Understanding bubbles through student loans

Economic cycles are one of the most, if not the most, important things we need to know when studying all kinds of economic phenomena. They lead our behaviour and our expectations, and can help us make important decisions in advance. Right now, we’re trying to get out of the “Great Recession” via expansive monetary policy and budgetary austerity. What should come after the end of the recession is… well, another 10 years of expansion! Does it sound easy? It isn’t ☹

In the last 25 years, we have witnessed how the economy has transitioned from one bubble to another, to another… Sure there was a lot of panic in between, but the forecast for the next few years doesn’t seem to be any different from what we’ve experienced so far. Economic bubbles are not easy to predict and detect, but we already have some experience and stay alert for whatever strange variations we see in the macroeconomic charts.

In the mid-late 1990s, the tech industry took over the vast majority of the stock markets worldwide, especially in the USA, due to the “revolution” that was taking place in many aspects of our lives back then. Windows 95 became a must in everyone’s houses or workplaces, lots of companies started operating exclusively online, and billions and billions of dollars from all kinds of investors helped this new business model grow, in hopes of becoming rich with (almost) no effort. It was at this time that companies like Yahoo!, Amazon or Microsoft began to assert their dominance in the global markets, and with great power came great money. Everyone wanted their slice of the dot-com cake, so many venture capitalists invested their money in as many websites and tech start-ups as they could, careless about the actual business or location of those new competitors. The NASDAQ index peaked by the minute, with high-tech companies like Oracle or Intel getting eclipsed by new online corporations that offered, in most cases, little to no added value.

On March 10, 2000 the NASDAQ peaked at more than 5000 points (!!!), nearly double over March 1999, and the stocks from companies like Akamai or Alteon, to name a few, rose over 200% in no time. This frenzy was suddenly stopped with huge sell orders from companies like the ones above and many more. Within 2 months, panic took over the markets and the stocks were down nearly 80% of their all-time-high, with dozens of dot-com start-ups going bankrupt. A tragic ending for what was supposed to be the greatest revolution of all time.

However, the markets did not want to get used to this new boring post-apocalyptic scenario, and a new bubble started growing not long after the dot-com crash. You’re right: subprime mortgages. There are hundreds (thousands!) of books, articles, graphs and analysis dealing with this horrible crash whose effects we’re still suffering. It is not my goal to discuss this subject here, but we need some basic guidelines to understand what’s going on in 2018.

After the big failure of the dot-com experiment, many investors and banks tried their luck again with real estate. Tower cranes created not-so-beautiful landscapes in every single major city of Europe and USA, and buying a house became the top priority of millions of young and middle-aged workers that started to see the light at the end of the tunnel. What they did not know is… that light was a train.

Jobs were easy to find, and they paid well. In countries like Spain, construction workers made up to €3,000 a month, which was more than twice the standard for that kind of low qualification jobs. Seeing how things were starting to go well again, most people didn’t think long-term and signed mortgage loans that included a newly built house, an expensive car, and even a vacation trip all in one single loan that sometimes ate up 60% of the monthly revenue. As you already know, that artificial growth could only last for so long. Remember late 2007-2008: Lehman Brothers, panic, public debt crisis, GDP plummeting…

10 years after that, we’re being told about a recovery, and the beginning (finally) of a new economic cycle that we should be completely confident about. However, most people don’t learn from their mistakes, and all we have is yet another bubble: student loans. Financial crisis might be over for the most part (not sure about real estate though!), but the younger generations are in big trouble.

When we want to know whether there’s something wrong with a certain market or what the expectations on certain assets or liabilities are, we look at trends and past situations that could help us understand the present one, so let’s take a look at the charts!

As we can see, the student loan bubble is nothing new, but it is starting to reach values that are something to really worry about. The worst part? It keeps growing steadily and doesn’t seem to stop anytime soon. Don’t get me wrong: education is one of the most important things to invest in, but we must be conscious of the magnitude of this problem.

When students complain about the ridiculously high tuitions they have to face, they’re actually right. Inflation is something to be expected; in fact, it is desirable in small amounts, so that the economy can grow and that there is room for innovation and development. But, as you can imagine, an inflation of more than 250% over the course of the last 40 years is not healthy. It is a source of trouble (debt) that condition’s people’s expectations for their whole lives.

The only thing we know for sure is that lots of students are forced to go into huge debt to cover one of the most basic needs in today’s global world: higher education. So far, the employment rates for most majors have been high enough to compensate for the tremendous costs of four years of college, but wages do not (and should not) keep up with the continuously rising prices of higher education. It’s just a matter of time before many loans start to remain unpaid as the cost of living increases and the choice for many people becomes clear: basic needs and survival go first.

Given this possible scenario, what will the Fed and the Government do? Will they risk another panic wave like the one they created with Lehman Brothers? Will they let investors lose all their money, risking yet another financial crisis? Or will they forgive everyone’s sins as they have done every single time and let public debt skyrocket once more? The forecast calls for a serious thunderstorm and, if I were you, I’d be more than ready for another 10 years of risk, uncertainty and struggle.

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