Moneybeat: Cancellation of student debt | WORLD

MARY REICHARD, HOST: Next, The world and everything in it: Monday Moneybeat.

NICK EICHER, HOST: Now it’s time for our weekly conversation on business, markets and economics with financial analyst and advisor David Bahnsen, director of wealth management firm The Bahnsen Group. Good morning!

DAVID BAHNSEN, GUEST: Glad to be with you, Nick.

EICHER: Let’s start with student loans. All of my colleagues were telling me last week that I just needed your opinion on President Biden’s decision on debt forgiveness – $10,000 to $20,000 for those under the $125,000 income threshold.

What about this new policy?

BAHNSEN: Yeah, I’ve been about as critical of that as anything the Biden administration has been. And there was a lot to criticize to be quite frank. But it’s kind of another level, both for the crude and cynical political nature of it, to which I’ll add a contrary view that I think won’t work. So, all policies aside, as a policy, there is no limiting principle. The idea that the federal government should be arbitrarily, I don’t like the term “debt forgiveness”, because the people who got the money still got it. So the treasury is telling someone they don’t have to pay back other people’s money that was paid to another third party, who has nothing to do with the transaction, the university administrators, we think they should be negatively involved and they are not. So this actually raises one of the biggest criticisms I would have is that it totally misses the biggest problem we have which is the runaway tuition caused by a government grant federal, as people pay more or less more money to have their children are more indoctrinated or brought into a party culture, for less access to high quality teachers who are in class, maybe seven or 8 % of the time, and which produce an even less important diploma on the market. So it’s only all this criticism of higher education that I would suggest that goes hand in hand with galloping price inflation. And it does none of that. And where they say, Well, it’s become unfair, it’s too expensive. They have no way to repay. They were promised that they would get a better job than they actually got, these things all have another root to their problem. And we can move forward and fix this problem. And I’ll have plenty of ideas that they want to do that. And in the meantime, we are again talking about hundreds of billions of dollars in debt, which represents the future growth of the economy.

EICHER: You mentioned inflation, David. I have heard many right-wing analysts predict that this will fuel the headline inflation we are experiencing. I read you last week in DC-Today saying that was wrong. You have a micro/macro analysis on the issue of inflation, if you could share it with us.

BAHNSEN: Yeah, first let me start with the part that is absolutely inflationary. And that’s the part I want everyone to care about. There is now a greater ability to pay because people take into account that there will almost inevitably be future debt forgiveness, it makes absolutely no sense that people can go into debt. And we can call it unfair, and so on, and so forgive that big $300 billion, $400 billion, but then not change any of the rules going forward, which means there’s no there is no reason for all of this not to happen again, and then having to cancel this debt in the future. So it allows universities to charge even more, after already going through more than 20 years of the most perverse price inflation we’ve ever seen. And those are the three areas of inflation that have consistently bothered me, namely higher education, housing, and health care. And those are the only three areas where we’ve had significant inflation over the past 40 years. And those are the three areas that the federal government subsidizes the most in the economy, which I think creates unacceptable inflation. But all that to say that the argument that now pours gas because it gives everyone that extra cash to run around and spend, I think is missing some of the mechanics. There is no new money created by this. Everyone incurred their student debt years ago, their student loans, everyone paid it off to their college administrators. And now they don’t have to repay that part and they haven’t repaid anything for the past two years. And so there’s not this inflationary spike because there’s no new money being created and new cash coming out and being spent. Some have argued, well, yes, but now there will be this greater degree of margin and the way their loans are valued, which then means a bit of extra money that they would have in spending available. That’s not usually what people mean when they talk about gasoline on a fire. So that’s my macro argument for why I don’t see an inflation spike from this. But my micro-argument is much more important, which is that the administrators of the universities I’m talking about are going to raise prices because of this.

EICHER: A few weeks ago I invited listeners to ask questions – and I will repeat that invitation to submit a question to David Bahnsen, preferably using your phone to make a voice memo, try to keep it tight and precise, and send me a file at [email protected]so we can consider your question for air.

Today, here is our first: Samuel Kimzey, who teaches humanities at the Valley Classical School.

KIMZEY: Hello, Mr. Bahnsen. I’m listening from Blacksburg, Virginia. I love listening to your weekly segment with the world and I really enjoyed your book as well. There is no free lunch. So I wanted to ask economic questions specifically about gas and oil prices, primarily about the flow and prices of gas that we’ve seen change dramatically over the past few weeks? What do you think is the best explanation for the significant drop in prices, especially since the White House, at least to my knowledge, has not changed any of its regulatory positions or opened up more federal land for new drilling pipelines and things like that?

BAHNSEN: Well, thank you for that very thoughtful and related series of questions. And I will do my best to respond with regard to strategic petroleum reserves. I’d like to start there, because you’re absolutely right about the amount they’ve done, they’ve been doing it now for a good four months and they’ve changed, and we’re at our lowest of reserves since 1985. Now I can’t say the fall in gasoline prices from July to August had anything to do with it I think much more likely it’s the very nature of the way which oil and gas prices are working to begin with – they are forward looking, and there has been some degree of increase in the market for production from the United States, as American producers have increased further their own production, not to the extent that we wish. We have to remember that when we’re talking about oil prices going from 120 to 95. We’re not talking about them reaching a cheap level, we’re not talking about them reaching what we want, a great equilibrium for the producers and consumers would probably be much closer to $70 oil, a barrel. The question you raised about no new permits on federal lands wouldn’t drive prices down anyway, because remember, these are pipelines. It doesn’t produce new oil, it just gives us more ways to transport the oil once it’s produced. Right now, without new pipeline permits, you’re more dependent on trucks and rail to move oil. But what pipelines do is give us a safer and more efficient way to transport oil. And so I think the ultimate way we get more production is for American companies not to be starved of capital from the ESG movement to get more permissions for drilling permits, which is different from pipeline permits on federal lands. I think we’re going to start seeing a little more, but it’s too little and it’s too late.

So the question goes back to what you originally asked, why have gasoline prices gone down? Sometimes the cure for high prices is high prices, it starts to reduce behavior. And I think there was some demand erosion at the margin that there are people who won’t drive on $6 gas who will drive on $5 gas. And so the normal market game of supply and demand begins to work together. But I just think we have to remember that we’re all still talking at very high bandwidth. So still very high, it has come down, and it may go up, but it hasn’t reached the point that you would want it to be for a healthier consumer response while maintaining the necessary margins for production.

And then finally, on a global level, we have to remember that gasoline prices have come down, meaning automotive gasoline, natural gas prices are at a 15-year high. So people’s home heating bills and other things that are used the way electricity is supplied for about 40% of the country, those things have skyrocketed even as the price at the pump has gone down. And so oil and natural gas are, you know, right now kind of separate from each other. And all this speaks of the problems of inadequate production.

EICHER: David Bahnsen is founder, managing partner and chief investment officer of the Bahnsen Group. His personal website is Bahnsen.com.

We ran a little long this week, but we wanted to start with listener questions and also dig deeper into the student debt issue, so thanks for taking the time. David, thank you. I hope you are having a good week!

BAHNSEN: Thank you very much, Nick.


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