Back in late 2006 and early 2007 a few (soon to be very rich) people were warning anyone who cared to listen, about what cracks in the subprime facade meant for the housing sector and the credit bubble in general. They were largely ignored as none other than the Fed chairman promised that all is fine (see here). A few months later New Century collapsed and the rest is history: tens of trillions later we are still picking up the pieces and housing continues to collapse. Yet one bubble which the Federal Government managed to blow in the meantime to staggering proportions in virtually no time, for no other reason than to give the impression of consumer releveraging, was the student debt bubble, which at last check just surpassed $1 trillion, and is growing at $40-50 billion each month. However, just like subprime, the first cracks have now appeared. In a report set to convince borrowers that Student Loan ABS are still safe - of course they are - they are backed by all taxpayers after all in the form of the Family Federal Education Program - Fitch discloses something rather troubling, namely that of the $1 trillion + in student debt outstanding, "as many as 27% of all student loan borrowers are more than 30 days past due." In other words at least $270 billion in student loans are no longer current (extrapolating the delinquency rate into the total loans outstanding). That this is happening with interest rates at record lows is quite stunning and a loud wake up call that it is not rates that determine affordability and sustainability: it is general economic conditions, deplorable as they may be, which have made the popping of the student loan bubble inevitable.The inability of students to default on student loans has bought the financial system a little more time, perhaps a year or two, but as is always the case with economics, the negative consequences can only be delayed, they cannot be put off indefinitely.
There are two very big problems here. The first is that the inability to write off these delinquent loans means that the banks are adding to their already large pool of fictitious paper assets. The second is that these hopelessly indebted students are never going to become homeowners, thus reducing the demand for housing and thereby adding to the forces causing housing prices to decline. This further adds to the fictitious paper assets of the banks, which already stands around 40 percent.
In other words, the presently perceived inflation rests on tremendously precarious grounds. We have reached the point where we now have a Potemkin money supply, even if we have not yet reached the level of the Soviet absurdity where the workers pretend to work and the government pretends to pay them.