Wage Report, global real monthly wages fell 0.9 percent this year on average, marking the first decline in real earnings at a global scale in the 21st century.

You will find more infographics at Statista

The multiple global crises we are facing have led to a decline in real wages.

"It has placed tens of millions of workers in a dire situation as they face increasing uncertainties,” ILO Director-General Gilbert F. Houngbo said in a statement, adding that “income inequality and poverty will rise if the purchasing power of the lowest paid is not maintained.”

While inflation rose faster in high-income countries, leading to above-average real wage declines in North America (minus 3.2 percent) and the European Union (minus 2.4 percent), the ILO finds that low-income earners are disproportionately affected by rising inflation. As lower-wage earners spend a larger share of their disposable income on essential goods and services, which generally see greater price increases than non-essential items, those who can least afford it suffer the biggest cost-of-living impact of rising prices.

“We must place particular attention to workers at the middle and lower end of the pay scale,” Rosalia Vazquez-Alvarez, one of the report’s authors said.

“Fighting against the deterioration of real wages can help maintain economic growth, which in turn can help to recover the employment levels observed before the pandemic. This can be an effective way to lessen the probability or depth of recessions in all countries and regions,” she said.

Tyler Durden Mon, 12/05/2022 - 20:00

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