Economic Headlines for the Week Ending October 21, 2011…and What it Really Means.
Student Loans to Top $1 trillion…USA Today reported that the total amount of student loans outstanding will top $1 trillion this year, far outpacing the amount of credit card debt outstanding.
What it means…What is the only question asked of a prospective student loan borrower? “Are you a student?” OK, that’s simplistic and not true, but the point remains that based on nothingness we have a system that will provide tens if not hundreds of thousands of dollars of loans to those with the least experience in managing their finances – the young. What makes this so horrific is that student loans cannot be discharged by bankruptcy, and follow a person forever. So if a young person borrows too much at the start of his or her life, and then cannot find a job that affords the ability to pay it back, then he or she is simply stuck. Forever. This has the makings of a very bad situation.
No European Agreement This Weekend… Members of the European Monetary Union (EMU) which control the euro announced that there would be no sweeping agreement announced this weekend to deal with country defaults and thereby save the euro.
What it means…The issue is not that hard. When the euro was constructed there were safeguards put in place so that down the road stronger countries would not have to bail out weaker countries. Now that there is a real chance of bankruptcy of a country, the members of the EMU are desperately trying to find a backdoor that allows them to make the stronger countries pay for the weaker ones. German taxpayers should be angry and fearful.
Manufacturing Indices Mixed… The Empire Manufacturing Index missed expectations, but the Philly Fed Index beat expectations handily.
What it means…The economy has not fallen off a cliff. There is still economic activity, albeit not as strong as people might like. Our view for some time is that the economy will return to recession (indeed, never really left), but the big negatives won’t be until 2012. Look for some stronger numbers in the near future, but don’t think that the recovery is on track.
Consumer Price Index was Hot, and Producer Price Index was Hotter…The Consumer Price Index measure of inflation was up 3.9% for the year, while producer prices were up 7.0%.
What it means…Don’t be surprised as you begin your Christmas shopping to see prices that are much higher than last year. This continues the trend of paying more for almost everything, except real estate. The problem is that a household’s cost of shelter usually
doesn’t change during the year, even though the measure of that cost might change. With wages falling, the continued rise in prices will be even more painful in the months and years ahead. All of this makes getting out of debt that much harder.
Chinese Allow Local Governments to Issue Bonds… The Chinese government is ow allowing local governments to directly issue bonds; this replaces the old way of local borrowing, which was through banks.
What it means…Taking a page from the Western world, China is using debt to solve a debt issue. Over the past several years local government bank borrowing has soared. As those bank loans come due, the local governments don’t have the money to pay them off. The solution? Borrow more, of course. This is just another step in the direction of a debt crisis in China, the only question is when.
(source: HSDent Publishing)
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