Student Loans & The Redistribution Of Wealth

By Daniel R. Amerman, CFA

Below is the 2nd half of this article, and it begins where the 1st half which is carried on other websites left off.  If you would prefer to read (or link) the article in single page form, the private one page version for subscribers can be found here:

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Too Many Interests Trying To Grab A Piece Of The Future

For 20 years, I have been a vocal critic of a number of fatal flaws within the conventional retirement planning model, and the still developing debacle with student lending is only one part of one of the biggest of the flaws.  Everyone wants a piece of the future - and they are using federal law to carve it up right now.

The future, in this case, isn't the impersonal compounding of trends and numbers - but very real individual people.  The generations behind the Boomers have been targeted and legally obligated to pay for Social Security, Medicare and now student loans, on top of a rapidly growing network of transfer payments that are increasingly built into the law.  With the money they have left over, if they have a job at all, they are supposed to raise consumption to maintain stock market values, as well as come up with the tens of trillions of dollars to buy out the Boomer investments at the highest prices in history.

Those expectations don't add up, not even remotely.  The attempt is being made to take more from the wealth creators of the future - the Boomers' collective children and grandchildren - than they will have available to them.  Ethics and generational abuse aside - you can't take what it isn't there.

Yet, those expectations of being able to essentially take infinite wealth from the finite wealth creators of the future is built into the very heart of conventional financial and retirement planning even today.  The factors discussed in this article simply aren't considered.

Price Of Student Loans Will Be Asset Deflation

Along with the students who are the primary victims, retirees and other investors in the future will be paying a steep price for the Federal government-enabled redistribution of wealth to college and university administrations today.  

It is a fairly basic relationship.  The lower standard of living for millions of students in the future means simultaneously lower consumer spending, and fewer investors with less money available to purchase investments.  That is a toxic combination for stock prices over the long term, meaning prices are likely to be driven down in real terms, which translates to asset deflation.  Investment portfolios don't reliably compound in value each year like they do in the computer models, but instead buy less and less with each year.

However, this does not necessarily mean that stock prices won't be rising.  The most dangerous combination of all is shares prices rising because of monetary inflation, while purchasing power is driven down because of asset deflation.  We've been there before, in the 1970s, and asset deflation can indeed be masked by monetary inflation and fool a nation, as discussed in my article "Deadly Dow 36,000 & The Secret History Of A 70% Market Loss", linked below.

We Are All In This Together

Ethics and common decency are reason enough, but there are other powerful reasons for older Americans to try to help college students today, and do what they can to stop runaway spending and runaway student loans.  Throw all the elaborate numbers and models out the window:  what retirement really comes down to is people. 

Retirees who have stopped working are reliant for their standard of living upon people who are still working, whether the transfer of wealth occurs through the government or private investment.  Simply put - the lower the wealth for the generations behind the Boomers, then the lower the standard of living for the Boomers in retirement.  We truly are all in this together, and it  doesn't get any more basic - or inescapable - than that.

When wealth is taken from our collective children for decades to come - it is taken from all of us for decades to come.  When a politically powerful special interest group enriches itself by taking from college students - it is also grabbing a big slice of the financial pie of the future, which then comes out of the future standard of living of us all.