The Sin of Commission

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To omit is to care-less. To commit is to care not. From the perspective of the populace and the financial markets, the question is whether the Federal Reserve has committed a sin of omission or commission when it comes to the thorny issue of inflation.

The subject of inflation has never been as complex as it is today. No doubt, an oversupply in countless industries, many of which would be more competitive if not for the ease with which inefficient operators can stay in business, pulls down traditional price gauges. This dynamic underlies the case for pronouncements that prices across the full spectrum are rising in benign fashion according to the metrics employed by those charged with safeguarding the dollar’s buying power. Economists deploy the term “hedonics” to shush-shush the whiners, ensuring the masses that their dollar buys so much more today than it did in prior times. The problem with this is the masses don’t necessarily need another cheap television, especially one that’s bound to break down. Last we checked, two of their most important needs– affordable education and health care–are not available at Walmart.

The (not) funny thing about inflation is that is doesn’t exist unless it pertains to something you need to buy, in which case inflation is a very real phenomenon, at least if you populate what is nostalgically known as the American middle class. Listen to any retiree and they will regale you with exact data points on the price of a pound of ground beef, their statin prescription, or a gallon of gasoline. Step down the demographic ladder to would-be empty nesters and they will tell you the pain in their budgets emanates from helping their children pay their rent, the cost to maintain their own home, and the fact that dining out, flying away or sleeping over at a hotel makes travel a thing of luxury, and therefore for many, also a thing of the past. Slide down one more rung on the age ladder and you arrive at the truly hard pressed — families whose high-schoolers live and die for an iAnything, or worse, those with offspring entering college. These folks are faced with some of the most difficult financial decisions of their lifetimes. Such is the reality of out-of-control higher education inflation, spurred on by the fact that student debt has become a profit center.

There is a distinct irony to easy monetary policy helping fuel the skyrocketing cost of a college education. Data on mortgage equity withdrawal (MEW) do not detail where the money goes, but the nearby graph suggests that during the housing boom, home equity withdrawal provided a potent support for tuition increases. Many of those bills are just now coming due as home equity lines of credit (HELOC) that were originated in the mid-2000s are nearing the end of the ten-year period over which only interest payments are made. (Never mind that Reatytrac recently reported that 56% of the 3.3 million open HELOCs in that $158 billion pipeline are “seriously underwater.”) After the bubble burst, the crash in house prices that began in 2006 put mortgage equity withdrawal into hibernation. Did that arrest the rise in tuition costs? Not hardly. Student debt added fuel to that fire.

Mortgage Equity Withdrawal

While there is no suggesting that student debt is a nouveau form of household debt, the fact that its growth took off in earnest in 2006 is anything but coincidental. Wage growth stagnating at the same time did nothing but exacerbate the budgetary dilemma of families. Something had to give and in the end the new source for the lack of wherewithal to fund higher education became student debt. The overall figures are widely reported but nevertheless breathtaking. There is even a student debt clock that has been designed by an educational website for MarketWatch which is modeled after the infamous National Debt Clock. Though it’s hard to fathom, student debt increases by $3,055 every second based on the growth rate in the nine years through 2015’s first quarter. The latest data point from the New York Fed placed total student debt at $1.2 trillion, a figure that has doubled since 2007 and surpasses both auto and credit card debt. Without doubt, cuts in public spending on higher education have not helped matters. The less the public can contribute, the more families have to.

Of course, there is a class of Americans who roundly applaud the Fed’s advancing an exclusionary definition of that scourge inflation and what it allows – the investors. Asset price inflation, whether speaking of stocks, bonds, commercial real estate and by extension, high-end residential real estate has been magnificent. The good news for the tony invitees to the rally’s party is asset price inflation is anything but benign and wholeheartedly welcome. The better news is measured inflation gives the Fed license to never remove the proverbial punch bowl. The catch is when the bubbles inflating all of these asset classes burst, the exit will not be wide enough to allow each and every investor who has been enriched since 2009 safe passage from paper to realized wealth. Perhaps then, the other kind of inflation, the one that is poorly measured but oh so critical, will make a difference, even to investors.

In the end, when the results of the grand experiment in easy monetary policy are in hand, history’s judges may determine that a more honest approach to measuring inflation was needed all along. If that is the case, the Fed’s sin will not be one of omission but rather that of commission.