My wife and I were married in 2004 and had over $50,000 in student loan debt. Our starter home was a fixer-upper on Appian way in Lexington, not the greatest area. When others were buying new homes in a newer development we stayed put and opted for new paint and carpet. We drove beat-up, old Hondas and our vacations consisted of….wait, there were no vacations. We prioritized debt reduction over the immediate gratification of ‘stuff.’
When we paid off a credit card, auto loan or finally student loans, we celebrated by splitting an appetizer at Ruby Tuesday’s, directly across the street from where we worked part-time during college.
Over the last 22 years, we’ve worked very hard to build a successful financial future that wasn’t always rosy. I know I’m not alone in my thoughts regarding how hard work, disciplined financial spending, and wise investing reap great rewards.
I am not at all angry or upset with those who will benefit from the new debt forgiveness plan our government has passed. In fact, I know many, including a nephew who will benefit, and I truly am happy for their windfall. I wasn’t upset when our family received no stimulus nor was it when our business passed on forgivable PPP loans. What I am concerned with however is the direction we’re heading with these new ideas of ‘free’ money.
Make no mistake that free money placed into the financial system whether, through direct payments, loan forgiveness, or a combination has a ripple effect that ultimately raises prices for everyone. In fact, this is not liability forgiveness but rather liability transfer as we shift the money owed from those who won’t pay to those who will. It’s a trajectory that won’t work and has never in history worked before.
We’ve hopefully all heard the analogy of the teacher who basically began giving out the same grades to all students regardless of work in order to display socialism. Initially, the D student would receive the A student’s grade regardless of whether or not they did the work. Very soon however the A student decided to stop working as why would they continue to pursue a solid grade if it no longer mattered and separated them from the pack. Ultimately the entire class failed.
Now, you may think I’m going to immediately talk about how bearish this may be for our economy or market when in fact, at this moment I don’t see that at all. In fact, I see the government’s movement into new industries as the foundation for some of the best investment opportunities today. While our government may move more and more towards socialism, I will remain a capitalist. If they want to give tax credits for electric vehicles and admonish the energy industry, my investment ideas will focus on this area and seek to participate in the upward momentum rather than fight it.
However make no mistake that on a longer-term trajectory, the course set is simply unsustainable. My children’s children will be faced with the debt which will accompany these decisions and saddled with the inflationary repercussions of monetary devaluation. We’re a long way from that but unless we course correct soon, the outcome is inevitable.
I truly wish that rather than short-term solutions we became intentional with long-term financial education. If we could simply begin teaching the next generation how to make wise financial decisions, I truly believe our future would be incredible. Unfortunately, a band-aid is much easier and quicker than long-term solutions.
Tomorrow Jerome Powell speaks at Jackson Hole regarding the fed’s actions and inflationary pressure. The economic backdrop has been changing by the day and is not in a positive direction. I believe markets have already priced in these economic changes and are why any hint at ‘watching the data’ for guidance, should spark further upside. Of course, as we mentioned in our webinar, should he harness his inner ‘Volker’ the Bears will be out in force.