Little interest

American banks pay depositors less than online accounts

They seem to be relying on the power of inertia to retain their customers—a risky strategy



EVERYONE knows that interest rates are rising—except, perhaps, one group: American savers who have put $12trn in bank accounts. They have seen the government’s deposit guarantee, purportedly designed to protect them, become a ticket for banks to receive free money. For evidence, look no further than the ubiquitous bank branches dotting America’s high streets.

Those seeking a home for their money find that, unlike petrol stations or grocers, banks are not required to post their most important price, the interest rate. Ask and you will be referred to a specialised member of staff. After a wait, numbers are typed into a computer, followed by pauses for thought, a bit of throat clearing and, often, comments that the current rates on offer may not exceed inflation. Then come hints, doubtless filtered through a compliance department, of the higher returns available on the bank’s investment offerings, which, of course, carry risks (and fees).

Only then is the diligent customer told the rates on offer, ranging from almost nothing to almost nothing at all. A knowledgeable saver might then ask about certificates of deposit, guaranteed securities with maturities of up to five years. Here too the banks’ offerings often carry meagre rates. The exception may be a promotional deal—a slightly higher rate with an expiry date, intended to draw in new customers.

The high levels of deposits the big banks are sitting on suggest that many give up at this point, despairing of earning any return on their money. They would be wrong, however. Should they look online, at, for example, Bankrate.com, a common reference point, they would find lists of rates provided nationally on deposits (up to 1.6% per year) and certificates of deposits (3%). These rates have been rising, in line with the broader bond markets.

You would expect the gap between what is offered to savers in banks and what can be earned online and in the money markets to close. Not so. In 2014 Gary Zimmerman launched a web-based financial link, MaxMyInterest.com, that enabled customers to transfer funds smoothly between their usual banks and higher-yielding online accounts (also government-guaranteed).

At the time, banks paid on average 0.11% on savings accounts. Online his clients could receive 0.87%. Since then, his online rates have risen to an average of 1.52%, compared with 0.09% paid to high-street bank depositors.

If banks bother to defend their low rates, it is to point to an expanding range of associated benefits that they offer: automated banking, bill payment, credit cards, an ability to consolidate all of this easily online, and so on. This has sparked debate about “deposit beta”, or how much of an interest-rate rise banks can afford not to pass on to savers (short answer: a lot).


Jason Goldberg, an analyst at Barclays, has compiled data stretching back to 1934 on the spread between how much banks have to pay for money and what they receive (see chart).

After the financial crisis, low prevailing rates compressed this margin. But its recent widening has lasted unusually long—the first three-year streak since the 1970s is expected. And Mr Goldberg thinks more is to come as rate rises by the Federal Reserve continue to exceed what filters down to depositors. That will play a critical role in strong bank profits.

Given the upheaval and price-cutting that online shopping has brought to the rest of the retail world, this is at the very least odd, and seems unsustainable, were it not for the power of inertia. But relying on inertia is a dangerous strategy. At some so far undiscovered tipping-point, customers may wake up abruptly, shift their money and never come back.


An Eventful Week in the Syrian War

By George Friedman and Xander Snyder


Turkey’s invasion of Afrin in northern Syria has redrawn the established lines of battle.

Turkey proposed cooperation with the United States in Afrin and Manbij, both of which are held by Syrian Kurds—whom the US has been supporting and the Turks consider hostile.

Though no formal agreement has been reached, US Secretary of Defense James Mattis said the US would work with Turkey to coordinate their actions in Syria. Then, the Syrian Kurds apparently invited pro-regime forces into Afrin to help fight back against the Turkish assault.

Joining the Fray

With Turkey joining the fray in Afrin and inching closer to Aleppo, a critical city over which Syrian forces have already fought a bloody battle, Bashar al-Assad has a choice: either escalate his military conflict with Turkey and its proxies or come to a settlement. To win a military victory in the region, Assad would need to move his forces along the southern edge of Afrin until they reach the Turkish border in the west and then turn farther south until pro-Turkish forces in Idlib—a region largely controlled by another Turkish proxy, Hay’at Tahrir al-Sham—are surrounded. Assad will try to encircle Turkish proxies in Idlib and cut off their supply routes to Turkey.



Source: Geopolitical Futures (Click to enlarge)


From the regime’s perspective, therefore, working with the Kurds makes sense. It can use the 8,000–10,000 Kurdish fighters from the People’s Protection Units (YPG) in Afrin to repel the Turkish invasion and avoid expending its own resources. It also makes sense for the Kurds, who are facing a Turkish assault with few allies, since the US has said it will not support the YPG in Afrin.

But Turkey has its own plans to surround the YPG and cut off access to its allies. On Feb. 20, Erdogan announced that the Turkish military would attempt to envelop Afrin in the next several days, blocking the YPG from receiving support from pro-Assad forces. Turkey and Assad are therefore applying the same strategy to different regions, while trying to avoid a confrontation that could draw in more outside powers and escalate the conflict.

This situation could give rise to a tactical settlement in Afrin. Faced with the risk of a far bloodier battle than it anticipated, Turkey may be willing to halt its advance if the Syrian regime—and by extension, Iran and Russia—agrees to move the Kurds out of Afrin and Manbij to an area east of the Euphrates, and if it could also guarantee to control the Kurds’ actions thereafter. The Syrian government could then take control of areas that have been held by semi-autonomous Kurdish entities for several years. The Syrian Kurds might also agree to this arrangement—it would allow them to avoid even more bloodshed, and they could negotiate a role for themselves in the Syrian government. Iran, an Assad ally, might also accept an agreement because it would reverse Turkey’s advance east. Such a settlement wouldn’t end the Syrian war, but it would help temper the conflict in Afrin.

It remains unclear whether the pro-regime forces that were deployed to Afrin have made much progress. Turkey said it halted their advance by shelling them as they entered the province, promising to engage directly if the fighters helped defend the YPG.

Fierce Bombardment

Meanwhile, over the weekend, some 600 special forces from the Free Syrian Army, which Turkey supports, were sent to Afrin, as a probable response to the deployment of pro-regime forces. This came at roughly the same time as a UN Security Council resolution was unanimously passed calling for a 30-day cease-fire across all theaters in Syria. Turkey supported the measure but said that the resolution would not affect its operations in Afrin.

Farther south, an area east of Damascus known as Eastern Ghouta underwent some of the fiercest bombing of the entire Syrian civil war. Reports estimate that more than 500 people were killed in just a few days. Syrian army commanders have said that the bombing campaign will precede a ground offensive meant to retake the pocket of rebel resistance, which has held out in Eastern Ghouta for several years despite the Syrian army maintaining a siege and blockade of most food and aid.

The regime’s behavior in Eastern Ghouta serves two strategic purposes. First, it eliminates the risk posed by rebel-held territory on the outskirts of the country’s capital. Second, it eliminates the risk quickly so that Assad can concentrate his forces to the north, adding to the defensive capabilities that the regime can deploy to block and prevent Turkey from moving too far inland.


The Ghost of Inflation Reappears

By Randall W. Forsyth

The Ghost of Inflation Reappears
Photo: iStockphoto 


“And things are going up/ and up and up and up/ And my check remains the same/ That’s why I got the blues/ Got those inflation blues.”

Wall Street seems to be singing along with B.B. King’s lament, although it isn’t feeling the squeeze like the hoi polloi. The moneyed crowd worries that the gravy train of cheap money from the Federal Reserve will come to an end. Main Street, however, soon may be feeling B.B.’s blues, as its denizens see any uptick in their paychecks eaten up by the increased cost of living.

“Inflation Blues” dates back to the bad old days of stagflation, that ugly term from an ugly time decades ago of simultaneously rising prices and high unemployment. And while we’re far from those Carter-era readings that sent the so-called Misery Index—consisting of inflation plus the jobless rate—soaring, recent data belie the bullishness that, until a couple of weeks ago, prevailed on Wall Street and Main Street alike.

The consumer-price index jumped 0.5% in January, the Bureau of Labor Statistics reported last week. The core rate that conveniently strips out food and energy prices rose 0.3%. Both of those readings were above forecasts, but also flattered by the conventions of rounding to one decimal place. Before rounding, the overall CPI was up 0.54%, while the core measure was up 0.349%. With just a few hundredths more of a percentage point (that’s basis points to financial folks), the total jump would have been 0.6%, while the core increase would have come in at 0.4%.

Leaving aside the month-to-month squiggles, the real story is that inflation is closing in on the Fed’s 2% target. Former Fed Chair Janet Yellen had been nonplussed by inflation’s failure to move up to the central bank’s standard for “price stability,” and was cautious in increasing the Fed’s key policy interest rate, which currently is targeted in the 1.25%-to-1.50% range. Low interest rates, of course, have been an important prop to the stock market and to asset prices in general.

Yellen’s recently installed successor, Jerome Powell, won’t have the same confusion about falling short on inflation. The stock market’s recent paroxysm of volatility was set off a couple of weeks ago when the BLS showed that average hourly earnings in January were up 2.9% from the level a year earlier. The consumer-price data also indicated an acceleration in price trends over shorter periods. For instance, the overall CPI increased at a 4.4% annual clip over the latest three months, lifting its year-over-year rate to 2.1%, according to the calculations from Michael Lewis’ Free Market Inc. consultancy. Core CPI, meanwhile, increased at a 2.9% yearly pace in the past three months, and was 1.8% above its year-earlier reading. 
In other words, the much-bruited 2.9% annual rise in hourly earnings reported for January is just keeping ahead of inflation. But there also was a drop last month in hours worked, which meant total earnings actually were down 0.1% in a month when pay packets supposedly were increasing at last for working men and women. (Could those hours lost be a result of the widely reported flu outbreak? JPMorgan economist Daniel Silver considered that possibility. He wrote in a report that the flu season could have affected the workweek, but the impact would seem to be small.)




In any case, the effects of the flu and any seasonal aberrations in the recent numbers will pass.

And even if January’s rise in the CPI was overstated, a real cyclical uptrend is under way.

Those rising prices, moreover, have been eating away at pay gains and have forced consumers to dip further into already meager savings to maintain their spending.

Looking more deeply at the January jump in CPI shows definite trends, according to Steven Blitz, chief U.S. economist at TS Lombard. Deflation in the prices of consumer goods we like to buy is ending; the rate of increase in the cost of things we have to buy either is rising, as for food and energy, or remains high, as for services or rent.

Goods inflation has been held down since the mid-1990s by increased low-cost imports, technology, or slowing spending by “aging baby boomers” (or should that be “aged”?). The dollar’s weakness is boosting import prices (up 1% in January and 3.6% from its level a year earlier), which should pass through to consumer prices this year and into the next.

As for technology, the magic of hedonic adjustments produces deflation, although the real world sees mobile phones costing a grand or more. Meanwhile, the cellphone price wars of last year lowered the inflation measures back then and, in turn, will boost the year-over-year increases in price gauges in 2018. (To paraphrase the song from a few years ago, it’s all about that base.)

Consumers’ paychecks had been keeping up with rising rents and services costs, while prices of goods have been falling, Blitz continues. “With goods prices set to rise and rent showing no signs of slowing down (in the aggregate), consumer finances are set to be squeezed further,” he writes.

That vise has been visible for some time. To keep up their spending, Americans cut their savings to just 2.6% of income in the fourth quarter.

But that’s not a new phenomenon, according to Stephanie Pomboy of MacroMavens. Nondiscretionary outlays—for food, energy, housing, and medical expenses—have accounted for 55% of the increases in household spending over the past two years. During that same period, savings have been “pillaged,” she writes in a recent missive to clients. “The ineluctable conclusion is that the decline in saving is occurring out of necessity, not choice.”

One cost of living that doesn’t get counted directly is debt service. In another note, Pomboy points out that the cost of paying back debt jumped by $62 billion through the third quarter—which predates the most recent rise in interest rates. Given the increase in rates since then and the Fed hikes likely this year, she conservatively estimates an additional $75 billion jump in debt service in 2018. “That alone would wipe out nearly all of the $80-to-$100 billion boost to growth forecast from the tax cuts,” she observes.

As for drag from the fiscal side, President Donald Trump’s suggestion last week of a 25-cent-per-gallon tax would wipe out 60% of the benefit of the tax cuts to individuals, according to Strategas’ Washington team lead by Daniel Clifton. No wonder this trial balloon was made of lead.

It’s too early to tell, but the unexpected drop of 0.3% in January retail sales was consistent with consumers being squeezed by higher prices. Don’t pin too much on one month, since retail sales are among the data series most prone to revision; December’s preliminary 0.4% increase was revised away to no change, for example. And sales of more costly gasoline provided a big boost; gas sales grew at a 23% annual rate in the past three months, while overall sales expanded at a 2.1% annual clip.

Inflation is depicted by optimists as a sign of the economy’s robustness, which will justify both higher stock prices and higher interest rates. On the latter score, the New York Fed’s Underlying Inflation Gauge rose to 3% in its latest reading, half again the central bank’s inflation target.

If inflation is sapping consumers’ spending power, even after employment gains and tax cuts, it could be seen as a harbinger of diminishing strength, especially as borrowing costs climb.

SO, TO CONTINUE THE song lyrics theme, last week wasn’t the end of the world as we know it. Depending on which index you cite, stocks had their best week since Nov. 11, 2016, with the Dow Jones Industrial Average up 4.25%; or since Jan. 4, 2013, with the Standard & Poor’s 500 index up 4.3%; or since Dec. 2, 2011, with the Nasdaq Composite up 5.31%.

More to the point, last week’s rebound sprang the market from the so-called correction, as the S&P 500 halved its drop from its Jan. 26 peak to 4.90% by week’s end. The real question is why the equity market pulled out of its nose dive. None of the fundamental reasons for the correction had changed.

If anything, the worries about inflation were confirmed by the aforementioned CPI and New York Fed data, which makes another quarter-point hike in the federal-funds rate a 100% certainty at the March 20-21 Federal Open Market Committee meeting, according to Bloomberg’s analysis. The odds of a second hike this year, in September, and a third, in December, were solidly better than even money, after having wavered during the stock market’s slide the previous week.

The plunge was so powerful that it set up for a spring back, comments Doug Ramsey, chief investment officer at the Leuthold Group. But that doesn’t imply that the selling is over, he adds in an email.

There was no real sign of panic in the selloff, outside of speculators who had shorted the Cboe Volatility Index (or certain quarters of the financial media), which typically indicates that retreats are overdone. Surges in other pessimism indicators, such as put/call ratio in options or swings in timing-oriented mutual funds or exchange-traded funds, also were absent.

Bulls’ demises typically are preceded by a period of narrowing participation of at least three to four months, and more typically twice that, he continues. “The latest high, which was only three weeks ago, wasn’t accompanied by the usual weakness in breadth, small-caps, and cyclicals—market signals which indicate that Fed tightening has really begun to bite,” Ramsey adds.

That process still lies ahead, according to him. But he also first sees a renewed rally—starting from lower levels. While the bull market isn’t over, he concludes, neither is the correction.


Private equity chiefs face conversion dilemma

Groups agonise over whether to follow Ares to become a corporation and pay less tax

Javier Espinoza



The US government's recent tax overhaul has potentially major consequences on how private equity firms choose to structure themselves © FT montage / AP


Private equity bosses are facing an uncomfortable choice: do they seek to benefit from US president Donald Trump’s tax cuts with a corporate rejig that would potentially boost valuations? Or do they stay as partnerships, which have proven a reliably lucrative means of keeping taxes lower on earnings?

The dilemma comes at a time of a wider change at private equity groups, where ageing founders at Blackstone, KKR and Carlyle are looking to anoint the next generation of leaders.

Private equity bosses have long complained that their stocks are undervalued, in part because of the lack of inclusion in big indices that would be solved through the shift in structure.

Only one firm has so far made its choice. Los Angeles-based Ares Management said last week it would be the first major private equity group to switch from a partnership tax structure to become a corporation. This means it can benefit from the Trump administration’s tax cut for corporations from 35 per cent to 21 per cent.

Apollo and KKR said they would consider the switch, which would allow them to join major stock indices that block the sort of publicly traded partnerships typically used by buyout groups.

“There is potential for increased ownership because the additional red tape and costs under a partnership structure is prohibitive for some investors,” says Jerry O’Hara, a private equity analyst at Jefferies in San Francisco.

“Ultimately if Blackstone wants to be eligible for inclusion in an index like the S&P 500 it would mean a broader investor base and ultimately a higher multiple on its share price.”




But the partnership structure — which has been used for more than a decade as private equity groups sought to list their shares — has proven lucrative. As partnership structures, companies such as KKR and Blackstone benefit from lower tax rates than a standard corporation.

Crucially, it allows them to shield their performance fees, known in the industry as “carry”, from corporate taxes, passing them all the way to shareholders.

If private equity firms convert to a corporation from listed partnerships, their performance fees are suddenly subject to a 21 per cent tax charge.

Last year Blackstone, the largest alternative asset manager in the world with more than $400bn in assets under management, made $3.7bn in performance fees, representing more than half of total fees. Rival Carlyle took $2.2bn in such fees for 2017 — or about 65 per cent of overall fees.

Ares has become the industry’s first test case. Mike McFerran, Ares’s chief financial officer, says the conversion “will simplify our structure, broaden our potential investor base, improve our liquidity and trading volume and provide a more attractive currency for strategic acquisitions”.

But it relies less on performance fees than some larger groups, which means that its shift is regarded with some scepticism among rivals. A conversion makes more sense for alternative asset managers where a large portion of earnings comes from management fees, which face the statutory tax rate.

The stock jumped as much as 14 per cent after the announcement.

Executives at the largest listed private equity groups have said they are taking their time to understand the implications.

“[These large private equity groups] need additional data points. Having one of their peers make the jump first would help,” says Jefferies’ Mr O’Hara. “Everybody is waiting for somebody else to do it so they can sit back and watch.”

KKR said this month that its management was “seriously considering” the switch and would update the market in three months’ time.

But it warned that had it been organised as a corporation last year under the new 21 per cent tax rate, its net profits last year would have been 17 per cent lower. In order for its stock price to have stayed constant then, its price-to-earnings valuation multiple would have needed to expand from 10 times to 12 times.

Despite this, some analysts expect KKR will be next to convert. And that might lead to Blackstone making the move. Following Ares’s announcement, analysts at Credit Suisse said “if Ares and KKR’s valuations improve meaningfully under the C-corp structure . . . this would increase the probability of Blackstone converting too”.

Blackstone’s vice-chairman Tony James says there would be “tax leakage” if the firm chose to convert, however. And his company is still not certain on whether the share price will rise sufficiently to make the conversion worth it.




“This is a decision we can make once,” he says, “and we want to make it deliberately.”

The advantage of converting to a corporation comes down to being able to access equity indices that have deemed listed partnerships are off-limits because of the bookkeeping burden they create. Partnership tax forms sent to investors called K-1s are complex enough that institutional investors cannot easily process them.

The corporation change also opens share ownership to foreign investors, says Christopher Schenkenberg, a tax partner at Grant Thornton. “Under the partnership structure an investor sitting in London that owns units in a listed private equity group needs to file a US tax return. That is not the case in a corporation.”

Credit Suisse said in a note that the Russell, the FTSE and the MSCI indices could also add alternative asset managers, triggering “significant passive buying (and active buying from investors who are benchmarked to these indexes)”.

Leon Black, chief executive of Apollo, described the decision to switch as “classic game theory”, whereby the actions of each player affect the rest.

Private equity can also look at other alternative asset managers for guidance, as their share prices have benefited from being in a corporate structure. An analysis by Credit Suisse showed companies such as Partners Group in Europe, Brookfield in Canada and Hamilton Lane in the US appear to have thrived. Their stocks trade at about 25 times earnings per share compared with listed partnerships in the US, which trade at roughly 11 times on average, the bank estimated.

But others have decided against converting to corporations for now. Lazard, the global investment bank headquartered in New York but domiciled in Bermuda, said in its recent earnings call that switching status would lead to its tax rate jumping roughly 10 percentage points. Other aspects of the new tax law related to taxation of foreign earnings were also unfavourable to Lazard.

Even with clear benefits from the conversion there is little advantage in moving quickly, multiple industry executives have said.

As Glenn Youngkin, co-chief executive of Carlyle, puts it, converting “is a no-going-back kind of decision”.

How China Could Freeze the US Military

by Nick Giambruno



Last April, President Trump launched 59 Tomahawk cruise missiles into Syria.

He was responding to an alleged chemical weapons attack by Bashar al-Assad’s Syrian government.

It was Trump’s most dramatic military move since he became president. It was also the United States’ first deliberate attack on the Syrian government.

At the exact moment he ordered the strike, Trump was also hosting China’s president, Xi Jinping, for dinner at Mar-a-Lago, Trump’s Florida resort. Xi’s wife was also there.

Trump said:

I was sitting at the table. We had finished dinner. We are now having dessert. And we had the most beautiful piece of chocolate cake that you have ever seen. And President Xi was enjoying it. And I was given the message from the generals that the ships are locked and loaded. What do you do? And we made a determination to do it. So the missiles were on the way. And I said: ‘Mr. President, let me explain something to you… we’ve just launched 59 missiles… heading toward Syria and I want you to know that.’

When asked how President Xi responded, Trump claimed: “He paused for 10 seconds and then he asked the interpreter to please say it again.”

The timing of the attack was meant to intimidate Xi and send China a message.

You see, China and Syria are allies. The Chinese give Assad’s government diplomatic, military, and economic support. China has also used its veto power at the UN several times to support Syria.

Essentially, Trump invited President Xi and his wife to his home for dinner. Then, over cake, he bombed one of Xi’s friends.

Trump hoped his hardball diplomacy would encourage China to tighten the screws on North Korea. He also wanted China to make changes in other areas like trade. He explicitly told Xi as much.

However, on closer look, Trump’s Syrian fireworks show was nothing but a hollow gesture.

That’s because, without China, Trump would have no missiles to launch at anyone.

The guidance systems on the Tomahawk cruise missiles Trump launched at Syria depend on special materials that China has a near monopoly on producing. Surely, Xi knew this. Though Trump probably didn’t at the time.

And it’s not just the missiles...

If China decided to cut off these special materials, the entire US military would cease to function in short order.

Not surprisingly, Trump’s display of machismo did not impress the Chinese. Nor did it make them change their approach to North Korea.

A few months later, North Korea tested both an intercontinental ballistic missile capable of hitting the continental US and a thermonuclear weapon for the first time. Both might’ve been prevented if China had pushed harder to reign in North Korea.

So eventually—and likely soon—the US government will try to force China’s hand through trade and economic means.

Trump already threatened to cut off trade with any country that does business with North Korea. He was talking about China.

And Trump’s Secretary of the Treasury threatened to kick China out of the US dollar if it doesn’t crack down on North Korea. That would be akin to dropping a financial nuclear bomb on Beijing.

Sure, these seem like exaggerated threats. But it shows Trump’s frustration. It also means trade penalties against China could be imminent.

I think a full-blown trade war is coming soon.

But China has a big card to play. It could restrict access to that special material I just mentioned—the material used to make advanced electronic components, like the Tomahawk cruise missile guidance system.

China has used this strategy before. About six years ago, it restricted exports during a spat with Japan. The supply crunch caused a veritable mania in the special material’s industry.

Almost overnight, the price of this special material went up over 10 times.

Companies in the industry went up many times higher.

That’s why you should position yourself now.

The US and China are in the early stages of a trade war. It’s only a matter of time before it escalates.

That will probably happen soon. The perilous situation with North Korea guarantees it.

The next time China restricts access to this special material, I think the industry will explode… just like it did the last time.

Even a whiff of the possibility that China could restrict supplies again would send these stocks soaring.


Loan Shark Nation: Forcing Our Kids To Choose Between Student Loans And Everything Else


It’s mid-winter, which means millions of high school seniors are winding up their childhoods and planning for what comes next. For many this next stage is college.

But in yet another example of how we baby boomers have rigged the system in our favor at the expense of pretty much everyone else, student loans – barely necessary when most boomers graduated 40 years ago – have become a life-defining problem for our kids and grandkids.

A college degree is now so expensive that for most students it requires massive borrowing. But the starting salary in most fields has risen so slowly that growing numbers of indebted grads can’t reduce – let alone pay off – their loans. From today’s Wall Street Journal:

Jumbo Loans Are New Threat in U.S. Student Debt Market 
During the housing boom of the 2000s, jumbo mortgages with very large balances became a flashpoint for a brewing crisis. Now, researchers are zeroing in on a related crack but in the student debt market: very large student loans with balances exceeding $50,000.
A study released Friday by the Brookings Institution finds that most borrowers who left school owing at least $50,000 in student loans in 2010 had failed to pay down any of their debt four years later. Instead, their balances had on average risen by 5% as interest accrued on their debt. 
As of 2014 there were about 5 million borrowers with such large loan balances, out of 40 million Americans total with student debt. Large-balance borrowers represented 17% of student borrowers leaving college or grad school in 2014, up from 2% of all borrowers in 1990 after adjusting for inflation. Large-balance borrowers now owe 58% of the nation’s $1.4 trillion in outstanding student debt. 
“This is comparable to mortgage lending, where a subset of high-income borrowers hold the majority of outstanding balances,” write Adam Looney of Brookings and Constantine Yannelis of New York University.
“A relatively small share of borrowers accounts for the majority of outstanding student-loan dollars, so the outcomes of this small group of individuals has outsized implications for the loan system and for taxpayers,” the authors say. 
The problem is particularly acute among borrowers from graduate schools, who don’t face the kinds of federal loan limits faced by undergraduate students. Half of today’s big balance borrowers attended graduate school. The other half went to college only or are parents who helped pay for their children’s education. 
Grad school borrowers tend to be among the best at paying off student debt because they typically earn more than those with lesser degrees. But the rising balances unearthed in the latest study suggest that pattern might be changing. 

Overall across the U.S., one-third of borrowers who left grad school in 2009 hadn’t paid down any of their debt after five years, compared to just over half of undergraduate students who hadn’t, federal data show. 
The findings on graduate schools are particularly noteworthy because the government offers little information on the loan performance of grad students, who account for about 14% of students at universities but nearly 40% of the $1.4 trillion in outstanding student debt.

Now, a 25-year-old with massive student debt probably doesn’t qualify for a mortgage. But they might be able to get a car loan, which partially explains why auto loans are rising right along with student loans. A car is necessary to get to work, and borrowing is the only way to get a car if a big piece of your income is going towards student loan interest.





So that’s our world: Stocks, bonds and real estate – long since acquired by baby boomers who graduated college with minimal student debt and therefore had the cash flow to invest – are way up, making us the richest generation ever. Meanwhile our kids and grandkids are going ever deeper in debt with no apparent way out.

Of course there is an eventual way out: Someday they’ll inherit our manipulated wealth. But in the meantime their inability to cover our Social Security and Medicare is forcing the government to pick up the slack with trillion-dollar deficits as far as the eye can see, more or less offsetting the value of our estates.

The only real solution? A massive devaluation that shifts resources away from owners of financial assets like bonds and towards debtors who get to discharge their loans with cheaper currency. All roads, in short, lead to currency crisis — and soaring gold and silver.