The interesting thing is that unintended consequences is that it occurs more often in real life than people tend to think. To give you a hint, I post this cartoon that I found floating around Facebook that depicts the central idea of a reality about to strike the US soon.
developments]. This seems to be another major bubble that has been forming, and would be something as disastrous as the US sub-prime crisis... ok maybe not so bad, but like a smaller version of sub-prime. A really closer look at the data reveals similarities of this bubble with the sub-prime bubble. For example, have a look at these two charts the first one which depicts a history of house values in the US (Source here), while the second depicts student loans (Source the popular bubble warning site by Jesse Colombo):
So how this this bubble come about? According to the Austrian Business Cycle Theory (ABCT), bubbles are activities that arise on the back of loose monetary policies of the central bank (in this case the Fed). With a view to stimulate the US economy following the sub-prime crisis of 2008, the Fed has embarked upon epic cycles of monetary easing fueled by programs such as the Quantitative Easing programs (QE1, QE2 and QE3). While the Fed can inflate out of thin-air, they cannot control where the injected liquidity goes within the economy. The prevailing low interest rates along with the depressed job markets following the housing bust would have been likely to have made people consider getting a college degree so as to improve job prospects during the eventual recovery. This this is what appears to have happened - you can see a lift-off on sorts in students credit following September 2008.
Now here is what makes the problem worse. Years of constant monetary expansion would necessarily cause price inflation. However, the complete effects of inflation are not so easy to see given that productivity gains offsets the effects of price rise. This is the reason consumer goods are cheaper today (than say a decade ago) despite the fact that the prices of raw material and labour has increased during the period. However, here is the catch. There cannot be major productivity gains in education and hence the visible effect of monetary inflation is more easily visible in terms of a rise in tuiton fees. To put this in context, during the 1950s, the tuition fees at Harvard were approximate $600 a year... but in 2012 the tuition fees are to the tune of $36,000. This is a huge increase! Given that tutition fees are rising rapidly, students have attempting to borrow more money to keep up.
However, the jobs markets across the economy continue to remain depressed. This is hardly surprising given that incessant monetary pumping cannot generate real resources (such as land, labour and capital goods) which are needed for sustainable growth and recovery. Printing money out of thin air does not confer any social benefit and hence is unlikely to improve the unemployment problem... but would instead exacerbate it given that it prevents efficient liquidation of malinvestments from the boom. Hence while education costs (and student indebtedness) is on the rise, wages do not appear to be keeping up. Hence a crisis becomes inevitable.
Now to put the magnitude of the current problem in perspective, consider the following stats as provided by this infographic:
- Student debt exceeds $1 Trillion
- The magnitude of student debt exceeds that of credit card debt
- Student tution fees has risen over 5x since 1985 and has almost doubled in the past decade
- Two years after graduation the 45% of graduates make only $15,000 a year
The students loans crisis appears to have the makings for the next sub-prime crisis. And irrespective of what happens, the Fed will print more money. I guess some people will never learn.