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3 ways student debt impacts the economy – CNBC

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During the height of the pandemic, workers with college degrees were spared some of the harshest consequences. The Bureau of Labor Statistics reports that workers with a bachelor’s degree are less likely to be unemployed and earn 67% more than those with just a high school degree. Plus, college graduates live longer than those without a college degree.

While student loans can be crucial in helping Americans access these benefits, economists say that student debt is holding the economy back.

Approximately 45 million Americans collectively owe $1.7 trillion in student debt. And even though federal student loan payments have been paused since March 27, 2020, the student loan crisis is still looming. The moratorium is set to expire Oct. 1, 2021 and politicians and experts warn that millions of borrowers may be thrown into “extraordinary financial hardship” when payments resume. 

CNBC Make It spoke with Nela Richardson, chief economist of human resource management firm ADP, about three of the biggest ways student debt impacts the economy. 

1. Generational inequality

Richardson stresses that student debt is a concern because of the way it disproportionately impacts young people today more than in previous generations

Decades of cuts to education funding means that students pay much higher college costs than previous generations did. Over the past 10 years, college costs increased by more than 16% and student debt totals increased by 99%. Today, not only do roughly 70% of college students take out loans to pay for their education, but they take out larger volumes.

Plus, recent college graduates have entered the workforce during one of the most hostile labor markets in history for young workers. According to an analysis of BLS data by Pew Research Center, 2020 college graduates saw a bigger decrease in labor force participation than those who graduated during the Great Recession. 

“Student debt falls heavily on the shoulders of young people. They have the lowest incomes and are most likely to have recently finished college,” says Richardson. “We know from our data that young people were disproportionately impacted by the pandemic. They were more likely to report a job loss, a reduction in job responsibilities or a pay cut. When you add that to student debt, that creates quite a sizable hurdle.”

The result is growing generational inequality that will have significant long-term consequences, she warns: “It’s about macro growth. We should care [about student debt] because it does affect the future of GDP growth when there’s a lack of investment among young people.”

Federal Reserve data indicates that millennials control just 5% of U.S. wealth while baby boomers control over 52%. In 1989, when baby boomers were around the same age as millennials are today, they controlled 21% of the country’s wealth.

2. GDP

Student debt impacts borrowers over time by raising debt burdens, lowering credit scores and ultimately, limiting the purchasing power of those with student debt. Because young people are disproportionately burdened by student debt, they will be less able to participate in — and help grow — the economy in the long run. 

“What you want is widespread opportunity for investment over time. That’s what’s good for the economy. That’s what’s good for Wall Street,” says Richardson. “If you don’t have that, then you’re looking at slower growth from the prime-aged working population — and that’s problematic.”

The Federal Reserve estimates that student debt shaves roughly 0.05% off GDP per year. While the current impact may appear relatively small, as borrowers struggle to buy homes, save for retirement and invest in the stock market, the impact may become more significant.

“All those assets that the boomers have been accumulating to feed the economy, who’s going to buy those assets? Who’s going to take over to make sure that the stock and asset markets keep going up?” asks Richardson. “Maybe boomers can leave those through inheritance to their children, but that just concentrates wealth, which gets back to the issue of inequality.”

3. Delinquency

Finally, there is the concern that many borrowers are expected to default on their student loans.

Currently, about $158.5 billion worth of federally managed student loans are considered in default — and this total may increase once the pause on federal student loan payments expires. Brookings estimates that by 2023, nearly 40% of borrowers are expected to default on their student loans.

“If you have delinquencies, that lowers credit scores, and that’s problematic in terms of doing anything in the economy from getting a credit card to getting a mortgage,” says Richardson, citing ADP data that suggests student loans account for 35% of severely derogatory loan balances, more than three times the delinquency rate of mortgages.

Richardson fears that because of student loan difficulties, borrowers will be held back from generating wealth through means such as buying a home or starting a business. “When you think about how the middle class builds wealth over time, there’s two ways in the U.S.: homeownership and entrepreneurship,” she says.

While consumer spending appears to be stable for now, Richardson stresses that the student debt crisis should be addressed in order to maintain economic growth. 

“If you’re very focused on the here and now and the present economic recovery, you can shrug off consumer debt,” she says. “But if you care about the future, and you think about what leads to feature growth and investment, then student debt is one thing that can block that.”

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UK's Johnson expects steady recovery for economy this year – Financial Post

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LONDON — British Prime Minister Boris Johnson said Britain’s economy would show a steady recovery this year albeit with “bumps on the road” after the country posted a strong increase in the number of employees on company payrolls in June.

“You’re seeing the job numbers increasing and I think the rest of this year there will still be bumps on the road but I think you’ll see a story of steady economic recovery,” Johnson told LBC radio on Wednesday.

(Reporting by Guy Faulconbridge and Kate Holton, writing by Elizabeth Piper Editing by William Schomberg)

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Fed Considers Tapering Bond Purchases as Economy Grows – The New York Times

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Federal Reserve officials are gathering in Washington this week with monetary policy still set to emergency mode, even as the economy rebounds and inflation accelerates.

Economists expect the central bank’s postmeeting statement at 2 p.m. Wednesday to leave policy unchanged, but investors will keenly watch a subsequent news conference with the Fed chair, Jerome H. Powell, for any hints at when — and how — officials might begin to pull back their economic support.

That’s because Fed policymakers are debating their plans for future “tapering,” the widely used term for slowing down monthly purchases of government-backed debt. The bond purchases are meant to keep money chugging through the economy by encouraging lending and spending, and slowing them would be the first step in moving policy toward a more normal setting.

Big and often conflicting considerations loom over the taper debate. Inflation has picked up more sharply than many Fed officials expected. Those price pressures are expected to fade, but the risk that they will linger is a source of discomfort, ramping up the urgency to create some sort of exit plan. At the same time, the job market is far from healed, and the surging Delta coronavirus variant means that the pandemic remains a real risk. Policy missteps could prove costly.

The Fed’s balance sheet has grown, thanks to bond-buying.

The Federal Reserve has swollen its balance sheet by buying bonds to bolster the economy during the pandemic, making it a bigger player in markets.

Source: Federal Reserve

By The New York Times

Here are a few key things to know about the bond-buying, and key details that Wall Street will be watching:

  • The Fed is buying $120 billion in government backed bonds each month — $80 billion in Treasury debt and $40 billion in mortgage-backed securities.

  • Economists mostly expect the central bank to announce plans to slow those purchases this year, perhaps as soon as August, before actually dialing them back late this year or early next. That slowdown is what Wall Street refers to as a “taper.”

  • There’s a hot debate among policymakers about how that taper should play out. Some officials think the Fed should slow mortgage debt buying first because the housing market is booming. Others have said mortgage security buying has little special effect on the housing market. They have hinted or said they would favor tapering both types of purchases at the same speed.

  • The Fed is moving cautiously, and for a reason: Back in 2013, markets convulsed when investors realized that a similar bond-buying program after the financial crisis would slow soon. Mr. Powell and crew do not want to stage a rerun.

  • Bond-buying is just one of the Fed’s policy tools, and is used to lower longer-term interest rates and to get money chugging around the economy. The Fed also sets a policy interest rate, the federal funds rate, to keep borrowing costs low. It has been near zero since March 2020.

  • Central bankers have been clear that tapering off bond purchases is the first step toward moving policy away from an emergency setting. Increases in the funds rate remain off in the distant future.

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IMF warns of growing poverty, unrest and geopolitical tensions – Al Jazeera English

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The global economic recovery continues, but with a widening gap between advanced economies and many emerging market and developing economies thanks to vaccine inequity and a lack of fiscal support, the International Monetary Fund (IMF) warned on Tuesday

While the latest update to the IMF’s World Economic Outlook sees the global economy still growing 6 percent this year – unchanged from its April estimate – Chief Economist Gita Gopinath noted that the composition of the recovery continues to change.

“The recovery is not assured until the pandemic is beaten back globally,” Gopinath told reporters during a virtual press conference as she presented the latest outlook titled Fault Lines Widen in the Global Economy.

The IMF sees global growth decelerating to 4.9 percent next year. Advanced economies are expected to achieve 4.4 percent growth in 2022 – down from 5.6 percent in 2021 – while growth in emerging and developing economies is seen slowing to 5.2 percent in 2022 from an expected rebound 6.3 percent in 2021.

Rich, emerging and developing nations all took an economic beating last year when the coronavirus pandemic forced governments to close borders, shut businesses and idle manufacturing hubs worldwide.

As countries rolled back COVID restrictions this year, growth forecasts jumped as people emerged from lockdowns and unleashed pent-up demand for products and services. That demand surge though is expected to moderate next year.

Developed economies armed and shielded with a healthy supply of COVID-19 vaccines and fiscal firepower have managed to open up businesses and resume operations. But the emergence of new COVID variants and infection spikes laces uncertainty into the recovery path.

Growth in the US, the world’s largest economy, is seen slowing to 4.9 percent in 2022 after a bounce back of 7.0 percent expected this year. Europe is also expected to slow to 4.3 percent in 2022 from 4.6 in 2021.

A man displays a sign which reads ‘Bolsonaro vaccine thief’ during a protest against Brazil’s President Jair Bolsonaro in Sao Paulo, Brazil [File: Carla Carniel/Reuters]

Growth in the Middle East and Central Asia is expected to decelerate to 3.7 percent next year from 4.0 in 2021, while emerging and developing Asian economies are expected to dip more than a point from 7.5 in 2021 to 6.4 in 2022.

Latin America and the Caribbean are forecast to experience the sharpest fall from 5.8 percent in 2021 to 3.2 in 2022 after plummeting 7.0 in 2020.

Sub-Saharan Africa is the only region that is expected to see growth climb – from 3.4 in 2021 to 4.1 percent in 2022.

Vaccines & trillions in fiscal support

Vaccine inequality is seen as a chief driver of the widening gulf between recoveries in developed and less developed economies.

Close to 40 percent of people in advanced economies have been fully vaccinated compared with only 11 percent in emerging market economies and a tiny fraction in low-income developing countries.

Fresh waves of COVID-19 cases this year, notably in India are a major source of the deepening inequality between rich and poor nations.

“The emergence of highly infectious virus variants could derail the recovery and wipe out four and a half trillion dollars cumulatively from global GDP by 2025,” Gopinath warned.

Detroit residents sit in the waiting area after receiving their first dose of the COVID-19 vaccine at a pop-up vaccination clinic in Detroit, Michigan, US [File: Emily Elconin/Reuters]

To make matters worse, poor countries and even emerging markets lack access to the funds necessary to jolt economies back to health. Advanced economies, on the other hand, passed $4.6 trillion in fiscal support for 2021 and beyond. In developing economies, most measures expired last year.

And some emerging markets like Brazil, Hungary, Mexico, Russia and Turkey have also started raising interest rates to contain soaring inflation triggered by supply chain bottlenecks as economies reopen. Higher interest rates cool economic growth.

“A worsening pandemic and tightening financial conditions would inflict a double blow to emerging markets and developing economies and severely set back their recoveries,” Gopinath warned.

Inflation & action

A significant portion of the “abnormally high inflation” readings is transitory, resulting from the pandemic’s hit to vital parts of the economy such as travel and hospitality, and from a comparison with last year’s abnormally low readings, Gopinath said.

The IMF forecasts inflation to remain elevated next year. In emerging markets and developing economies food price pressures and currency depreciation will continue to create yet another worrying disparity in economic recovery.

Major central banks must clearly communicate their outlook for monetary policy and ensure that inflation fears do not trigger rapid tightening of financial conditions, the IMF stressed.

A police officer stands guard in front of protesters as the country deploys army to quell unrest in Vosloorus, South Africa [File: Siphiwe Sibeko/Reuters]

The Fund’s proposal to end the pandemic, endorsed by the World Health Organization, the World Bank, and the World Trade Organization, sets a goal of vaccinating at least 40 percent of all people in every country by the end of 2021 and 60 percent by the middle of 2022.

The IMF urges at least 1 billion vaccine doses to be shared in 2021 by countries with more than enough of them and calls on manufacturers to prioritise deliveries to low and lower-middle-income countries.

The fund said its allocation of some $650bn worth of its reserve currency, known as Special Drawing Rights, should be completed quickly to help countries in need fund their spending needs. Greater action is also needed to ensure the G-20 successfully delivers on debt restructuring for countries where debt has ballooned and become unsustainable, said the IMF.

Gopinath further urged countries to focus more on reducing carbon emissions and slowing the rise in global temperatures to avoid yet another human and financial catastrophe. As it stands now, only 18 percent of recovery spending has been on low carbon activities.

“Concerted policy actions…can make the difference between a future where all economies experience durable recoveries or one where divergences intensify, the poor get poorer and social unrest and geopolitical tensions grow,” she said.

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