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For a deeper understanding of why the economic-political crises in the UK, listen to my September 30, 2022 Alternative Visions radio show. Contradictions between war induced inflation, energy shortages, collapsing European currencies, and emerging recession in Europe are intensified in the case of Britain and a harbinger of things to come on the European continent.

TO LISTEN GO TO:

https://alternativevisions.podbean.com/e/alternative-visions-britain-s-economic-crisis-isolated-event-or-harbinger-of-things-to-come/

SHOW ANNOUNCEMENT:

Dr. Rasmus reviews the intensifying UK economic crisis that escalated this past week. Bond holders and investors provoked a crisis in Britain’s pension funds in response to the new Truss government’s proposals to cut taxes and enact price caps on the accelerating cost of energy for UK households and small businesses. Capitalist investors don’t want fiscal spending they fear will stimulate the economy and therefore demand and inflation, the latter now double digit and predicted to rise to 17%. They want higher interest rates from the UK bank of England to protect the value of their investments—from rising inflation as well as collapsing British currency, the pound, that has fallen 40%.Rasmus explains this represents growing contradictions between capitalist fiscal-monetary policies and splits within the UK capitalist class. The show further explains and critiques the EU’s latest proposals for sanctions on Russia by creating a G7/EU global oil price cartel, which is doomed to fail if it ever gets implemented. Latest events summarized also in Russia-Ukraine/NATO war.

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This past week the European Commission, the umbrella political organization for the European Union nations, issued its latest set of sanctions on Russia.

The most important of the measures was the announcement that the EU was establishing a price cap for purchases of Russian crude oil in global markets. In so doing, the EU in effect plans to become a cartel controlling the price of global oil.

Saudi Arabia and even OPEC in the past failed as a cartel to control the price of global crude by controlling its supply. Yet the EU believes it can become a cartel and control the price of oil even globally even without influence over global supply.

Under the plan, which still requires the approval of all EU economies, the EU will not buy Russian oil at global prices set by market supply and demand. Instead, it will buy Russian oil only at a price that is capped below that of the global market. Reportedly the participants in the Commission discussed a price per barrel of crude capped around $55-$60 a barrel. EU economies will purchase Russian crude only if it is sold to them at or below their ‘cap’.

The plan, if approved, will go into effect only this December 2022.
The idea of the west setting a price cap on Russian oil as a form of sanction originated with Janet Yellen, Secretary of the US Treasury, some months ago. It was an economically absurd proposition then, and remains no less so today. The price cap may not prove effective, but it does illustrate the ineffectiveness of sanctions to date on Russian oil and energy products (i.e. natural gas, uranium ore for Europe commercial nuclear facilities, etc.).

Global oil is traded (bought and sold) in the global market solely in US dollars. So too are other critical industrial commodities and many agricultural commodities. The main focus of US sanctions, including the price cap idea, is to deny the target country—in this case Russia—access to revenue in dollars from the sale of its oil.

Theoretically, the loss of dollars from lower priced oil sales means Russia won’t be able to purchase as much needed imports critical for its economy in general and its war effort in particular. The lack of dollars in turn further means, again theoretically, Russia would have to print more of its own currency, the Ruble, to make up for lack of dollars in its own economy. That might lead to inflation as excess money supply is created for the domestic Russian economy. In turn excess money supply creation in Russia might lead to devaluation to domestic inflation and devaluation of the Ruble.

US initial sanctions on Russian oil and energy to date have largely failed. Russia’s export revenue from sale of oil has actually risen since sanctions and war began last February. Russia has sold more oil to China, India, and at least half of the world economies that have been ignoring US/EU announced sanctions altogether.

The EU ‘price cap’ idea is supposedly going to what oil sanctions up to now, which have been full of loopholes and exemptions, have failed to do—i.e. reduce Russian revenue from oil sales and its accumulation of dollars from those sales.

It is important to note that the EU itself has all but ignored sanctions on Russian oil to date. Russia has continued to ship oil to Europe. And the EU hasn’t even bothered to enforce sanctions on Russian natural gas imports or uranium ore shipments. What reduction in oil and natural gas shipments to Europe that has occurred, has been mostly due to political actions not sanctions. Last spring the Nordstream2 pipeline was quickly closed and more recently sabotaged. So too was the Nordstream1 pipeline. Prior to sabotage, Nord1 gas flow to Europe was reduced in stages by Russia to about only 30% of capacity. It wasn’t sanctions but decision by Russia that reduced the gas exports. There are two remaining large gas pipelines from Russia to Europe still functioning. One crosses the Ukraine and another transverses Turkey and the Aegean Sea into the Balkans. Europe has not tried to reduce gas flow from these with sanctions, although it is likely politics will result in their reduction and shutdown as well eventually.

But to the extent Russian natural gas flow to Europe has been reduced, the causes have been political and have had nothing to do with sanctions. So sanctions on Russian energy exports to Europe have hardly been implemented, let alone been effective. The EU price cap idea is supposed to finally result in sanctions on Russian oil sales and revenue.

Sanctions on exports to Europe and US of Russian industrial commodities have also been rife with exemptions, loopholes and work arounds. In the US, for example, Russian nickel and palladium exports needed for catalytic converters in US autos and in steel production have been significantly exempted. The US some time ago implemented sanctions on Russian oil imports to the US. The amounts of Russian oil imports were quite small. In any event, the US—unlike Europe—has a glut of excess oil and natural gas.

Russia has been earning significant export revenues therefore from the sale of its oil, natural gas, as well as many industrial commodities, ever since the US/EU sanctions regime was first imposed last January 2022. The ‘price cap’ is but the latest desperate attempt by the US and EU to make the sanctions on Russian oil to Europe ‘work’. But it won’t work. Here’s why:

First, the price cap is not going to take effect until December (if at all even then since all the EU nations must agree). So why should Russia even bother selling any oil to Europe in the interim. In business contract matters, if one party notifies the other it is breaking its contract and is no longer going to buy from the seller, that seller can simply cancel its contracts early and not wait until December. Russia will likely therefore cut off its oil exports to Europe sooner rather than later, and just redirect the oil elsewhere to China, India or rest of the world. No need for sanctions of any kind in other words.

But the price cap sanctions idea involves not just the EU buying Russian oil. The price cap is really the US/EU foray into what’s called ‘secondary sanctions’. That is, sanctions on other economies around the world. Up to now, the US has been careful about enforcing sanctions or penalties on other countries that refuse to go along with sanctions to date—and there are many such examples of economies that have been refusing to participate in sanctions. After all, if the Europeans themselves have allowed various exemptions to oil, gas, and commodities exports from Russia, why should other countries abide by the sanctions?

And there’s another even better reason why China, India and so many other countries globally have continued to buy Russian oil: Russia reportedly is selling its oil at around a 30% discount from the global market price.

The global market price today is around $80-$85 a barrel, depending if it’s west Texas crude or Brent (Northsea) oil. So Russia’s 30% discount means it’s selling at around $50-$60 a barrel now. If the EU is talking about setting a price cap at $55, what’s the point? It would have to set a cap even lower than it’s been discussing. But EU won’t be getting any Russian oil after December if Russia decides to turn off what little is still flowing there, as it responds to the price cap threat. And if the EU is not getting any Russian oil but it’s demanding the rest of the world economies adhere to the price cap, who believes the rest of the world is going to take that seriously. EU has nothing to lose from a price cap; but the rest of the world does.

Regardless of any EU artificially set price cap on global oil, should China, India and other countries support the idea just because the US and EU say so. Should they cancel their long term oil contracts with Russia at 30% discount from global market prices because US and EU say so? Buyers of oil and energy in global markets want price stability and reliable delivery. Russian oil provides that stability. The idea of a price cap means potential instability. And who would trust an arbitrary price cap set by Europe and the US as a bureaucratic political directive?

The whole idea of a price cap as a form of sanction set by EU/US by directive is absurd. Few if any will follow. But such is the arrogance of western imperialism to think they still have the power to enact and enforce such a measure. Perhaps in decades past. But no longer.

But the EU and US think they have an ‘ace card’ up their sleeve that will enable them to impose a price cap on the rest of the world: most of the shipping insurance companies are based almost exclusively in the west. What the price cap may have in mind is if other countries don’t follow the cap, then the shipping insurers won’t insure the ships that carry the Russian oil. That would stop the shipment of Russian oil to those countries not following the price cap. The price cap thus is designed to function as a form of indirect ‘secondary sanction’ on countries that don’t go along with the oil sanctions.

Europe is not the real target of the price cap proposal. It will get its oil from the US which will provide much of what Europe needs, albeit at a higher price than the alternative Russian oil. There’s no price cap on US oil; just Russian in the EU proposal.

Stopping the flow of Russian oil to other countries by means of a price cap combined with shipping insurance denial will likely result in a shift toward alternative shipping not located in the west. That means a loss of profits for western oil shipping companies. This has not been lost on Greek, Cyprus and Malta shipping companies who spoke out at the recent EU meeting discussing price caps. They are opposed to the price cap idea for good reason.

To sum up: the idea that the EU can become a global price setting cartel in the world oil market is absurd. What OPEC couldn’t do on the supply side, Europe cannot do on the demand side. Cartels only work if all parties go along, and China, India and the rest of the world simply will ignore and not go along with Europe thinking they can set an arbitrary price of global crude below its market price.

The EU’s recent announcement of new sanctions went beyond just the ‘price cap’ idea. It also announced new sanctions on Russian imports to EU of steel, paper, machinery, appliances, chemicals, plastics and other items. But wait! Weren’t these already sanctioned? If there’s now need for further sanctions on imports of these Russian products, that means sanctions on industrial commodities to date were also full of exemptions and loopholes all along.

China, India, Brazil and other emerging market economies are distrustful of US/EU sanctions to date and justifiably so. That will be especially true of the arbitrary price cap on Russian oil idea. It will be viewed as not imposing much of a cost on Europe, but likely destabilizing world oil markets’ supply and price.

But perhaps they shouldn’t worry that much. The price cap idea is unworkable, probably won’t be supported by all the EU, and carries with it the smell of secondary sanctions by another name, as well as the stink of arrogant western imperialism.

Dr. Jack Rasmus

Last week the US central bank, the Fed, made it clear to investors and all the rest that it was going to war on inflation, regardless if it meant collateral damage to millions of future unemployed. The Fed’s 3rd 75 basis pts rate hike also set off a firestorm of global currency collapse and stock market contractions. While the Fed admits it can’t do anything about supply side causes of inflation or corporate price gouging–which constitutes two-thirds of inflation, it has signaled it will try to make up by crashing consumer and small business demand. The other war is the intensifying conflict in Ukraine. The US/NATO has begun playing a bigger role behind the scenes assisting the Ukraine army in recent gains. In response, Russia has begun to mobilize 300,000 more reservists needed to match Ukraine’s 300,000 forces in the field. Russia’s ‘Special Military Operation’ (SMO), based on limited force commitment in the field, is now over. What replaces it remains to be seen, but the likelihood is a greater escalation in coming months.

TO LISTEN TO my Alternative Visions radio show on the above ‘two war’s of Friday, September 23, 2022 GO TO:

https://alternativevisions.podbean.com/e/alternative-visions-092322-two-wars-the-fed-and-ukraine/

Listen to my recent radio interviews (15-20 min. ea.) on the Fed’s latest interest rate hike and its consequences for inflation and recession:

1. WBAI-NY (Pete De rienzo show host)

https://soundcloud.com/user-879607737/092122-trump-fam-suit-putins-nukes-fed-rate-hike-iran-unrest?si=0b15d2e3fb9342a6993191e3b84ae436&utm_source=clipboard&utm_medium=text&utm_campaign=social_sharing

2. Critical Hour Radio (Wilmer Leon & Garland Nixon hosts)

https://drive.google.com/file/d/1FI8TYc7_kxHVr6A2PKWlEyeVxTgxWadO/view

3. By Any Means Necessary Show (Sean Blackmon host)

https://drive.google.com/file/d/1jCxQo4HnHSk60jNp9LAHAepBUB4ctqWX/view

4. Political Misfits show

https://drive.google.com/file/d/1SD4qdUcwoDLnxt5hjfoYwj_X_hi3j2g1/view?usp=drive_web

There is much that Michael Hudson and I agree on, especially with regard to the growing economic and political influence of finance capital in the last half century. We differ, however, in our analyses of how the growing global weight of finance capital destabilizes the global capitalist economy (and especially USA & UK variants) as well as its role in the US economic empire–that is, imperialism.

Another difference between Hudson and I is Hudson sees debt as the centerpiece and lynchpin to reform of the current capitalist economic system. He thus calls for a ‘debt jubilee’ in which by a political-legal action debt is expunged from the capitalist system. In my view, however, a debt jubilee is politically naive call for reform. Capital cannot function without debt, and as it financializes it necessarily creates more debt to function. To therefore call for a ‘jubilee’ in which debt is expunged requires a political revolution first. It is not possible to ‘reform’ excess debt by expunging it from the capitalist system. Capital’s political elite will not assassinate itself. The call for Jubilee is thus a naive, never attainable reformist demand.

Still another important difference in our analyses is Hudson sees a direct conflict between finance capital and industrial capital in the 21st century in which the former is prevailing over the latter. In contrast, my view is this class dichotomy proposition is over assumed. Capital is Capital and the two expressions–finance and industrial–are actually quite integrated. Finance capital is becoming more industrial; Industrial capital has been financialized for some time and is becoming more so.

This writer recently joined in a discussion on another blog, where commentary and exchange occurred on Michael Hudson’s book, SuperImperialism, in which his above basic propositions regarding debt, finance capital, and imperialism were discussed.

My reply and contribution to the discussion was as follows:

“Hudson is right about the growing financialization of Capitalism in the late 20th century, accelerating in the 21st and that financialization creates excess debt in its wake. But he’s wrong about Industrial capital (China, Russia) vs. Finance capital (USA). The USA is still the global leader in industrial capital. USA and China each produce about 25% of the world’s goods output. The USA does it with fewer workers, which means its rate of exploitation of labor is higher. More important, Hudson misses the fact that since the advent of Neoliberal economic policies (late 70s and ever since) US has enabled its multinational corps to offshore much of US goods production. So when industrial capital inside the US is combined with US industrial capital relocated offshore in the empire, the USA capitalism is still the ‘industrial’ capital leader. It is simultaneously become the ‘financial’ capital leader as well. But to the point: in the age of global capitalism and global US economic empire, one cannot compare national economies (China v. USA). As neoliberal policies were implemented and expanded from Reagan to Biden, finance capital also expanded offshore along with industrial capital, beginning in the late 1980s and accelerating. The US empire around the same time also created what I call the ‘twin deficits’ solution to enable US capitalism to repatriate a good part of the surplus value back home that its offshore multinational corporations created. It purposely and consciously (following the Plaza (NY) Accords with Japan and Louvre accords with Europe) ran a trade deficit whereby money capital created offshore was recycled back to the USA in the form of buying US Treasuries and other M&A acquisitions. That surplus allowed the USA to run massive budget deficits in turn, which further in turn allowed the USA to fund constant wars in the 21st century ($8T)while at same time cutting corporate and investor taxes by $15T. Global financialization was essential in order to recycle this foreign created surplus value.

In short, US trade deficits are ‘good’ for US capitalists in that they ultimately increase the global repatriation of value and, very important, enable funding wars and massive tax cuts for capitalists (ie the state returning value to the capitalists via the tax system)

USA empire and capitalists find both industrial and financial capital profitable. In some ways the former is even more profitable. (Note here that ‘profits’ are both from productive labor as well as ‘fictitious’, for Marxists). Capitalism sucks up global productive labor profits via imperial policies. But it same time creates more ficititious profits. Contra contemporary Marxists’ analysis, fictitious capital is not irrelevant..at least not to the capitalists. Fictitious capital and profits expand because there are no costs of goods, no need for labor in most cases, and the turnover is far faster than for industrial goods profits.

It is naive to call for a Debt Jubilee without clarifying that debt is essential now (in many forms not just financing industrial capital as in the 19th century) to capitalism and the US global economic empire. An anti-capitalist revolution would be necessary to expunge debt in general in the system. Hudson doesn’t understand this and calls for a debt jubilee under capitalism, as if the capitalists would agree anyway to such ‘reforms’ that would topple their own economy and eliminate much of their current system of profit maximization (fictitious as well as productive labor profits). An anti-capitalist revolution would be required to expunge debt on any scale. And that takes a political strategy, not an economic reform proposal to pass legislation to enact a debt jubilee.

There’s one more comment on Hudson ‘Superimperialism’ thesis and view that financialization is taking over real investment, leading to the decline of US economic empire, as finance capital attains dominance over industrial capital:

Do the capitalist global energy companies represent industrial capital? Yes, they produce the non-durable products called oil (and chemical derivatives of same). They make profits from industrial production. But the global price and therefore profits from oil is as much ‘financial’ as industrial. A major part of price and profit is determined by finance capitalists speculating on global oil futures exchanges. Profits are thus both industrial (production) and exchange (speculation in financial oil futures markets). So are the world’s oil corporations ‘industrial’ or ‘finance’? How does one speak of industrial vs. financial in this case? The same can be said for most globally traded industrial commodities, also bought and sold on futures markets. And then there’s the world’s great manufacturing corps. Many of them make a majority of their ‘profits’ from financial asset investing, not producing. In other words, in 21st century global capitalism, run by the American empire, the old 19th century distinction of bankers/finance capital vs. industrial capital is largely in accurate. It is just Capital, finding ways to leverage finance in order to make even more ‘fictitious’ money capital as it squeezes labor to extract more value and thus profits from production as well.”

Dr. Jack Rasmus
Sept. 16, 2022

Listen to my annual Labor Day assessment of the condition of American workers and their Unions, and latest key trends and developments including Amazon & Starbucks organizing and the mainstream press virtual blackout of historic collective bargaining negotiations currently underway involving US railway workers and west coast longshore dock workers.

TO LISTEN GO TO:

https://alternativevisions.podbean.com/e/alternative-visions-090222-labor-day-2022-the-state-of-american-workers-unions/

SHOW ANNOUNCEMENT:

Dr. Rasmus presents his annual labor day overview of the condition of American unions and working class. A description of the history of the rise and fall of union membership in the US from the 1920s to the present is given, followed by why overall union membership still remains stagnant despite 60-70% of workers saying in polls and surveys they want a union. Corporate-Govt causes of the decline vs. union top leadership failures are addressed. On the positive side, Dr. Rasmus reviews the past year’s positive union events including formation of unions at Amazon, Starbucks and other retail and the direct election of new top union leaders in the autoworkers and Teamsters unions. The state of current negotiations involving the ILWU (west coast dockworkers) and the Railway unions is covered, and the key strategic nature of these unions and negotiations are noted. On the negative side, the failure of the Biden administration to get the promised PRO Act passed and the White House’s token responses. An overview of the condition of the US working class over the past year concludes the show, including what’s really happening with jobs, the decline in real wages, other compensation losses for the working class in 2021-22 and why Biden’s recent legislation will have no benefit to workers in the short term.

Listen to my last two weekly Alternative Visions radio shows in which I analyze in depth and critique Biden’s latest two legislative programs: Student Debt cancellation and Inflation Reduction proposals.

To listen GO TO:

(Student Debt Cancellation)
https://jackrasmus.com/2022/08/25/bidens-bifurcated-student-debt-cancelation-plan/

(Inflation Reduction Act)
https://alternativevisions.podbean.com/e/alternative-visions-081922-biden-s-inflation-reduction-act-and-how-we-got-it/

Today, August 24, 2022 President Biden announced his long-awaited plan to alleviate in part the burden of nearly $2 trillion carried by 45 million American students and former students. The official figure for student loan debt is $1.7 trillion. But when private bank loans and parent loans are considered, the total is around & 1.9 trillion, with an average student debt of $37,000.

In recent decades the cost of college education has tripled while the support for it from US states has declined sharply. Moreover, what started out as grants in aid for students steadily migrated to banks and private financial institutions loan debt. About 90% of the $1.9T debt is held by the US government; the remaining by private sources.

One of the most unpleasant arrangements in the current structure of student debt in the US is the government charges interest rates for it that are much higher than corresponding rates charged by banks holding their share of the total debt. Government rates range from 4.99% to 7.4% while bank rates are around 3.2% (fixed) to 1.3% (variable). The differential in rates is clearly designed to push students to ‘consolidate’ their annual education loans with the US Dept. of Education to private banks. Thus, the private banking sector is given a significant cut of the student debt pie.

Loans for both go up annually and are will rise in 2022-23 and after as general interest rates rise by Federal Reserve actions.

Another onerous characteristic of the current system is that as many as one-third of the 45 million with debt were never able to complete a college degree. They bear the cost without any benefit whatsoever. Their fate is due to allowing for years parasitical so-called education institutions to lend to students with the false promise of a guaranteed job. While some of the worst abuses of this parasite educational institution fringe, preying on the poorest students, have been corrected in recent years, the problem continues to a significant degree.

Another element of the system’s crises is the institutions of higher education in general in the USA. They’ve used the availability of easily obtained student loans from the government to steadily jack up their tuition and add all manner of questionable ‘fees’ as shadow tuition increases. They’ve then taken this student loan largesse and used it to fatten the ranks of college administrators, to raise the pay of senior administrators of colleges to levels comparable to corporate CEOs, and embark upon in many cases needless expansion of campus building projects that have little to do with providing education. The consequence is professional football stadiums and basketball auditoriums and the obscenity of football coaches being paid millions of dollars in compensation a year, sometimes even more than the college or university presidents themselves. In short, the system is broken and students have been carrying an ever-rising bill in the form of out of control student debt.

During his election campaign in 2020 Biden promised to resolve the problem and reform the broken system. Has his just announced plan achieved that? How so? And if not, how not?

Biden’s Proposals

The best description of Biden’s recent proposals is that it’s created a bifurcated higher education student debt system. Here’s the major proposals:

First, the proposals apply only to undergraduate students. It appears all graduate students, who bear an average loan debt of over $100,000 are not covered. But undergrads are also divided among the ‘haves’ and ‘have nots’.

A main feature is that $10,000 in undergrad student debt is forgiven, provided they are earning less than $125,000 a year in income as individuals or $250,000 as a couple. That’s of course not insignificant. But with average student debt of $37,000, and with tuition costs rising 5-10% a year and interest rates soon to well exceed 5%, even the $10k does not go very far. The average cost to attend a state university campus in California, for example, is over $15k-$17k a year and rising. The $10k reduction in principal will almost certainly be offset with rising out of pocket payments due to increasing tuition, fees, lodging, etc. as well as current rapid rise in interest rates on top of it.

As a second major element, Biden proposals attempt to address this ‘offset’ problem by reducing the amount of monthly payment on student loans from the prior 10% of discretionary income to now 5%. But if rates on student loans rise above 5% (where they are at now)—which will almost certainly occur within the next year and possibly beyond—then the 5% reduction in monthly payment will be more than offset by rising interest rates. For example, If the interest costs are more than 5% and students pay only the 5% monthly minimum, then they will have left over residual interest being added to their principal debt on a monthly basis.

Consequently, their total debt will continue to rise year to year—in effect ‘adding back’ over time annually some of the $10k forgiven this year. Their total debt might be right back where it was in just 3-5 years.

The piling on to principal of unpaid interest has long been another onerous feature of the student debt system. Former students who have found themselves disabled or unemployed, for example, were able to forego monthly payments but during that period of joblessness their principal kept accruing interest that steadily raised their total debt. Something similar might be the consequence, in other words, of lowering the monthly out of pocket payment to 5%, while allowing tuition costs and interest rates to rise.

Biden’s third major proposal is to reduce student debt from Pell grant loans by another $10K, so the lower income former students, who typically receive Pell grant loans, will have a $20k total debt forgiveness. But if one listened to Biden’s announcement address, he quickly noted that Pell grant loan recipients would not necessarily automatically get the second $10K forgiven—even if they earned less than $125k income per year now. They would have to ‘qualify’ for it, according to Biden. Just what constituted qualification he of course did not say, as he quickly went on describing other features of his proposals.

About 14 million of the 45 million with student debt are Pell grant debt holders. How many of them will actually get the extra $10k forgiven is unclear. It will be left to the bureaucrats to define what ‘qualifies’ for expunging Pell grant loan debt. One should not expect generosity from the bureaucracy when it comes to ‘means’ testing.

The fourth main feature of Biden’s announcement addressed the time frame over which all of a student’s remaining debt might be expunged. Currently, if one enters public service then what remains of total debt after 10 years will be forgiven. But what defines public service? So far that’s been narrowly defined and those eligible limited. Biden suggested that definition might be expanded, even perhaps to considering military service or national guard duty as qualifying public service. He also let it slip that maybe 2 year community college debt might be forgiven after a 10 year period. There was also a reference to maybe a 20 year limit for everyone with student debt. Again, the bureaucrats will decide.

A big question related to year limits to debt forgiveness is when does the time clock start? Is it today, when the program was announced? Or does it go back to the year of the origination of the loan? And what about loans that are consolidated with private banks after the government originated them? What’s the start date in the 10 or 20 year clock?

A final major feature of Biden’s program is that these partial debt forgiveness measures take effect only when the last two and a half years of student debt forbearance comes to an end. That’s next January 1, 2023 for both debt cancellation and end of debt forbearance and resumption of monthly student debt payments. All students will resume paying student debt on that date. All graduates as well as all undergrads with still remaining student debt after the $10k or $20K forgiven. 20 million may have their relatively low levels of debt canceled, while 25 million, with much higher average levels of debt, will have to start paying again.

The boss giveth with one hand and taketh away more with the other, which is a definition of spending programs under the Biden administration since February 2020, one might argue.

Biden estimated that the commencing of student debt payments to the government will raise government revenues by $50 billion a year. That’s approximately $500B over a decade.

Independent sources prior to today’s announcement had estimated the cost of the $10k forgiven will amount to $321B over a decade, or around $32B/yr. on average. So the US government will stay make an $18B a year net surplus off student debt.

The Problem of Bifurcated Student Debt Reform

There are some serious problems with Biden’s proposals. First, as many have pointed out, the proposals resolve the debt problem for about 20 million of the 45 million, if one is to believe the claim of the administration that 20 million students will have their full debt canceled. That leaves 25 million still sinking deeper under the unsustainable mountain of debt.

As previously noted, the 5% minimum payment means for many that their residual interest will keep adding to principal should interest rates rise. For new student debtors, rate rises and the escalating further of student college costs means total debt will rise as they pay the 5% minimum. Also previously noted, it’s not clear how much government bureaucrats will allow Pell grant debt holders qualify for the extra $10K cancellation.

Unless student debt reform includes a ceiling on debt interest rates and there’s a cap on how much colleges are allowed to raise tuition and fees, total student debt principal for millions will continue to rise. Both rates and tuition & fees should not be allowed to rise more than the cost of living (for the urban district in which the college resides).

And the time is long overdue for the government to step in and limit colleges shuffling millions to administrators, spending on infrastructure turning colleges into youth resorts and on construction projects that have nothing to do with education—not least of which is allowing football coaches to have million dollar annual salaries and golden retirement parachutes.

If private banks can charge current rates, fixed or variable, 2-3% below that charged by the US government, why can’t the government charge similar lower rates? Why does the US government insist on gouging US students even worse than the banks?

Student loan rates should be pegged to the 10 year US Treasury bond. And if that 10 yr T-bond declines in price, so should the interest rate on student debt decline by a like amount. It wouldn’t be difficult to create a formula for student loan rates based on a combination of the T-bond rate plus an inflation adjustment (after first lowering current rates charged by the government to the lower levels currently charged by banks as a start point).

Then there’s the problem of grad students debt. If grad students earn less than $125k a year why shouldn’t they be included in the $10K cancellation?

Not allowing the debt cancellation provisions to apply to grad students creates a form of bifurcation. So does introducing a means test for who qualifies for the Pell loan extra $10k cancellation. Any student with a Pell grant loan should be eligible for the second $10k, period.

Biden admitted that the 10 year public service rule for eliminating remaining debt after ten years isn’t working well. In his TV address he toyed with the idea of expanding eligibility for public service exemptions to occupations not currently covered but offered nothing specific. In other words, he made it sound like it was part of the proposals when it was just Biden’s own wishful thinking out loud.

A simple and firm schedule for eventual complete debt cancellation for all is necessary. Millions of students face a kind of permanent indentureship: They can’t keep up with even the interest payments. Missed or partial interest payments just keep adding to a rising level of unpaid principal. They have no hope of ever exiting the indentureship.

A simply rule might be established by the US government: for every year in which payment of the debt was made, a year of cancellation of debt occurs. That would apply immediately to all current student loans regardless of the remaining duration of the term of their debt. New student debt might be issued for a 20 yr. term period in order to keep monthly payments low. The 10 year cancellation rule above would mean no one pays for more than 10 years.

In short, there are several very big holes in the Biden proposals. There are no inflation adjustments for rising college costs or interest rates. There are no caps on interest rates. Students still with debt must keep paying more interest to the government than they do to the banks if they consolidate loans. It should be the opposite for government loans: rates should be lower than the banks’ rates. There was loose talk by Biden about a better rule for canceling remaining debt for public service. But a cancellation rule should apply to all in order to avoid tens of millions mired in permanent economic debt indentureship.

And there’s another big problem. Biden’s proposals are authorized only by presidential Executive Order. It can be overturned by Congress, and likely will be, especially if and when Republicans take over Congress again.

And there’s the question why didn’t Democrats pass legislation to cancel student debt? They seemed to be able to get the required 50 +1 votes in the Senate in the past 10 months to pass $600 billion for infrastructure, $280 billion for semiconductors & manufacturing R&D, and $740 billion for the mis-named Inflation Reduction Act.

The Ideology of Student Debt

While the Biden administration’s student debt proposals do provide benefits for some, they clearly leave behind a majority (25m) of student debtors who now face further, even accelerating student debt levels.

Republicans and business sources have adamantly opposed even Biden’s proposals. They argue the debt forgiveness raises the government’s deficit and is also inflationary. But simple economics 101 refutes that ideological claim.

Independent sources have estimated that the Biden proposals will reduce student debt payments to the government by $321 billion over next ten years. If evenly distributed over the period, that’s about $32 billion a year. In his address Biden indicated that resumption of student debt payments for those still owing will occur on January 1, 2023 and will bring about $50 billion a year in resumed revenue to the government. That’s $500 billion a decade. The difference is roughly $180 billion net revenue over 10 years. How then is it that a net gain of $180 billion represents a deficit, is the point?

Those that argue it is deficit busting to cancel student debt are typically silent when it comes to the infrastructure, chips and R&D, and recent Inflation Reduction Acts that together amount to more than $1.6 trillion spending, the vast majority of which ends up in corporate coffers. Nor do the same opponents mention the $64 billion passed in Ukraine military and economic aid this past six months as deficit causing. The Ukraine aid alone in six months is double that amount for a full year of Biden’s student debt cancellation proposals.

As for inflationary effect of the debt cancellation, if the $32B of debt canceled contributes to inflation then requiring resumption of $50 billion in debt payments will almost certainly result in less consumer demand for other products and services as students divert what might have been spending on other goods and services in order to resume their debt payments. That’s a reduction of Demand and therefore inflation. The combined result of -$32B and +$50B is a net reduction of Demand and therefore inflationary pressures.

Ideology always obfuscates the truth. It inverts cause and effect. It replaces causation with correlation. And performs a dozen other ‘language games’ to confuse what’s real. That’s its fundamental nature. And ideology runs rampant in the halls of US government whenever policy is implemented, whether via executive order, Congressional legislation, of bureaucratic rule making. The arguments that canceling student debt is deficit busting or inflationary belongs in the category of ideological argument. It’s right up there with similar nonsense like business tax cuts always create jobs, free trade benefits all, or income inequality is caused by workers’ lack of productivity—to name but the few most notorious such propositions.

Some Ways to Resolve the Student Debt Crisis

There is no good economic reason why all student debt should not be canceled. Doing so would have no appreciable negative effect on the general economy. In fact, it would release badly needed income for consumption and savings by households that would boost the real economy, in the process redirecting what is now being diverted to both banks and government balance sheets. The fundamental reason why there’s no general student debt cancellation is that bankers and investors (and their politicians) do not want to create the precedent of debt forgiveness for households. (They don’t mind forgiving, of course, the nearly $1 trillion in loans to small business in the 2020-21 Payroll Protection Program). And they want the government to keep funneling government student debt origination to them, the banks, via the student debt consolidation process that exists.

Short of just declaring a general debt cancellation, there is another path that might do essentially the same. That is just eliminate the onerous consumer bankruptcy law changes that were introduced under George W. Bush and allow individuals to get out from under their crushing levels of student debt burden by simply declaring bankruptcy. Prior to Bush this was an option. But Congress changed the law during Bush and made it virtually impossible to declare bankruptcy due to student debt—while at the same time it further liberalized business bankruptcy laws to let businesses dump and restructure their debt. Giving individuals and former students the same bankruptcy rights as businesses would thus represent another alternative path to student debt cancellation.

Of course, that would make the lawyers richer in the process. A more equitable solution is to just cancel all debt over a course of a 10 or an even 5 year phase-ins as discussed above.

But one shouldn’t expect that to happen under the rule of either wing of the Corporate Party of America, aka Republicans or Democrats. The Republicans will continue to say student debtors have no seat at the economic table; while the Democrats will say students can gather the debt cancellation crumbs that may fall under it.

Dr. Jack Rasmus
August 24, 2022

Here’s two brief 20 min. radio interviews on Inflation Reduction Act, Europe’s economic crisis, student debt scenario, US housing recession, and related topics: TO LISTEN GO TO:

Critical Hour Radio (Friday, August 19, 2022)

https://drive.google.com/file/d/1FXHRaKhaJ7O6mCT__NLsqTezm1vwkPdu/view

Political Misfits Radio (Tuesday, August 23, 2022)

https://drive.google.com/file/d/1Y4LYrsZBOAR9LD9NkGt-bpguWD-U_PJz/view?usp=drive_web

Here’s some of my early reflections today, on what Biden may likely do tomorrow, as rumors running he’ll announce something about student loan debt. Following are a few of my brief takes today on twitter:

#StudentDebt My best guess what Biden will do: extend student debt forbearance from August 31 current expiration to end of year 2022 (conveniently after midterm elections). Likely forbearance will end same time with -$10k debt forgiveness effective date. 1-1-23 for both?

#StudentDebt Why does US govt charge students loan rates of 5%-7.5% (fixed) while private banks charge 3.2% (fixed) and 1.3% (variable)? To get students to consolidate govt loans with banks. About 10% total student debt ($1.9T) held by banks. That’s why banks are opposed to -$10K

#StudentDebt 44 million students have loans. $10K reduction proposed by Biden ends debt for 12 million or so. Will apply only to students earning less than $125k income/yr. Cost will be about $32B/yr.($321B over 10 yrs) $32b/yr is less than half/yr Biden’s already given Ukraine

#StudentDebt How much student debt in US now? Officially, $1.7T. But that doesn’t include loans to parents to pay for student costs. Or other private bank loans taken out by students. Total is nearly $1.9T and rising.

#StudentDebt rumors flying Biden announces $10K cut tomorrow. But when will it take effect? 2023? Later? Will Biden also announce end of forbearance on debt payments? If so, will cut household spending while -$10K debt won’t increase it (contrary to what Larry Summers says)