Geo-Graphics

Back in March, we showed that the $1.4 trillion in U.S. direct federal student loans that will be outstanding by 2020 will amount to roughly 7.7% of the country’s gross debt. This is 6.3 percentage points higher than it would have been had the scheme not been nationalized in President Obama’s first term. The government’s net debt was not directly affected by the move, as the government acquires assets when it issues student loans. The problem is that projected default rates on such loans have been climbing as the volume issued has increased, as shown in the graphic above. If we apply the projected default rate on loans originated in 2009 to the amount of student loans outstanding in 2012, we find that defaults on federal student loans currently outstanding are likely to cost taxpayers almost $80 billion. And the cost is projected to increase rapidly over the next decade as default rates continue to rise and the amount of student debt the federal government owns soars. There is more than a whiff of resemblance between the rise of the federal government’s student debt liability and the mortgage bubble – the detritus debt of which wound up nationalized. There is little in the way of credit checks carried out, and no evaluation of future earnings prospects. In the ten years to 2008, the amount of mortgage debt tripled: $3.2 trillion to $9.3 trillion. The CBO projects that student loans on the government’s balance sheet will rise just as fast: $453 billion in 2011 to $1.4 trillion in 2020. A 17.3% default rate on $1.4 trillion in loans would cost taxpayers about $240 billion. This is equivalent to 1% of the CBO’s GDP projection for 2020. It is also more than three times the 2013 federal funding level for the Department of Education, and just slightly less than ten times the amount the president requested for science, technology, engineering, and mathematics (STEM) programs in his most recent budget. It is surely worth asking, therefore, whether this $240 billion could be used more effectively than it will be in writing off defaulted student loans. Department of Education: Default Rates Bloomberg.com: Student Loans Go Unpaid, Burden U.S. Economy Wall Street Journal: Federal Student Lending Swells Geo-Graphics: Will Student Debt Add to America’s Fiscal Woes?

China “may have” overinvested to the tune of 12-20% of gross domestic product (GDP) between 2007 and 2011 – this is the diplomatically worded conclusion of a working paper released last week by the IMF.  This week’s Geo-Graphic backs it up. As our figure above shows, the share of the Chinese labor force working in manufacturing and construction, at 38%, is roughly twice the global average – towering well above manufacturing powerhouses like Germany (25%) and South Korea (23%).  Manufacturing’s share of the Chinese work force, at 29%, is also 6 percentage points higher than the level at which other fast growing economies have typically begun slowing.  Once that share exceeds 23%, according to analysis by Barry Eichengreen, it “becomes necessary to shift workers into services, where productivity growth is slower.” Construction’s share of the Chinese labor force, at 9%, is also 2 percentage points higher than in the United States at the peak of the housing bubble in September 2006.  Labor data therefore suggest that China is headed for an extended slowdown in GDP growth. IMF: Is China Over-Investing and Does It Matter? Eichengreen, Park, and Shin: When Fast-Growing Economies Slow Down Orszag: China’s New Leaders Face an Economic Turning Point Mallaby: Beware Membership of This Elite Club

The United States marches solemnly towards its fiscal cliff, awaiting only the command from the Goddess of Reason to halt. Unfortunately for Greece, that country plugged its ears back in March. Like the United States, Greece made prior commitments on spending and taxation in order to bind itself to the mission of deficit reduction. Unlike the United States, Greece left itself little means to unbind itself. As shown in the graphic above, its massive debt restructuring in March only reduced its debt-to-GDP ratio from 170% to 150%, but in the process made further significant restructuring much more difficult. Before the March restructuring, Greece owed private sector creditors €177 billion in obligations governed by Greek law and only €30 worth governed by international law, the latter being vastly more difficult to walk away from. After the restructuring, Greece owed private sector creditors only €86 billion, but all of it was now governed by international law (31.5%*177 + 30). And it also added €75 billion to its €124 billion stock of official sector (EU and IMF) obligations, bringing that total to a whopping €200 billion. Though Greece desperately needs to shed more debt, it faces the problem that its private sector creditors are now all shielded by international law, and its public sector creditors are protected by the power to hurl it into unsplendid economic and political isolation. This suggests strongly that Greece should simply have repudiated all its Greek-law private sector debt back in March, when it had the chance. Why didn’t it? Many reasons, some of which flimsy – such as fears of triggering credit default swaps if the restructuring were “involuntary.” But the most pressing reason was to avoid crushing the Greek banking sector, which was exposed to Greek sovereign debt to the tune of about €50 billion. The €25 billion lent to Greece by the so-called European Financial Stability Facility (EFSF) in order to recapitalize its banks would then have to have been a much higher €50 billion. Still, Greece would be at considerably less risk of hurtling over the fiscal cliff today had it avoided taking on the additional €56 billion worth of nonrepudiable private sector IOUs in March. In contrast, the United States can avoid its looming cliff by Congress and the president agreeing just to keep on adding to the prodigious national tab. It’s good to be the king of reserve-currency issuers - at least until the market cuts your head off. European Financial Stability Fund: Questions and Answers IMF: Greece's Financial Position in the Fund as of Sept. 30 BIS: Consolidated Banking Statistics Geo-Graphics: The IMF Is Shocked, Shocked at Greece's Fiscal Failure. Should It Be?