A Trillion in Tuition

With an overwhelming number of topics for discussion these days, I find myself running into information overload on what to write about (a form of writer's block= too much out there!).  I have a new simplistic way of organizing whether an issue is newsworthy:  pay attention when the number associated with the issue has a "T" next to it..."T" like TRILLION. In 2002, I worked for Deutsche Bank and I remember we celebrated being the first European bank to have assets over $1 Trillion Euros. Back then it was a huge deal. 

Today, it is the prioritization "line in the sand" for politicians, economists, and journalists trying to deal with issues that matter. Numbers that have a "T" next to them include:  bailouts, Federal Reserve money printing, US National Debt owned by foreigners, pension shortfalls, municipal liabilities, household debt, etc.  The item I would like to discuss today, however, is college debt.  This number, according to Alan Collinge from StudentLoanJustice.org, is nearing the $1 Trillion mark.  While Americans have tightened their belts, reduced some frivolous spending, and gone back to school to help their candidacy for employment, college debt has surpassed credit card debt! No small feat!  

I have seen tons of articles about the topic of higher education recently and wrote a little note about it a few months ago (Creative Economy).  There are a couple things I would like to share about why people should be paying attention.  Why is the government pushing us so hard to go to college and offering us financing at terms that appear too good to be true?  Well, it is one of the ways to get people under the proverbial "thumb" of Uncle Sam. These loans do not go away, the interest rates will go up, and the government is behind 90% of them.  "Take out a loan, go back to school...help our collective brain trust get smarter...lets show countries around the world that our education standards are the highest...Asians go to school 8 days a week, we have to step it up!" It seems logical to me.  After the housing bust, the government needs to somewhat modify the American dream.  What is the 2nd most expensive asset we buy, something we are told we cannot live without, and something the government can easily offer to us?  A COLLEGE DEGREE.



The competition is fierce.

 

No wonder this debt is piling up and the cost of college is rising at its fastest pace ever.  It is a way to balance the debtor-creditor relationship – if the students owe the government a trillion and the government owes China and Japan a trillion…hmmm.  Get the students to owe us more and then our national debts will not look so bad.  Follow me?  Some public universities are seeing double digit increases in tuition each year (LINK).  As you extrapolate those increases you will see why new parents have to start paying attention…TODAY!  Here is a helpful website (College Tuition Calculator) for all of the parents out there who plan on seeing their children go to 4 year universities.  If you want to be spared from doing the work, here is a theoretical scenario of a newborn:

-Current school tuition/room and board annual cost:  $20,000
-Years until college: 17
-Number of years attending the university: 4
-Expected annual tuition increases over the next 17 years:  6%
-Expected annual returns on investment for savings account: 2%

TOTAL COLLEGE COST:  $235,597

-Monthly savings required today in order to pay this amount once college begins: $939 (based on the 2% savings rate of return) (the math on these numbers)

Add a couple kids to the equation and you can see how this is becomes a monstrous problem quickly.  The sheer notional size of the numbers is staggering; that is not the only shocking part.  I found some other interesting "features" about student loans that I am willing to bet not everyone was aware of.  Student loan debts are precluded from the following protections that apply to traditional consumer debt (mortgage, credit card):

1.)  Bankruptcy protection (you go bankrupt and your student debts are NOT erased)
2.)  The right to refinance (government loans cannot be refinanced though private loans can)
3.)  Fair debt & collection practices (they can garnish disability and call you at odd hours)
4.)  Adherence to usury laws (interest rates have no limit)
5.)  Truth in lending requirements (disclosures can be vague)
6.)  Statutes of limitations (time does not run out on how long they can come after you)

(Source: Default-Student Loan Documentary)

I was surprised to find this was the case for college loans...then I thought about it for a second… then I was not surprised.  Either college will have to become more affordable or we better start saving now.  Either way the government is incentivized to make college more expensive.  You owe them more and they get to tip the terms on the debt in their favor.  At the end of the day, we do not want every kid in America trying to become the next Lebron James. Of course bailing out on college wasn't the worst bet for Henry Ford, Michael Dell, Bill Gates, and Mark Zuckerberg, but they may be the exception.  Is meritocracy and mentorship the answer?  If someone can get the job done without the degree, then they should not be viewed any differently.  For example, I am spending a year traveling, getting my version of a post-graduate degree in global entrepreneurship from the college of “the world.”  Should that not count as legitimate education?

Livin' off the Fatta the Land

If you take a look at the right hand side of this blog you will notice a few sites that I like to follow.  One of them is Sovereignman.com (introduced to me by @Shamrock5000).  Yesterday, Sovereignman posted a link to a Stansberry Research video that sounded like a doomsday "public service announcement."  The video took about an hour to get through and contains important information about the devaluation of the dollar, piling US government debt, and a lengthy teaser advertisement for you to become a Stansberry client (boring).  If you want to take an hour to watch this click here (LINK TO VIDEO), or you can just keep reading and I will sum it up for you.  

The main point is that the US has no way out of its deficit spending and federal debt load - the interest payments on the debt will become too great, thus, the liabilities will grow in such a way that the only solution is for the dollar to be devalued even further (it fell 8% in 2010).  What does devalued really mean?  In a nutshell: your savings will be worth less because the prices of goods and services will become much much higher in the future (see my post below on "The Frog").  Stansberry suggests we can take action to protect ourselves from such events by doing some or all of the following:

-Own physical gold (buy a gold coin or buy stock in PHYS)
-Own physical silver (buy a silver coin or buy stock in PSLV)
-Have access to a rural place (call Aunt Ida on the farm and tell her you have dibs on the extra bedroom)
-Own money in a foreign currency outside the US (this is trickier)
-Own stored food in your basement (twinkies can withstand nuclear holocaust)
-Own land

I want to focus on the last one for a second.  Land.  Maybe Lenny and George from Of Mice and Men had the right idea? I recently contacted a land broker because I am curious about the idea of owning land as a hedge to the aforementioned travesty that some the doomsayers are predicting.  The investment properties of owning land appear to be multifaceted.  First, if real assets appreciate (real assets meaning things you can touch, live on, or drop on your foot and they hurt) due to inflation, then the value of the land should rise.  Second, if you are growing crops on this land and the prices of those crops rise, you stand to gain by selling those crops to the people without land (this can also be achieved by leasing parts of the land to farmers).  Third, you can eat the food grown on the land so the "personal survival" box is checked as well.  If you think about alternative investments, few cover all of these bases.  Sure you can buy food with gold and silver but what happens when you eat all your food and spend all of your gold?  Land appears to be the better hedge.   

Rather than go out and borrow money to buy a massive tract of land, I think the idea of a land collective makes total sense - pool a group of people together to buy a piece of land. There really is power in numbers here.  If you ever NEED this land (and I say this because clearly we all see that the grocery stores are still fully functional and our money still works), you have a group of people that will be farming it with you and protecting it with you.  I will take it a step further.  You want land that has access to freshwater. You need water to grow food no?  If you live in Michigan you are in a great position because you are surrounded by the equivalent of a fresh water ocean.    

I am not saying commit your entire life savings to an idea like this but why not spend 5% of it on a share of farmland that is within 2-3 hours drive from your house.  This should not break the bank.  Others are jumping on the land grab as well.  George Bush just bought 100k acres in South America.  John Malone (telecom magnate) bought an $83million piece of land in New Mexico at around $300/acre.  Bill Gates bought a 500 acre ranch in Wyoming.  Of course these are not small purchases and they have the luxury of private jet escape pods to get them to wherever they need to go, but you can see that the "smart" money is involved in this.

I am curious what people think about this topic.  It is seldom talked about and is clearly not as sexy as investing in AAPL or some high yield bond fund.  But if you were to commit some of the money going into your IRA or 401k (which the government may have some influence on in the near future) to something like this, I think you get closer to whatever a "well rounded investment portfolio" should look like.  If anyone is interested in exploring some kind of land collective/partnership/mutual fund, please let me know.  We already have a few people on board.  Something to ponder for 2011.    

A Frog Inquires: "is it hot in here or is it just me?"

The old adage says that if you throw a frog in boiling water he will quickly jump out. But if you place the frog in cold water and raise the heat ever so slightly to boiling, he will lay still and cook to death.  Replace the frog with “the American taxpayer” and make the water temperature the “level of prices” and you have a metaphor for the current US monetary policy.  It would most certainly not be in the best interests of politicians, or central bankers alike, to turn the inflation switch on overnight.  That would result in nothing short of riots.  In light of that, it is becoming increasingly obvious that the only way out from under the mountainous pile of government debt is through moderate price inflation and erosion of purchasing power over time.  The other alternatives would result in a US government default or debt restructuring and we can be sure that no President, Democrat or Republican, would concede to that under his or her watch.

Some economists will contest claims of higher price levels and lower purchasing power with the sagging level of the Consumer Price Index (CPI) relative to historical inflationary periods.  Contrary to some beliefs, one can argue that CPI is a manufactured index that is used as a benchmark for keeping wages, benefits, and cost of living indices in check, and fails to depict an accurate basket of goods.  While deflationists are constantly pointing toward the multitude of retail discounts and dollar menu offerings they come across during trips to the mall, they fail to mention rising prices in things like beverages, clothing, pharmaceutical drugs, utilities, transportation, college tuition, and most importantly, inputs like metals (hard commodities) and agriculture (soft commodities).

There appears to be a disconnect between where actual commodity prices are going, and where consumers expect the prices of goods made from these commodities are going.  Is it reasonable to think that the things we need to buy (food, clothes, cars, etc.) will miraculously become cheaper even though the inputs used to produce them are skyrocketing?  NO!  Some simple facts: corn is up 43% this year, soybeans are up 30%, wheat is up 34%, coffee is up 52%, cotton is up 100%.  Food and clothes will become more expensive unless the labor to make these items becomes much cheaper. Fortunately, East Asia is already under pressure to improve working conditions so do not expect labor to become less costly.  On the metal front: copper is up 18% year-to-date, silver is up 62%, platinum is up 20%, palladium is up 77%, and gold is up 28%.  ‘Nuff said? 

The laymen frequently combat these statistics with the “wealth” they are accumulating in their stock portfolios and retirement accounts.  “If the stock market is up, my portfolio rises, and I am getting richer,” they quip. It appears as if American taxpayers forget that they will lose if the dollar wins the race to zero.  After applauding the recent strong performance in the stock market, most Americans show no angst from the 13% decline in the dollar over the past 4 months.  “So we won’t go to Europe for vacation this year!” some might crack.  Unfortunately it is not that simple.  The US operates at a trade deficit and we consume many goods from other countries so cutting out vacations abroad will only alleviate part of the pain caused by the weaker purchasing power of the dollar.

To my fellow frogs I fear we must be realistic and face the facts that life will become more expensive. It could get a lot pricier should the Government and the Fed not perfectly thread the needle of igniting an economic recovery while giving our foreign lenders some semblance of confidence in the dollar.  We should prepare for higher prices domestically or find a way to denominate our assets in other stores of value to avoid getting cooked (buy some land or some Chinese yuan…or take my grandpa’s advice and buy 4 boxes of cereal before the price goes up!).