Moneybeat: Canceling student debt

MARY REICHARD, HOST: Next up on The World and Everything in It: the Monday Moneybeat.

NICK EICHER, HOST: Time now for our weekly conversation on business, markets, and the economy with financial analyst and adviser David Bahnsen, head of the wealth management firm The Bahnsen Group. Good morning!

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

EICHER: Let’s begin with student loans. All of my colleagues were telling me last week that I simply have to get your opinion on President Biden’s decision on debt cancellation— $10,000-to-$20,000 for those under the $125,000 income threshold.

What of this new policy?

BAHNSEN: Yeah, I've been about as critical of this as anything that the Biden administration has done. And there's been a lot to be critical of to be quite candid. But this is a sort of another level, both for the just crass, cynical political nature of it, which I will add a contrarian view that I do not think is going to work. So all the politics of it aside, as a matter of policy, there's no limiting principle to it. The notion that the federal government should be just arbitrarily, I don't like the expression ‘forgiving debt’, because the people who got the money, still got it. So the Treasury is telling someone that they don't have to pay other people's money back that was paid to another third party, who has no skin in the game in the transaction, the university administrators, we would think should be involved in this negatively and they're not. So that actually brings up one of the biggest criticisms I'd offer is it is totally missing the biggest problem we have, which is runaway price of tuition caused by a federal government subsidy, while the people are more or less paying more money to have their kids more indoctrinated, or brought into more of a party culture, for less access to high quality teachers who are in the classroom, maybe seven or 8% of the time, and producing a degree that is even less significant in the marketplace. So there's just this entire critique of higher education I'd offer that goes with a runaway price inflation. And this does nothing about any of that. And where they say, Well, this has gotten unfair, it's too expensive. They don't have a way to pay back. They were promised they'd get a better job than they actually got, those things all have another root of their problem. And we can go ahead and address that. And I'll have plenty of ideas that they want to do that. And in the meantime, we're talking about yet again, hundreds of billions of dollars of debt, which represents future growth coming out of the economy.

EICHER: You mentioned inflation, David. I heard many analysts on the right predicting this would pour gasoline on the overall inflation we’re experiencing. I did read you last week in D.C.-Today saying that gets it wrong. You’ve got a micro/macro analysis on the inflation question, if you’d share that with us.

BAHNSEN: Yeah, first, let me start with the part that is absolutely inflationary. And it's the part that I wish everyone cared about. There is now a greater capacity for payment as people price in the almost inevitability that there is going to be future debt forgiveness, it makes absolutely no sense that people can run up student debt. And we can call it unfair, and, and so forth, and then therefore forgive this big $300 billion, $400 billion amount, but then change none of the rules going forward, which means there's no reason this all doesn't happen again, and then have to forgive that debt into the future. So that enables universities to charge even more, after they've already gone through 20 plus years of the most perverse price inflation we've ever seen. And these are the three areas of inflation that constantly bothered me, which is higher education, housing, and health care. And those are the only three areas that we've had significant inflation in for the last 40 years. And those are the three areas that the federal government most subsidizes in the economy, which is what I believe creates unacceptable inflation. But all that to say the argument that now pours gasoline because it gives everyone this extra money to run out and spend, I think misses some of the mechanics. There's no new money being created by this. Everybody got their student debt years ago, their student loans, everybody paid it out to their college administrators. And now they don't have to pay that portion back and they have not been paying anything back for the last couple of years. And so there isn't this inflationary spike because there isn't new money being created and new cash that goes out and will get spent. Some have argued, well, yeah, but now there's going to be that greater degree of margin and how their loans are assessed, which then means a little extra money that they'd have in disposable spending. That's not generally what people mean when they refer to gasoline on a fire. So that's my macro argument as to why I don't see an inflation spike from this. But my micro argument is far more important, which is that university administrators I'm telling you will raise prices because of this.

EICHER: A few weeks ago, I invited listener questions—and I’ll repeat that invitation to submit a question for David Bahnsen, preferably using your phone to make a voice memo, try to keep it tight and to the point, and send me a file at feedback@worldandeverything.com, so we can consider your question for air.

Today, here’s our first one: Samuel Kimzey, who teaches humanities at Valley Classical School.

KIMZEY: Hi, Mr. Bahnsen. I'm tuning in from Blacksburg, Virginia. I love listening to your weekly segment with world and I've also really enjoyed your book. There's no free lunch. So I wanted to ask any economy questions specifically about gas and oil prices primarily about the flux and gas prices that we've seen dramatically shifting in the past few weeks? What do you think is the best explanation for the significant drop in prices, especially given that the White House Well, at least as far as I am aware, has not changed any of its regulatory stances or opened up more federal lands for drilling new pipelines and such?

BAHNSEN: Well, thank you for that series of very thoughtful and related questions. And I'll do my best to answer as it pertains to the strategic petroleum reserves. I'd like to start there, because you are exactly correct about the amount that they've been doing, that they've been doing it now for a good four months and change, and that we are at our lowest level of reserves since 1985. Now, I cannot say that the drop from July to August in gas prices has anything to do with this, I think much more likely, is the very nature of how oil and gas prices work to begin with - they're forward looking, and there has been some degree of increase in the market of production from the US as per US producers ramped up their own production more, not to the degree we want it to. We have to remember when we're talking about oil prices going from 120 to 95. We're not talking about them getting to an inexpensive level, we're not talking about them getting where we want great equilibrium for producers and consumers would probably be much closer to $70 in oil, a barrel. The issue you brought up about no new permits on federal land, that wouldn't be bringing prices down anyways, because remember, that's about pipelines. That doesn't produce new oil, that just gives us more ways of transporting oil, once it is produced. Right now, without new permits for pipeline creation, what you have is a bigger reliance on trucks and rail to transport oil. But what pipelines do is give us a safer and better way to move oil. And so I think that the ultimate way in which we get greater production is for the US companies to not be starved of capital from the ESG movement to have more permission for drilling permits, which is different than pipeline permits on federal lands. I think we will start to see a bit more of that, but it's all too little and it's all too late.

So then the question back to what you originally asked, Why did gas prices come down? Sometimes the cure for high prices is high prices, it does start to curtail behavior. And I think there was on the margin some demand erosion that there are some people that will not drive at $6 gas that will drive at $5 gas. And so it starts to have the normal market play of supply and demand working together. But I just think we have to remember we're talking about within a bandwidth of all still real high. So still real high got lower, and it can get higher, but it hasn't got to the point at which you would want it to be for a healthier consumer response and still maintaining the margins needed for production.

And then finally, on a worldwide level, we have to remember as gas prices have come down, meaning auto gasoline, natural gas prices have hit a 15-year high. So people's home heating bills and other things that are used the way in which electricity is powered for about 40% of the country, those things have gone through the roof even as the price at the pump has come down. And so oil and natural gas are, you know, right now kind of bifurcated from one another. And all of that speaks to 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 wanted to get started with listener questions and also dive in deeper to the student debt issue, so thanks for taking the time. David, thank you. I hope you have a great week!

BAHNSEN: Thanks so much, Nick.

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