Who pays the loan forgiveness?

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It’s been over a week, and there’s still no cohesive answer from the Biden administration on who will pay for student loan forgiveness, which could cost Americans between $300 and $500. billions of dollars by the time it’s all done.

For context, the White House announced on August 24, 2022 that individual borrowers earning less than $125,000 ($250,000 for married couples) will be eligible for up to “$20,000 in debt forgiveness to beneficiaries of the Pell Grant…and up to $10,000 of debt forgiveness to non-Pell Grant recipients. Many voices on both sides of the political aisle have challenged the wisdom of the program and posed the reasonable question of how it will be paid for.

Yet there has been no clear response from the US government. What the Biden administration has said is that the loan cancellation program will be funded entirely by deficit reduction. This is an absurd answer. It confuses a revenue item (reducing deficit spending, which is by definition spending money the government does not have) with a balance sheet item (increasing the national debt).

Total US federal tax revenue is approximately $4 trillion. However, in fiscal year 2021, the US federal government spent $6.8 trillion. Thus, in one year, the deficit has increased by approximately $2.8 trillion. In fiscal year 2020, the deficit was over $3 trillion. Both years have been extraordinary due to pandemic relief spending. However, the last time the federal government brought in more money than it spent was in fiscal year 2001. Let that sink in. Although the deficit has fallen from these outrageous levels to a projected loss of $1.0 trillion for fiscal year 2022, it continues to add to the accumulated deficit. These are not “savings” that can be used elsewhere; it just slows the pace at which our government is digging a deeper tax hole for all of us.

The result of this spending spree is that the national debt has skyrocketed. At the beginning of 2007, i.e. before the global financial crisis, the total debt of the United States stood at 8.5 trillion dollars, a figure considered enormous at the time. By 2015, it had more than doubled to $19.5 trillion, largely due to quantitative easing and spending to bail out banks and try to revive the economy.

It only got worse from there. As a result of pandemic relief, including government grants and unnecessary programs under the Biden administration, in August 2022 the total debt of the United States reached over $30 trillion, a figure that represents more than 125% of the total gross domestic product (GDP) of the United States. For context, that’s over $92,000 in debt per person in America.

Beware of hidden tax

The proposed student debt cancellation program will simply add another $300 billion to $500 billion to the total amount of US public debt. But it’s not that simple, because the growing national debt is a hidden tax on all Americans.

When financial investors such as pension funds and foreign countries are willing to buy U.S. debt at near-zero interest rates, which has been the case for the past two decades, this tax remains largely hidden. in the eyes of the Americans and the game continues. But when government spending goes wild and investors start to balk, trouble looms. Governments refuse to stop spending, just like a junkie who just can’t stop consuming, even though he knows it will kill him.

When the private market worries about all this and stops buying, which has happened for the past two years, the Federal Reserve is forced to buy government debt so the government can keep spending. This is called “monetizing the debt”. Before the global financial crisis of 2007-2009, the Fed’s balance sheet totaled less than $900 billion. It has taken nearly 100 years since the Fed’s inception in 1913 to reach this level. But in just 15 years, by August 2022, the Fed’s balance sheet had grown to nearly $9 trillion, a tenfold increase. That extra $8 trillion had no choice but to produce the asset bubbles and price inflation that America is experiencing.

Over-indebted governments, usually the largest debtor in an economy, have only three choices at this point: repudiation (i.e. defaulting on debt repayment), raising taxes on companies and individuals, or the generalization of taxation through systemic price inflation.

While some poor and developing countries have chosen to default on their debt, this does not work for a large advanced economy, especially not one that is the issuer of the world’s reserve currency, which is the US dollar, used in around 70% of all financial transactions worldwide.

Taxation doesn’t really work either, but that doesn’t stop governments from trying. Imposing taxes that are too heavy eventually backfires. People stop paying or go underground, unemployment rises, businesses close or move overseas, and economic activity comes to a standstill. Governments that overtax eventually get overthrown.

The only choice left to the US government is to allow inflation to run and thus impose a hidden tax on Americans. Despite the evidence of a slowdown in the growth of price inflation over the past two months, we can expect an inflationary trend to continue over the long term. Canceling student debt will only make the situation worse.

The Epoch Times Copyright © 2022 The views and opinions expressed are those of the authors. They are intended for general informational purposes only and should not be construed or construed as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or other personal finance advice. Epoch Times assumes no responsibility for the accuracy or timeliness of the information provided.

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