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Assets & Liabilities - Crash Course Chapter 14

Chris Martenson - September 19, 2014 - 19:29

As we learned in the prior chapter on debt, our nation has an historic, never-before-seen level of debt on the books.

Now some would say that it’s not reasonable to look only at debt, one also has to also consider the assets and total liabilities to assess the situation. 

And they're right.  After all, does it really matter if you have a million dollars of debt if you also have no additional liabilities but assets worth $10 million? 

Not really, because your assets exceed your debts and liabilities, you should be $9 million in the clear. 

What we're going to do in this chapter is look at both the assets and the liabilities of the United States so that we can assess whether the current debt loads are worrisome or not.

All right, let's begin here with assets. So what is an asset?   

One definition is: Items of ownership convertible into cash; total resources of a person or business, as cash, notes and accounts receivable, securities, inventories, goodwill, fixtures, machinery, or real estate.

By this definition an asset is something of value that can be converted into cash or provides access to, or enhances a flow of cash. 

If we simply say assets are bank deposits, real estate, a stock or a bond, and the physical stuff we own, we’d pretty much cover the vast majority of what we consider to be our assets.

A liability is a likely future expense for which one has an obligation to pay.  Not just the absolute legal requirements to pay – which are the debts - but also any outstanding obligations.

To make this understandable, for a family, their assets would be cash in the bank, home equity and other real estate held, and the things in their home that they owned.

The family’s debts would typically be in the form of a mortgage, an auto loan, credit card debt, and perhaps student loans.

And future other liabilities of this family might include college educations for children that have not yet been fully saved for, or taking care of ageing parents whose own resources are insufficient to cover their future needs.

While “debts” are technically a type of liability, for the purposes of this chapter, when we refer to debt we’re talking about a fixed commitment of a known amount.

When we say  “liability”, we’re referring to a future obligation to pay that is neither fixed nor accurately known. 

We know that providing care for an ageing parent will cost a lot of money, but not how much because we don't know the duration of the expense or how much it will be in any given year.

We’re making this distinction between the terms “debt” and “liability” because the media – and even our government – often treat the two very differently, something Congress reminds us of every time they say that Social Security and Medicare can be modified at any time and therefore don't count the same as our national debt.

So how does all this stack up in terms of our total net worth as a nation?

To get a handle on the situation we're going to look at the net worth of households because on the public side of the story, as we saw earlier, the liabilities and assets of the US and State governments really belong to the citizens. 

On the private side, the assets and liabilities of companies belong entirely to the bondholders and shareholders of the company, not the company itself.

And who holds bonds and stocks?  Ultimately somebody does, which for the most part means a private citizen does. 

Since we can pool citizens into households, we could examine household assets, deduct some relevant liabilities and get a decent view of where things stand.

The Federal Reserve tracks Net Worth at the household level and this data is routinely and widely reported in the media. 

According to the Federal Reserve, Household net worth exploded by more than  $20 trillion dollars between 2003 and 2008– an astonishing feat – before collapsing by $17 trillion dollars during 2008 and 2009. 

And then again, between 2009 and 2013, the net worth of the country has increased again by nearly $20 trillion.

To put those numbers in context, the entire net worth of the nation did not hit $20 trillion until 1989 so the recent gyrations are akin to amassing and losing as much wealth as was accumulated during the first 300 years of history. 

And these are NET assets, meaning debt has already been deducted so the Federal Reserve, and many in the media, take the position that with just over $77 trillion in net worth, Americans are doing just fine and our rapidly-climbing national debt levels are no cause for concern.

But before we get too excited about the astonishing wealth indicated here, there are two key oversights and a fallacy hidden in this report of which you should be aware. 

As always, the devil is in the details.  Before I address those I want you to observe this period here spanning from 2000 to 2003. 

That dip in the Net Worth of households was due to the stock market collapse that ran from 2000 to 2003 and caused such great panic at the Federal Reserve that Fed Chairman Alan Greenspan lowered interest rates to the emergency level of 1%, thereby igniting the greatest of housing and credit bubbles in all of history. 

That led to an even bigger crisis in 2008 that wiped out even more wealth, in response to which interest rates were lowered to 0%. Zero.

As in, as low as mathematics will allow. 

Booms and busts. Bubbles and bursts.  That's how the Fed prefers to operate. 

These declines in total net worth lead to this observation: debts are fixed

When you take on a debt, there it sits, growing larger until and unless you make payments on it. 

Debts do not vary with general economic conditions or whether you get a raise or lose your job.  Assets, on the other hand, are variable, sometimes gaining and sometimes losing value. 

And so this leads to the next Key Concept of the Crash Course: Debts are fixed, while Assets are variable. 

OK - Where did the $18 trillion in new wealth since 2009 come from? About 80% of that growth came from a rise in Financial assets and the remaining 20% came from growth in real estate and other ‘tangible’ assets. 

When we look closer at the actual amount of household net worth there is today, we see that 83% of the total net worth consists of financial assets totaling about $63 trillion while the tangible assets are the remaining 17% and total around $14 trillion.

If we examine these assets a little more closely we see that the  $63 trillion dollars worth of financial assets consist of things like pension funds, the assets of privately held businesses, deposits, stocks, and bonds, which we can roughly re-compose into these four main classes; stocks, bonds, cash or deposits, and the assets of privately held businesses. 

The other bucket of $14 trillion dollars in tangible assets consists primarily of real estate, which is 69% of this bucket, and consumer durables which would be your car, your dryer, and your snow blower, if you have one. 

For every single one of these assets, except cash, in order to liberate the wealth from these assets you’d have to sell them first. 

One general rule of asset markets goes like this:  Things go UP in price when there are more buyers than sellers AND things go DOWN in price  when there are more sellers than buyers.  Hold onto that thought for when we get to the chapter covering demographics.

Now let me expose two great oversights of this household wealth report. 

The first oversight I wish to illuminate is that the data is presented as if it applied to our entire country in a fairly even and therefore useful manner.  It does not.  

As of 2010 The Top 1% owned 35% of ALL net household wealth AND looking at stocks only owns 42% of ALL the country’s financial wealth.

If you can’t see it, I apologize; the top 1% is represented by a very thin green smear at the top of the column there.  So it’s great that our stock market keeps powering higher but for every trillion dollars it goes up, $420 billion of that newly-created wealth goes to only one out of a hundred households.

The Top 20% , which includes the top 1%,  owns nearly 89% of ALL  net household wealth and  over 95% of ALL financial wealth in the US.  

This means the bottom 80% of the citizens of this country, represented in yellow, holds only 11% of the total wealth of this country – and less than 5% of its financial wealth - and even within the remaining 80%, the distribution of wealth is similarly weighted nearly all at the top.

Oh, but wait a moment. The top 1% isn’t hogging everything.

If we look at debt, we see that the top 1% only holds 6% of the country’s debt. The next 9% own 22% of it; but the bottom 90% - that’s 9 out of every 10 people in the US – holds 73% of America’s debt.

So the rich hold almost all the wealth, but generously, allow the rest of us to hold the debt. Gee, thanks.

Given this tremendous disparity, I’m reminded that Plutarch once cautioned that an imbalance between rich and poor is the oldest and most fatal ailment of all republics

More immediately, this helps us understand why the great credit crisis of 2008 worse than expected.  Just as was true of the wealth gap in the late 1920s before the onset of the great depression, the severity of a crisis does not depend on average wealth, but the distribution of the wealth. 

If a large swath of the population lacks the means to weather the storm, then the storm will be longer, and harsher than otherwise would be the case.

So what does it mean that 80% of our population possesses a meager 11% of the total wealth?  For one thing it means that the recent efforts by the Fed to provide massive amounts of liquidity support to the biggest and wealthiest banks at the inflationary expense of the lower classes were not only misguided, but they were cruel and unusual. 

This leads to an easy prediction to make: The wealth gap in the US will hamper our recovery and deepen the downturn.

The second and bigger oversight is that that the fed mysteriously does not offset the net worth of the nation by the general liabilities of the federal and state governments or private corporations. 

Wouldn’t it make sense for the Fed to offset these against household wealth?

So let's look at those under and even unfunded liabilities.

What we're going to look at here are pension, retirement, and entitlement programs.   At the state and municipal levels we find that pensions are under-funded to the tune of $4 trillion

What this means is that as money was taken in through taxes, states and municipalities actively chose to spend that money elsewhere in preference to putting it into pension funds. 

Big promises and insufficient contributions were made at the same time.

What does it mean when we say that the state and municipal pensions are underfunded by 4 trillion dollars?  How is that calculated? 

The 4 trillion dollar shortfall is what is called a Net Present Value, or NPV, amount. 

This is important so let's take a quick peek into this idea.

A net present value, calculation adds up all the cash inflows, in this hypothetical example $1000 per year for six years, and offsets, or  “nets”, those inflows against all the future cash outflows.

Since a dollar today is worth more than a dollar in the future, the future cash flows have to be discounted and brought back to the present.  We NET all the cash inflows and costs, discount them back to the PRESENT to determine if the thing we are measuring has a positive or negative VALUE.   NET.  PRESENT.  VALUE.

This is the methodology used to calculate the status of state and municipal pension funds.  

Growth in the value of the pension fund assets plus future taxes are offset against cash outlays to pensioners, brought back to the present, to indicate that in order for the pension funds to simply have zero value, $4 trillion dollars would, today, have to be placed in those funds.

An important realization about NPV calculations is that the future has already been largely taken into account so waiting and hoping for a different future result to emerge pretty much never works. 

If we have to place $4 trillion in the funds today, but don’t do this, next year the shortfall number will be even larger. 

The only way it could be smaller is if fewer people are collecting benefits or the fund’s assets outperform the assumed rate of growth that fed the NPV calculation. 

Moving right along. Corporations are coming off the highest levels of profitability in decades but they too opted to underfund their pensions, to the tune of  $4 trillion Net Present Value dollars, in preference for, uh, other uses for that cash. 

Because pensions typically invest in bonds and stocks in a roughly 60/40 split any recessions or market declines will only add to the shortfall. 

In part, the pension shortfalls are a direct function of the extremely low interest rates currently available – thank you Greenspan and Bernanke! – and also because the main stock market index - even though it is making new highs here  at the end of 2013 - …is still languishing by historical standards if we inflation-adjust the returns over the past 15 years. 

Since most pension funds assume a seven to ten percent yearly compounded return, and since stocks and bonds are not yielding anywhere close to that amount over time – even including the market run-up from 2011-2013 - the pension shortfalls are understandable.

But when we get to the Federal Government, that’s when scary numbers emerge.   David Walker, the recently retired Comptroller of the US, and a personal hero of mine for valiantly and tirelessly working to raise awareness of the looming US government shortfalls, said of the US Government:

  1. It’s financial position is worse than advertised
  2. It has a broker business model
  3. It faces “deficits in its budget, its balance of payments, its savings — and its leadership.”

In my assessment he’s absolutely right. And here’s some data to support that.  This is a table taken right from the US government annual report found on the treasury department website. 

Again we are going to be looking at NPV numbers.  The first is a nearly $16 trillion dollar shortfall representing the total US government Net position without including social security and Medicare. 

Again, this means that ALL US government cash inflows PLUS   the value of all government assets have been offset against   known outlays to determine that, today, the US government would have to somehow obtain $16.1 trillion dollars to balance its liabilities and assets. 

But that’s just 1/4th of it.  Once we add in social security and Medicare, the shortfall suddenly balloons to $55 trillion dollars by the Treasury Department’s own calculations. 

Whoa!  Stop right there!  That’s over 3 times GDP!!  This means the US government is insolvent.  Full stop. 

Why is this not topic #1 on the President’s agenda?  A country this far in hock has some real future issues and is potentially on its way to bankruptcy. 

In case you are harboring the notion that there’s some money socked away in a special US government account, like a “lock box”, this picture shows George Bush standing next to the entire Social Security “trust Fund”. 

There it is… the entire trust fund is a three ring binder with slips of paper in it saying that the US government has spent all the money and replaced it with … special treasury bonds. 

Hold on there. Aren’t Treasury bonds an obligation of the US government?  How can the government owe itself money?  It can’t. 

All government revenue either comes from taxpayers or borrowing so when the time comes to pay off those special bonds that money will either come from taxpayers in the form of higher taxes, or additional borrowing. 

If it were possible to owe money to yourself and pay interest to boot, then we could all become fabulously wealthy by writing ourselves checks.  But of course, this is a foolish, easily dispelled, notion,

At any rate, depending on which government agency’s numbers you use, the Federal shortfall is anywhere from $53trillion dollars to $85 trillion dollars. 

This number is so large that it even scares small monkeys.  And proving the point that you cannot grow your way out of an NPV shortfall, this number has grown by nearly $40 trillion dollars over the past 10 years, advancing during both strong and weak economic times.

After all, who else besides taxpayers living in households are going to pay off those liabilities?  Nobody, that’s who.  If the fed did perform this offset, because the federal government alone has a negative net worth that far exceeds total household net worth, the reported net worth would plunge below zero.

I consider it a blatantly silly practice to tally up the assets of the country while neglecting its liabilities, let alone its debts.  

This is the same as someone with ageing parents and looming college bills claiming they are in good financial condition because they have a slightly positive balance in their bank account.

In summary, US households have a positive net worth if and only if we neglect to include liabilities into the mix.  When we include those, then the picture turns quite negative. 

Japan and Europe are in similar situations, driven by a poor combination of bad planning, failing to save, promising too much, again demographics, and low economic growth ever since the year 2000.

Because the liabilities are so silly, so large, you can count on them never being honored.  But just because we write a liability off it does not mean it goes away.  By giving retirees less, they or their families have to shoulder the burden of living within their means – something our government still refuses to do. 

To really understand why future the future liabilities of so many developed countries are massive and growing larger, we need to quickly explore the topic of Demographics.

Thank you for listening. 

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Categories: Economics

Daily Digest 9/19 - Scotland's 'No' Vote A Win For Betting Markets, Gold Bars Entice Super-Rich

Chris Martenson - September 19, 2014 - 07:19
  • This is the start of a long constitutional wrangle for the UK
  • Scotland’s ‘No’ Vote: A Loss for Pollsters and a Win for Betting Markets
  • Super-rich rush to buy 'Italian Job' style gold bars
  • Malaysian Flight M17 Crash Analysis, By The Russion Union Of Engineers
  • The Enchanted Land Where Community College Is Free? Welcome to Tennessee in 2015
  • The Next Crisis – Part one
  • Commodities Suffer As Oil And Gas Takes Rail Priority
  • Busy Days Precede a March Focusing on Climate Change

Join the conversation »

Categories: Economics

My Week with PirateBox, the DIY Mobile Cloud Storage Device

Shareable Magazine - September 19, 2014 - 06:54

Sharing books you've read can be as enjoyable as reading them again, and for centuries books have frequently changed hands from person to person, library to library. But what if you could share an entire archive of books from the palm of your hand with anyone in earshot? I spent a week experimenting with a DIY PirateBox to see how it works, but first let's explore notable episodes in the history of book sharing...

Categories: Economics

Chris at the College of Charleston, SC

Chris Martenson - September 18, 2014 - 13:50

Chris has been invited to give a public presentation at the College of Charleston in South Carolina.

The 2-hour event will leave lots of time for Q&A and interaction with Chris, and will focus on the declining availability of "The American Dream", as well as better paths for today's youth to consider taking.

Details on how to register for the event will be available soon.

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Categories: Economics

Stanford's Coal Divestment: Meet 2 Students—And 1 President—Who Made It Happen

Erica Knox: Leveraging privilege

Stanford University student Erica Knox went to see Bill McKibben’s “Do the Math” tour in November 2012. That’s when McKibben and launched a divestment movement to address climate change and challenge the power of the fossil fuel industry. Knox has been involved with divestment group Fossil Free Stanford ever since. “It’s definitely the group on campus where I feel like I’m actually creating change,” she said.

Modeled after the anti-apartheid movement of the 1970s and ’80s, the divestment campaign pressures universities and other institutions to sell their stock in fossil fuel companies. The movement has spread to more than 300 schools nationwide, as well as cities and faith-based institutions. San Francisco and Seattle, churches including the United Church of Christ, and small colleges such as Hampshire and Pitzer have already pledged to divest.

Divestment is just one strategy to combat climate change, says Knox, who is majoring in earth systems. But she says Stanford students can use their connection to the university’s $18.7 billion endowment to make a strong statement. “It’s important for us while we’re at a university with this kind of power and privilege to leverage that to actually make a difference.”

Donald Kennedy: President Emeritus for fossil fuel divestment

Divestment is nothing new to Donald Kennedy. While he was serving as president of Stanford in the 1980s, the university divested from specific companies that supported the apartheid regime in South Africa. Now, the former president and current Bing Professor of Environmental Science and Policy is supporting the university’s decision to begin divesting from coal-mining companies.

Kennedy was one of 170 tenured professors who signed a letter addressed to President Hennessy and the Board of Trustees. The letter, which followed a university-wide divestment petition that gathered nearly 2,000 signatures, called for Stanford to divest from all fossil fuels, including coal, oil, and natural gas. As President Emeritus, Kennedy’s was one of the most prominent names supporting the request to divest.

Kennedy, whose research interests include global climate change, believes coal divestment is valid, as there are alternative fuels that could be substituted for coal. He hopes there will be “careful and thoughtful analysis of what might be done elsewhere in order to promote a more effective set of climate policies.” He’s in favor of actions like divestment that encourage companies to pursue “a more controlled approach to the very serious problem of climate change.”

Amy Tomasso: Calling for climate change action now

Amy Tomasso, a Stanford urban studies major from Farmington, Conn., was drawn to Fossil Free Stanford’s focus on student activism and the momentum that divestment was gaining on campus.

Last year, the group met with the university’s Advisory Panel on Investment Responsibility and Licensing to request divestment from the top 200 fossil fuel companies. After months of review, Stanford’s Board of Trustees announced on May 6, 2014, that it had agreed to begin divesting its stock in coal-mining companies.

The announcement, which came sooner than expected, was a surprise to Tomasso and other activists on campus. It positioned Stanford as the first major university to make a commitment to divest from coal. Fossil Free Stanford organizers celebrated their victory while planning to push for divestment from all fossil fuels, including oil and natural gas. Tomasso says it’s important for young people to lead the fight for fossil fuel divestment because they’re the first generation who’ll be living through the consequences of climate change.

“Everyone can be an activist,” says Tomasso. “Everyone has things they care about and love. If you take a moment to think about them, you’ll realize that the call to action is now.”

Dana Drugmand wrote this article for The End of Poverty, the Fall 2014 issue of YES! Magazine. Dana is a YES! editorial intern.

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Categories: Economics

Chris & Adam Present in Lima, PERU

Chris Martenson - September 18, 2014 - 09:08

Chris and I have been invited to Lima, Peru to present a full-day seminar titled "New Global Scenarios That Will Define Peru for the Next 20 Years"

Entrepreneurs, corporate executives and government officials will be in attendance. If you live in or near Peru, this will be a valuable "meeting of the minds" at which the future of the country (and South America, in general) will be discussed in detail.

Key focus of the event:

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Categories: Economics

Off the Cuff: A Look Across the Pond

Chris Martenson - September 18, 2014 - 08:46

In this week's Off the Cuff podcast, Chris and Alasdair Macleod discuss:

  • Independence For Scotland
    • The implications of this week's historic vote
  • Gold's Depressed Price
    • The establishment benefits from a low price
  • Europe vs Russia
    • Why the EU holds a losing hand
  • The Evils of Central Banking
    • Creating worse problems than they're supposed to solve

Join the conversation »

Categories: Economics

Daily Digest 9/18 - Why Money Is Worse Than Debt, True Cause Of Fracking Leaks Found

Chris Martenson - September 18, 2014 - 07:44
  • Subprime Is Back With A Vengeance
  • House votes to arm Syrian rebels
  • Inequality, Nick Hanauer and the Patriot's Moral Code
  • Bank of England Panic! Scottish Independence Bank Run Already Underway!
  • Why Money Is Worse Than Debt
  • Libertarian ‘Utopia’ Styled After Ayn Rand Book Spectacularly Falls Apart Almost Immediately
  • Toward making lithium-sulfur batteries a commercial reality for a bigger energy punch
  • True Cause Of Fracking Leaks Found – Industry Breathes A Sigh Of Relief
  • Plasmon-assisted radiolytic energy conversion in aqueous solutions
  • Water-based nuclear battery can be used to generate electrical energy 
  • Obama delays key power plant rule of signature climate change plan

Join the conversation »

Categories: Economics

Car Emergency Kit List

Chris Martenson - September 17, 2014 - 13:44

A nice discussion of the benefits of having a well thought out list of emergency supplies and tools in your car for those times when you get stuck with your car and help could be a long time coming

Join the conversation »

Categories: Economics

11 Tiny House Villages Redefining Home

Shareable Magazine - September 17, 2014 - 09:05

Tiny house villages are a new part of the tiny house movement, yet they hold a lot of potential to transform lives and communities. The idea behind these villages is straightforward: bring tiny houses together in one place to create communities that share land, time together, skills, support, and other resources.

Categories: Economics

Occupy Offshoot Cancels $4 Million in Predatory Student Loans—and Starts a Debtors Union

Photo by Shutterstock.

Nathan Hornes was sitting on the couch watching Maury when he saw the ad for Everest College.

Owned by the for-profit education company Corinthian Colleges, Inc., Everest commercials are known to target low-income people, promising a flexible education and, through it, jobs that earn more than minimum wage. They're often aggressive, the actors calling viewers out for being lazy and then daring them to live up to their full potential. Hornes was an easy target.

“The first commercial I saw was the girl and she’s like ‘Oh, you’ve got to get off the couch,’” he said. “You can go to work, go to school, everything like that.”

Hornes, who had dropped out of high school to pursue a career in music, had just turned 20 and thought getting a degree sounded like a good idea. Plus, the woman in the ad promised, he could work around his current gigs. So he called Everest.

After that first informational call, Hornes said Everest representatives phoned him constantly, sometimes up to four times a day. They told him he needed to enroll for classes in order to graduate as soon as possible. They promised that a “network of employers” would be waiting after he graduated, and they would help him find a job. So Hornes signed up for a degree in business management, and at Everest’s suggestion he took out loans to pay for it.

Nathan Hornes on graduation day. Photo courtesy of Nathan Hornes.

“I used to always tell people I went to Everest,” he said of the early days, when he was proud of being a college student. But now, he said, “I don’t even like telling people I went to this school.”

At the time he enrolled, Hornes didn’t know how to evaluate a school’s accreditation or what to expect from college classes. Sometimes teachers didn’t even show up, and much of what they did teach felt like common sense. He said he didn’t even really have homework.

When he started to look for work after graduation, Hornes quickly realized his options were not as abundant as Everest had led him to believe. Job leads from the career center were sometimes forwarded from Craigslist. He hadn’t realized that many other colleges and employers don’t take degrees from for-profit colleges seriously.

“Employers find it laughable,” he said. “I’ve literally taken it off my resume. That’s how embarrassing it is.”

Now 24, Hornes shares a Los Angeles studio apartment with his aunt. He often works 16 hours a day at two part-time jobs, one of them at a Carl’s Jr. restaurant in the airport.

And that degree from Everest? He owes $56,000 for it.

A Rolling Jubilee for student debt

The abysmal quality of Hornes' academic experience may be extreme, but the debt—and the way it will constrain his life, possibly for decades—is not. Hornes and millions of other former students and their families are part of a student debt crisis of tremendous proportions: Americans—some of them senior citizens—together owe more than $1 trillion in student loan debt, the figure steadily rising as states and the federal government cut funding for higher eduction. Even credit card debt is not as large.

Graphic from Demos.

That's why Strike Debt, an organization that emerged out of Occupy Wall Street to protect debtors' rights, announced today it has purchased—and abolished—more than $4 million in student debt. It's a first for the organization, which until now has only canceled medical debt.

The organization's Rolling Jubilee project used $100,000 of raised capital to buy the privately owned debt of more than 2,700 Everest College students. They did this by purchasing private student loans from secondary markets for pennies on the dollar—just the way collection agencies do. And then, they simply canceled it.

The idea arose from conversations three years ago at Occupy Wall Street. There, and at smaller gatherings focused specifically on the issue of debt, people who held student loans or medical debts often stood in a circle and encouraged each other to shake off their feelings of guilt. Sometimes they brought their bills or other paperwork and set them on fire. Meanwhile, members were constantly studying the mechanisms through which banks, collection agencies, and other organizations traded and profited from debt.

They took what they learned and turned it into Rolling Jubilee.

The project kicked off in November 2012—on the one-year anniversary of Occupy Wall Street’s eviction from New York’s Zuccotti Park—and organizers raised more than $250,000. Because Strike Debt was paying only about $5 for $100 of debt, that amount allowed them to purchase millions of dollars worth of other peoples’ unpaid medical obligations.

In the nearly two years since then, organizers this week told YES! that Rolling Jubilee has canceled more than $15 million in medical debt.

But unlike hospital bills, federal student loans are guaranteed by the government and are mostly unavailable for purchase on secondary markets. This is where debt collectors usually hunt for it. However, because Everest College encourages students to privately borrow a percentage of their tuition to supplement money available through federal student loans, this for-profit school created a unique pool of student debt ripe for the raiding.

“We started with medical debt because there is a clear moral argument,” said Laura Hanna, a Strike Debt organizer. “People shouldn't be forced into debt because they get sick.”

Hanna said education was a natural next step, from an ethical point of view: “With education, people are trying to work to improve their lives. To make something better for themselves. Instead, most people fall into a debt trap. And there is no escape ... not even through bankruptcy.”

Graphic from Demos.

Predatory Lending U

Yesterday, the national Consumer Financial Protection Bureau sued Corinthian Colleges, Inc., for defrauding tens of thousands of students. The CFPB accused Corinthian of running a “predatory lending scheme,” enrolling students in an overpriced education that would never help them get a job.

Corinthian is charged with lying to prospective students about job placement statistics. Ben Lopez, a former Everest student, told us he was hired as a librarian's assistant in January when he finished his program, but after his graduation ceremony a few months later, he was laid off. Part of the company’s schtick is to hire recent grads to inflate career placement numbers, classifying one or two days’ employment as a career.

When 20-year-old Hornes first talked to Everest on the phone, the numbers they fed him were based on this and similar practices.

According to the suit, from July 2011 to March 2014, Corinthian issued 130,000 private loans to pay its own exorbitant fees. The outstanding loans total more than $568 million.

And what kinds of students did they target? The CFPB claims that according to Corinthian's own internal documents, they sought out people with “low self-esteem” and “[f]ew people in their lives who care about them”; “isolated” people who felt “stuck, unable to see and plan well for future.” They intentionally marketed to people with little-to-no financial literacy or credit history.

Everest recruits through daytime television advertisements like this one, which Hornes says he saw.

Moreover, the school misled students to believe it had no financial interest in the private loans they were pushing, known as “Genesis” loans. But because the law prevented Everest schools from receiving all of their funding from federal loans, they were incentivized to convince students to take private ones, which then allowed the school to receive more public money. As the Bureau put it, “Every Genesis loan dollar that Corinthian induced its students to borrow, in effect, allowed Corinthian to receive up to an additional nine dollars in Title IV aid.”

Corinthian has been under fire for a long time. It’s been accused of fraud by more than one federal agency and is on the verge of collapse. (For more on Corinthian's sad backstory, check out John Oliver below).

If won, the CFPB’s case will secure more than $500 million, which will be used to cancel existing private student loans. That would be great for former students like Hornes. But it could also take years, while many who owe the company money slog away at minimum wage, trying to pay down their Genesis loan.

When asked whether he might consider going to college somewhere else in the meantime, Hornes says he is interested, but wary. Going to school almost anywhere else would, for him, mean more debt.

A debtors union

As effective as Rolling Jubilee has been in calling attention to debt issues, $4 million hardly makes a dent in a trillion-dollar picture—not to mention the billions of dollars tied up in medical and other debts.

“Rolling Jubilee is a fantastic way to punch through the illusion that you actually owe what the 1 percent thinks you owe,” said Thomas Gokey, a Rolling Jubilee co-founder who's eager to take things to the next level. “It’s not going to be possible to buy all the debt out there and get rid of it, so we’re going to need other tactics to win … it’s going to be a coordinated, large-scale effort.”

Alongside today’s $4 million abolition announcement, Strike Debt is also unveiling plans for a new project: Debt Collective. Gokey, who's forthright about his personal investment in the effort (“My student debt today is significantly more than the last time I talked to YES!” he told us—and that was just two years ago), calls Debt Collective an “on ramp” to bigger changes and more aggressive tactics when it comes to abolishing debt. “There’s never been something like a debtors union before.”

Gokey envisions a movement where debtors are empowered to “renegotiate, resist, and refuse unfair debts” in the same way labor unions collectively leverage better pay, safer work environments, and time off. And to beat down the enormous pile of debt in general, they’ll advocate for free education and universal health care.

Hanna compares Debt Collective to “the factory floor of the past,” when labor organizers, gathered in the same physical space, came up with tactics like slowdowns, walkouts, and strikes. As debtors, Hanna said, “We might engage in collective bargaining or more robust refusal campaigns down the line … with an aim to transform the way we fund and access social goods.”

As for this round of jubilee, Strike Debt has been sending letters to the thousands of debtors from Everest, delivering the news of a lifetime. Unfortunately, Hornes will not be one of them (debts are purchased anonymously, and Strike Debt only finds out debtors' identities afterward). Still, he’s not giving in to the prospect of a lifetime of interest payments while working minimum wage jobs.

Our Economy Wants You to Be In Debt—5 Things You Can Do to Take Charge

Back in Los Angeles, Hornes is now a key organizer with the Everest Avengers, a group of nearly 200 current and former Everest College students who feel they were duped into believing they were paying for a good education and are now burdened with crippling debt because of it. And within the Avengers, the Corinthian Collective was formed.

Made up of about 40 former students from the for-profit school system, the Corinthian Collective has been working directly with Strike Debt to strategize around freeing students from unfair and fraudulent loans. On the table, Hornes hopes, will be options like legal action and working to convince the Department of Education to discharge outstanding debts for Everest students across the country.

He may have missed out on the high-quality education in business management he aspired to. Instead, though, Hornes has gotten a crash course in leadership and organizing. Today, he’ll be facilitating national conversations uniting Everest students, publicizing the facts behind his fraudulent debt, and fielding questions from the media.

Finishing up his short shift break before heading back to Carl’s Jr. last night, he said he now sees himself as a “buffer” who helps demoralized classmates understand that the education they received at Everest College will likely never lead to the jobs they were promised. Instead, it has brought them together.

Liz Pleasant, Christa Hillstrom, and James Trimarco wrote this article for YES! Magazine, a national, nonprofit media organization that fuses powerful ideas and practical actions.

Liz is web assistant and Christa and James are web editors at YES!


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Categories: Economics

Daily Digest 9/17 - Stable Yen Key For Japan Businesses, Fracking Causing Earthquakes in NM

Chris Martenson - September 17, 2014 - 07:06
  • Joe Hockey dismisses Australian property bubble claims as 'lazy analysis'
  • Costa Rica Rating Cut to Junk as Deficit Keeps Widening
  • UK house prices hit new record as London average breaks £500,000
  • Gas production blamed for rise in Colorado, New Mexico quakes
  • BOJ's Kuroda says stable yen key for Japan businesses
  • China Provides 500 Billion Yuan Liquidity to Five Banks
  • U.S. Stocks Rise While Oil Rallies as PBOC Adds Stimulus
  • Italian bank lending falls for 28th straight month in August
  • Ruble Drops to Record as Russia Sanctions Fuel Dollar Shortage
  • Puerto Rico to pay $9.7 mn to restructuring consultant
  • San Diego sidewalks in bad shape
  • Italian economy may contract this year - economy minister

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Categories: Economics

The Dollar May Remain Strong For Longer Than We Think

Chris Martenson - September 16, 2014 - 19:50

I have long been a dollar bull, not for any over-arching reasons based on inflation, deflation, rising geopolitical multi-polarity or any of the other issues that touch on the dollar’s valuation vis-à-vis other currencies. My analysis focuses on a few basics:  the dollar’s status as the global reserve currency, Triffin’s Paradox (a.k.a. Triffin’s Dilemma) and global capital flows into the dollar and dollar-denominated assets such as U.S. Treasury bonds.

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Categories: Economics

Why the Dollar Could Strengthen - A Lot - From Here

Chris Martenson - September 16, 2014 - 19:50
Executive Summary
  • The critical role of interest rates and carry trades
  • How capital flows across borders
  • The growth in supply of dollars is slowing
  • The rationale for the dollar strengthening from here by 50-100%

If you have not yet read Is Part 1: The Dollar May Remain Strong For Longer Than We Think available free to all readers, please click here to read it first.

In Part 1, we reviewed the key concepts that drive supply/demand (and thus the price/relative value) of the U.S. dollar. In Part 2, we’ll cover the dynamics that could push the value of the USD vis-à-vis other currencies much higher in the years ahead.

Interest Rates, Bonds and Carry Trades

To understand the price of any currency—measured in other currencies, gold, oil, etc.—we look at a currency as a special kind of commodity, one that greases transactional trade of goods and services and also serves as a store of value. Like any commodity, its price relative to other commodities is determined by supply and demand.

If demand is strong and supply is tight, the value will increase. This is the same for dollars, gold, oil, grain, bat guano, etc. The reverse is equally true: if demand slackens and supply balloons, the value will decline.

To understand the supply and demand for currencies, we need to understand the role of interest rates, sovereign bonds and carry trades.

The connection between interest rates and demand is self-explanatory: if interest rates paid at home are near-zero, and another nation’s bonds are paying a higher yield, it makes sense to sell (or borrow) one’s own currency and buy a bond denominated in another currency.

This is the foundation of currency carry trades.’s own Davefairtex recently offered an excellent explanation of how carry trades work on the Gold & Silver Group forum:

I believe that QE causes inflation in other countries by dropping rates to 0% which encourages carry trades, whereby traders borrow USD for extremely low rates here in the US, and then send it overseas to find a yield.  Cheap money in the US causes money to flow elsewhere, where rates are higher.

Carry Trade For Dummies:

Step 1) Borrow $1 billion US at LIBOR-1M rate; cost 0.16%.

Step 2) Trade $1 billion US for 1.075 billion AUD.

Step 3) Buy 1.075 billion 2-year AUD govt bonds; yield 2.52%

Step 4) Collect $23 million USD/year for doing no work at all.

Carry trades work in both directions for the dollar...

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Categories: Economics

20 Wire Coat Hanger Uses for Survival

Chris Martenson - September 16, 2014 - 15:27

A great little video going over the many uses or survival tools one can fashion out of a coat hanger or sturdy wire.

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Categories: Economics

Growstuff Uses Open Data to Help Local Gardeners

Shareable Magazine - September 16, 2014 - 09:27

Alex Bayley is an Australian software developer and avid gardener. When she looked online for information about growing food in her area, she came up short. Having worked with open data since 2007, Bayley understood the power of shared information, so she set up Growstuff, an online, crowdsourced repository for backyard gardeners around the world.

Categories: Economics

Daily Digest 9/16 - Calpers to Exit Hedge Funds, Fixing Climate May Add No Costs

Chris Martenson - September 16, 2014 - 08:01
  • Calpers to Exit Hedge Funds, Divest $4 Billion Stake
  • Babson's Warning
  • Whoever Saves A Life
  • U.S. to End Coverage Under Health Care Law for Tens of Thousands
  • Will Portland Always Be a Retirement Community for the Young?
  • U.S. to Commit Up to 3,000 Troops to Fight Ebola in Africa
  • Fixing Climate Change May Add No Costs, Report Says
  • U.S. Targets Islamic State’s Lucrative Oil Smuggling Operations

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Categories: Economics

New Report Explores Unifying the New Economy Movement

Shareable Magazine - September 16, 2014 - 07:57

The new economy has several different names including the sharing economy, the solidarity economy, community resilience, transition, the oppositional economy, and more. At its core, however, is an awareness that the existing economy, which thrives on maximizing growth and profits at all expense, has failed us.

Categories: Economics

Russian Energy Sanctions Will Bite Europe

Chris Martenson - September 15, 2014 - 23:44

For several months now, we've been running with the hypothesis that Russia would wait until fall arrived and then begin to crimp off EU gas, possibly even just cutting it off.

Well, even though fall is still officially a few days away, Russia has begun to retaliate, subtly, by diminishing the flows of gas to several European countries.

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Categories: Economics

Hydroponic Gardening

Chris Martenson - September 15, 2014 - 13:22

Can you grow a garden in the winter without soil?

Yes, it is entirely possible to grow a garden in the winter without soil. In fact, you can grow a garden in the winter without these things, using an increasingly popular technique called “hydroponics.” Hydroponics is an indoor soil-free gardening technique that has been used for thousands of years and allows the gardener to have complete and total control of their garden’s environment. With the hydroponics gardening alternative, you can grow just about any type of bountiful garden during those cold winter months right within your own home – even in your home’s kitchen.

If you’ve ever put a plant clipping into a glass of water, in hopes it will develop roots, you have practiced a form of hydroponics.

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Categories: Economics