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The Shocking Truth About Student Loan Forgiveness

Current Events Macro


michaeljburry tweetStudent loan forgiveness has become an incredibly popular idea. But Michael Burry himself has been warning about the scary reality of student loan forgiveness, going so far as to say it will have terrible consequences for America. I'm gonna explain why in three simple,  fast steps.

Step One – Inflationary Pressure

inflation over the past two yearsInflation has been a big part of our lives for the last two years, and student loan forgiveness could make it worse.

Let's start by reviewing a chart of M2 Money Supply. This chart starts in 2014 and goes to today's date. On the left, we go from $10 trillion up to $24 trillion.

a chart of M2 money supply
A chart of M2 Money Supply

I want to focus on this big red circle right in the middle, where the actual number of currency units, as measured by the M2 Money Supply metric, went up by 25% from 2020 to the end of 2021. A staggering amount.

m2 money supply increased 25 percent between 2020 and 2021
M2 Money Supply increased by 25% between 2020 and 2021.

I want to point out that this staggering increase in M2 Money Supply is one of the main reasons we have had such severe consumer price inflation which has disproportionately impacted the poor and middle class over the last couple of years.

Drunk Insolvent Uncle Sam locking everyone up in a cage
Your Drunk, Insolvent Uncle Sam locking everyone up in their cages for multiple years contributed to high inflation.

Also, we had the government – you're Drunk, Insolvent Uncle Sam – lock everyone in a cage, disrupting every global supply chain. This also contributed to massive inflation.

Why There Was A Dramatic Increase In M2 Money Supply

Why did M2 Money Supply increase? We all know there was panic-driven government deficit spending, stimulus checks, and PPP loans. But if Big Government were borrowing dollars through bond issuance or taxes, then that would not increase the number of currency units in M2 Money Supply.

So what inflationary brew was concocted to make M2 Money Supply rise to such a high degree?

To understand, we've got to start with quantitative easing and the Federal Reserve. Let's go right back to the whiteboard.

We've got the Federal Reserve on the left, their balance sheet assets (A) on the top left, and liabilities (L) on the top right. The same thing goes for the commercial bank in the middle and the average Joe on the right-hand side.

In this scenario, Joe will represent the non-bank entities in the real economy. Each balance sheet is blank, except for Joe's. He's got one asset, a treasury.

Now that the stage is set, the next step is for the Fed to come in and do quantitative easing. This happened in 2020 and 2021.

What is Quantitative Easing?

Quantitative easing is a monetary policy tool central banks use to inject money into the economy.

It involves purchasing government securities or other financial assets from the market with newly-created money to increase the money supply and stimulate the economy.

This is done to lower interest rates and make it easier for businesses and individuals to borrow money and spend.

Other objectives of quantitative easing include increasing liquidity, reducing volatility in financial markets, stimulating growth and job creation, and restoring confidence in the banking system.

Quantitative easing is typically used when traditional monetary policy tools are insufficient to stimulate economic activity.

How Does QE Work?

How Quantitative Easing (QE) works – Recall that Joe has a single US treasury on his balance sheet. The Fed comes in and buys that treasury (asset) from Joe through the primary dealer banks. This treasury ultimately moves from Joe's balance sheet over to the Fed's balance sheet via the commercial banks.

How The Fed Pays For Joe's Treasury

The Fed pays for Joe's treasury by creating dollar-denominated bank reserves out of thin air for commercial banks to facilitate the transaction. Commercial banks can create cash on the fly when they issue dollar-denominated credit, like loans or a deposit in Joe's bank account when he sells his treasury.

The dollar-denominated bank reserves created by the Fed are a liability to the Fed. The Fed's dollar-denominated bank reserves are given to Commercial Banks as assets which they use to credit Joe's account for the amount of his treasury. These reserves do not circulate about in the real economy chasing goods and services.

dollar-denominated bank reserves
Dollar-denominated bank reserves are on the Fed's balance sheet in Red. These same reserves are given to commercial banks as assets. Notice the same red dollar sign on the asset side of the commercial bank's balance sheet to represent this fact.

When Joe receives his credit, currency units in the real economy (M2 Money Supply) increase. This is exactly what happened during the pandemic, this big red circle right in the middle.

why M2 money supply increased during covid lockdowns
Why M2 Money Supply increase during covid lockdowns.

During the draconian lockdowns, local businesses went to their banks in a panic – worried for obvious reasons – asking to draw down their lines of credit.

When you combine line-of-credit draw-downs and the additional extension of credit with quantitative easing, you get M2 Money Supply increasing by 25% in a little over a year.

And you may be saying to yourself right now, “Okay, George, I get it. But what does QE have to do with student loan forgiveness?” That's a great question. We're going to answer that question starting now.

Step Two – Student Loan Forgiveness Equals More Debt

student loan debt equals more consumer price inflation
student loan debt equals more consumer price inflation

Student loan forgiveness equals more debt, which equals more 1uantitative easing, which equals, you guessed it, more consumer price inflation.

Let's start by going over a chart that goes back to 1970, all the way up to today's date. On the left, we go from $0 trillion all the way up to $32 trillion. This is government debt.

chart of government debt
Chart of government debt

So we start off it kind of flatlines in the 1980s. It goes up significantly. Then, as most of you know, in the late 1990s, the government actually ran a surplus. They had more revenue coming in than they had expenses.

1990s government surplus
1990s government surplus
President Clinton announces the 1998 budget surplus
President Clinton announces the 1998 budget surplus: Exactly $70 billion — The first budget surplus in a generation.

I mean, it's hard to believe in today's day and age, But as we know, in the early 2000s, your Drunk, Insolvent Uncle Sam started spending money again, like the drunken sailor he is.

Federal Debt - Total public debt
Federal Debt – Total public debt starts to increase in early 2000s

The debt starts going up and really skyrocketed during the GFC when we had all the bailouts.

Debt skyrockets during GFC
Debt skyrockets during GFC

Then during the Obama and Trump administrations, it continues to go up at a significant degree.

government debt during obama and trump
Government debt during Obama and Trump

Then we get to the COVID response, where debt goes straight up, parabolic. And since that time, it's absolutely skyrocketed.

government debt goes straight up during covid
Government debt goes straight up during covid

So just like we did in step number one, I want to focus on this red circle. And this is where debt went from $24 trillion to $31 trillion in just a year and a half.

When debt went from $24 trillion to $31 trillion in just a year and a half
When debt went from $24 trillion to $31 trillion in just a year and a half.

I mean, let that sink in for a moment. During this timeframe, M2 Money Supply goes up by 25%, and government debt goes up by almost 30%. This is one of the main reasons the Fed came in and did quantitative easing in the first place.

Let's think this through, as the government is deficit spending to this degree, they're issuing more and more Treasuries.

Well, it's simple supply and demand. If the supply of treasuries explodes and the demand doesn't keep pace, the price will decrease.

You already know that there's an inverse relationship between the price of a treasury and its yield, the interest rate. If treasury prices are going down, then yields are going up.

And during the pandemic in 2021, it was the opposite of what the Fed wanted treasuries to do.

The Fed wanted to keep interest rates, especially at the long end, very low, to keep the cost of mortgages low, the cost of credit card debt low, and the cost of auto loans as low as possible.

But now let's fast forward to today and we can see who the net buyer has been for treasuries over the past year and a half, the US retail investor. Pretty much all other entities have been net sellers of treasuries.

US treasury securities holders by type023
US treasury securities holders by type

So what this means moving forward is if the US retail buyer backs out and stops buying treasuries, the Fed might be the only game in town, meaning they might be the only buyer.

Okay, so let's take it to the next step. If we do student loan forgiveness, most of the assets on the government's balance sheet will disappear. And even if they buy that student loan debt to forgive it, let's say it's on the bank's balance sheet, they still have to issue more debt.

Let's focus on the student loans that are actually on the federal government's balance sheet.

Right now, we've got Student Stewart right here, and he is paying the government and the government takes those dollars and gives it to Grandpa Joe, who's picking up his social security check.

velocity of money example
A velocity of money example – one student's debt payment is another senior citizen's social security check payment.

Okay, well, if we go ahead and forgive student Stewart's loans, then he will keep that money for himself. This means there's no more cash flowing into the government to pay for Grandpa Joe's retirement.

Where does the government get the money to pay Grandpa Joe if Student Stewart gets to keep his student loan payments?

The government will either have to raise taxes, which will most likely not happen, or they will have to issue more treasuries. The deficit has to go even higher as a result.

If the deficit goes higher, then by definition, the overall debt would go higher and higher and higher. This will force the Federal Reserve to come in and do more quantitative easing, which pretty much takes us straight to a 2020 2.0 scenario.

We saw this explosion of 29% in debt. We saw an explosion of M2 Money Supply of 25%.

Government debt explodes by 29% since 2020.
Government debt has exploded by 29% since 2020.
M2 money supply explodes by 25% since 2020.
M2 Money Supply has exploded by 25% since 2020.

To a certain degree, this could be very similar to what we may see in the future if the government forgives student loans.

Low Velocity of Money vs. High Velocity of Money

Velocity of M2 Money Stock
Low velocity of M2 Money Supply
high velocity of M2 Money Supply
High velocity of M2 Money Supply

I want to point out something most people don't think about. It's low-velocity money compared to high-velocity money.

Most of you know from watching my videos that it's not just the number of currency units and the amount of supply but how fast those currency units circulate throughout the economy.

If we have very high velocity, we'll most likely have higher consumer price inflation rates. Low velocity puts downward pressure on inflation.

High velocity of money often means higher CPI
High velocity of money often means higher CPI.

Okay, if we have students Stewart paying the government, and then the government paying Grandpa Joe, we've got high-velocity money because it's most likely coming out of student Stewart's checking account and right into Grandpa Joe's checking account. We've got high-velocity money going to high-velocity money.

If the government instead has to issue and sell treasuries, then the proceeds of those treasury sales will likely come from a person's savings account. This also assumes that the Federal Reserve is not doing quantitative easing.

If the US treasury is pulling currency units out of people's savings accounts in exchange for treasuries, then that's considered very low velocity of money.

Again, you don't typically buy treasuries with your rent or grocery money.

So now the government is taking low-velocity money and giving it to people's entitlement payments like social security, disability, etc.

And these people are going to spend it very, very quickly.

What will this do to the overall velocity of money?

The velocity of money will likely increase, which puts further upward pressure on prices and, therefore, more inflation.

I want to remind you that the people paying these student loans are most likely impacted to the greatest degree by consumer price inflation because rich people can afford to pay off their student loans and don't worry about the price of gas or the price of food.

The people who are really struggling to make those student loan payments are the people that really feel the pinch when the price of food, the price of energy, or the price of rent goes up, which, ironically, is what will most likely happen if they do student loan forgiveness.

I know many of you are probably saying, “Okay, I understand the problem, George, but what is the solution?”

Well, it's actually quite simple.

In fact, to understand the solution better, let's cut to a clip of one of the biggest proponents of student loan forgiveness, Bernie Sanders himself.

Bernie Sanders: 50 years ago, what did it cost to go to the University of California? Remember?
Bill Mahar: 50 bucks! 500…
Bernie Sanders: Virtually free. The University of New York, right? Virtually free!

So isn't that amazing? When he was saying, “Bill, back in our day, college was like…$5…and now it's $50,000.”

And he doesn't even have the intellectual curiosity to ask why?

Why Is College So Expensive?

Prices were very low when we had the free market or the free market with college tuition. But when we added the government, subsidizing the cost of tuition, we added the government to the free market, and what happened? Prices went up.

[ctt template=”3″ link=”ArP4c” via=”no” ]Tuition prices were very low when we had the free market. But when we added the government, subsidizing the cost of tuition, we added the government to the free market, and what happened? Prices went up.[/ctt]

So you see, Bernie's solution is just to do more of what created the problem, to begin with.

My solution is just to do less. Look at the problem (the government), analyze it, and eliminate it (the government).

Step Three – The Real Problem And Another Real Solution

We discussed student loan forgiveness problems and inflationary pressures. But what we didn't discuss is the moral hazard. And I think this is just as important, if not more important.

Let's think about it. We've got all these students who behaved responsibly. They produce more than they consume. They saved their money to pay back that student loan debt, to fulfill the promise they made, to begin with.

What happens to those individuals when you take this student loan forgiveness group that may not have acted responsibly and reward them for their behavior?

I mean, at the end of the day, I'm not saying it's all the student's fault that they have this debt. But we have to have some accountability, for heaven's sake. No one took a gun, put it to their head, and said, “you have to take out the student loan debt.” It was a decision they made. It needs to be their responsibility.

Student loan forgiveness is an extension of the participation trophy grift. It's another example of the society that we have right now.

[ctt template=”3″ link=”jbP9i” via=”no” ]Student loan forgiveness is an extension of the participation trophy grift. It's another example of the society that we have right now.[/ctt]

You've got Johnny out there, sacrificing everything, staying in the batting cage, and practicing hours and hours. And then we have his counterpart, that just stays home and plays video games, and we give them the exact same reward. What does that do to society long-term? Well, we're gonna get into that in just a moment.

But before we do, let's also think about today's students that are in high school.

If today's high school kids see everyone that has gone to college not having to pay for it, then they will demand the same thing, and the AOC and Bernie Sanders types will give it to them. We go from having to pay for college to, most likely, free college. We go from free college to pretty much free everything.

That's going to transition, in my opinion, straight to Universal Basic Income (UBI). And that takes us straight into a central bank digital currency in an Orwellian nanny state.

And you may be saying to yourself, “Okay, George, well, that'd be great if we got everything for free.”

There's no free lunch. If you're getting something for free, then that means someone else is paying for it. And if they're not paying for it, you will inevitably pay for it by the quality you receive.

[ctt template=”3″ link=”1Keba” via=”no” ]There's no free lunch. If you're getting something for free, then that means someone else is paying for it. And if they're not paying for it, you will inevitably pay for it by the quality you receive.[/ctt]

Whether it's health care, whether it's college, university, a house, or a car, you name it, you get it for free, you get it from the government, and the quality and your standard of living will plummet.

[ctt template=”3″ link=”p6Sq6″ via=”no” ]Whether it's health care, whether it's college, university, a house, or a car, you name it, you get it for free, you get it from the government, and the quality and your standard of living will plummet.[/ctt]

But before we go any further, let's address this chart. It goes back from 1970 all the way to around 2018 or so. On the left, we go from zero to $100,000. This is the classic wage premium that you hear about all the time.

classic wage premium chart
classic wage premium chart

This red line represents those in society who just graduated from high school.

Redline – High School

The green line represents those who graduated from college.

Green line – College Kids

At surface level, if you just take a glance at this, you conclude what the Bernie Sanders types come to, and that's “Oh my gosh, all we have to do to make everyone rich is just send them to college.”

Kids who go to college make more money
Does college really make kids more money or good parenting?

Because obviously, if they go to college, they make much more money. But this is a classic example of confusing correlation and causation.

[ctt template=”3″ link=”j0CBG” via=”no” ]”If they go to college, they make much more money.” This is a classic example of confusing correlation and causation.[/ctt]

To illustrate this, let me tell you a quick story about my sister. She has two daughters. They would be my nieces. And I am very proud of them, to say the least. But they had an ideal upbringing.

The parents were never divorced. My sister was able to stay home and make sure that they did their homework. But more importantly, she instilled discipline, responsibility, integrity, and a work ethic into them.

It is true that both my nieces went to college, and both of them today are making a lot of money. But is it because they went to college? Or is it because my sister and my brother-in-law raised them well?

You see, I would argue that this gap really has nothing to do with high school and nothing to do with college. It is about the types of people who go to college and those who stay or flunk out of high school.

Most of you know someone who may have flunked out of high school. Usually, not always, but they were the types of people with the personality that made them unsuccessful, maybe from a monetary standpoint, for the rest of their life or into adulthood.

You see, it's really like a self-selection process, where college doesn't necessarily give the kids the skills needed to succeed but is an aggregator of kids who would have been successful. Why? Because their parents raised them well.

So do we have too few kids in college? Absolutely not. I would argue we have too many kids in college.

Imagine what a difference it could make if we returned to free market capitalism, where only those driven and passionate enough to pursue professions such as engineering, medicine, or law would attend college.

The rest of our youth could begin contributing more than they consume as soon as high school ends!

To further this cause, let's redirect the focus away from university studies and back onto parenting – then real solutions for our issues will manifest themselves.