Will student debt increase inflation?

This is an audio transcription of the FT press briefing podcast episode: Will student debt increase inflation?

Marc Filipino
Hello from the Financial Times. Today is Wednesday, August 31, and it’s your FT press briefing.

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ExxonMobil takes on Russian President Vladimir Putin. We’ll see how far it goes. The world’s second largest cinema chain is on the verge of bankruptcy and struggling to find its own corporate structure. Additionally, US President Joe Biden announced a plan to cancel student loans. Many economists believe this will increase inflation. But how much? I’m Marc Filippino, and here’s the news you need to start your day.

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The world’s second-largest movie theater chain is set to file for Chapter 11 bankruptcy in the United States. Cineworld is trying to restructure its nearly $9 billion in debt and rental debt. The company borrowed heavily to grow and compete with American rival AMC. She bought channels in the UK and the US and also tried to buy a Canadian channel. But the business collapsed during the coronavirus pandemic. Now that the FT has learned that Cineworld’s corporate structure is so complex, the company incorrectly disclosed the identity of its largest shareholder in its latest annual report. The Cineworld network of holding companies has raised a ton of debt on its shares, which are down 90% this year.

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ExxonMobil could be heading for a big legal showdown with Moscow. Earlier this month, Russian President Vladimir Putin signed a decree barring energy companies from transferring control of their operations or selling stakes until the end of this year. This is a big problem for Exxon. The oil supermajor is trying to leave Russia following Moscow’s invasion of Ukraine. Here’s FT Houston correspondent Justin Jacobs on Exxon’s response.

Justin Jacobs
So they submitted what is called a Notice of Difference. And basically it kicks off a round of negotiations between Exxon officials and Russian officials, and things are pretty interesting. We are currently witnessing a fight between Exxon, the largest Western oil company, and Putin.

Marc Filipino
Now, Justin, how influential is Exxon in this fight?

Justin Jacobs
Not a lot, to be honest. They wrote the value of their projects in Russia was about 4.6 billion dollars. I mean, one, you know, the problem is this project, it’s on Sakhalin Island in the far east of Russia. And this project provides power, electricity and heat to local communities in the area. And, you know, one of the issues that Exxon has raised is that they don’t want to have to shut it down before winter hits and leave local communities without power. So I think that’s an issue that they will raise in the negotiations and try to push Russia forward.

Marc Filipino
Okay, but how fair is that to show shareholders that they’re not going to give in and give in to Moscow without a fight, right?

Justin Jacobs
Yeah I think so. I think they have to go through a process and show shareholders they’re doing okay. It’s a huge project. It’s extremely complicated technically. It’s, you know, a tough project to manage. It is in inhospitable climates. It is therefore a difficult project for them. They can’t just give the keys to anyone. So I think they, you know, want to show their shareholders that they’re doing it right. And, you know, if this process continues and they don’t find a solution here within a month or two with the Russian government, and I think it’s very likely that they will refer it to the international courts and will try to enter arbitration where, you know, they could also sue Moscow for damages.

Marc Filipino
Justin Jacobs is the FT’s Houston correspondent.

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Tens of millions of Americans are burdened with the debts they incurred to pay for their higher education. Collectively, they owe over a trillion and a half dollars in student debt. But last week, US President Joe Biden said he would forgive up to $10,000 in student debt for those who hadn’t reached a certain income level. Many applauded the move, others condemned it. And economists are debating what effect this will have on inflation. Our correspondent in Washington, Kiran Stacey, has looked into the matter and joins me now. Hi Kiran.

Kiran Stacey
Hello marc. How is it going?

Marc Filipino
Things are going well. So Kiran, many people around the world already know that higher education in the United States is extremely expensive. How big of a problem for Americans?

Kiran Stacey
The level of indebtedness through student loans is enormous in the United States. Many people owe more than they ever borrowed in the first place. The burden falls disproportionately on the poorest people and on black borrowers as well. If you think, for example, of a poor borrower who is starting higher education, who takes out a loan, they usually pay higher interest rates because they have fewer assets to start with. It is therefore a slightly riskier bet for the bank. Consequently, they pay higher interest rates which accumulate over their lifetime. There is a social problem here.

Marc Filipino
OK, so that’s the social problem with the high tuition fees for higher education. But the economic issue being debated right now is whether debt cancellation will make inflation worse. I want to hear Marc Goldwein now. He is part of a nonpartisan public policy organization in Washington, DC called the Committee for a Responsible Federal Budget.

Marc Goldwein
When the economy is saturated as it is, as it is now, any new spending will drive up price levels. So if you tell people that you don’t have to pay your debt anymore and that you can instead use that money to go out and spend in the economy, that’s going to make inflation worse and that’s going to mean higher prices at home. groceries, gas pump, furniture, you name it.

Marc Filipino
OK, so what he’s saying is that this program doesn’t come at the right time with such high inflation, does it?

Kiran Stacey
I think that’s one of the reasons it’s been more controversial than some Democrats perhaps realized. Because the problem the president had when he announced it was that all the things that would come out of it, that were supposed to be beneficial, in this economy might actually not be a good thing. So when he talks about freeing up money so people can start their own business, buy their own house, pay for the things they want, in normal times, that’s fine. But when inflation is already very high, that’s when economists start to worry. Wait a second, if people take that money and spend it, it could fuel inflation again.

Marc Filipino
Now, on the other hand, there’s a Goldman Sachs report that says canceling student loans will have little to no impact on the economy or on inflation. Economic sociologist Charlie Eaton, he’s at the University of California Merced, he agrees.

charlie eaton
This will have no impact on inflation, partly because we will restart loan repayments at the same time, and partly because loan repayments on those debts that are canceled would have been spread over 20 years. So the amount of increased discretionary income people are going to have and the amount of additional borrowing capacity they are going to have is very small. And we know that people tend to save when they, to create wealth, when they have this type of debt forgiveness. They don’t tend to rush into spending sprees or take out extra loans to spend more.

Marc Filipino
Ok so that seems logical. But the opposite argument also seems to have something of its own. And we actually asked economist Marc Goldwein not only if there would be inflation because of all this, but how much and when we would see that inflation. And he estimated it would be a quarter of a percent over a year from the start of the student loan forgiveness program, which doesn’t sound like a lot, but he said it could be significant.

Marc Goldwein
And the quarter point could be a difference between the Federal Reserve having to raise rates, one more time, two more times there. So it’s true that it’s not important relative to the size of our inflation, but it’s important relative to our tools to help or hurt inflation.

Marc Filipino
And Kiran, what do other economists say.

Kiran Stacey
Every little addition to inflation makes a difference. Most economic analysts don’t think this will have zero impact on inflation. They think it will have an impact on inflation. Now the question is whether this will be inflationary enough for us to actually notice or whether the impact on core inflation numbers will be so small that it will be a worthwhile policy. I think that’s a valid point, but there’s no point in saying it won’t have any impact because it’s misleading. And this is the argument advanced by Marc Goldwein. He’s not claiming it’s going to have a huge impact, but he’s claiming it will have an impact and it might make a difference in terms of what the Federal Reserve has to do next year.

Marc Filipino
Kiran Stacey is our Washington correspondent for the FT. Thank you Kiran.

Kiran Stacey
Thanks Mark.

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Marc Filipino
Before we go, we want to let you know that this Saturday is the annual FT Weekend Festival. It’s in London, but you can attend virtually with a digital pass. The FT Weekend Festival features music, art and wine and great speakers. Our friends from FT weekend podcast will be there in person. They’ll even have a table set up with microphones so you can find yourself on the show. The FT Weekend Festival is this Saturday, September 3. Tickets are at ft.com/ftwf. This link and a discount code can be found in the show notes.

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You can read more about all these stories on FT.com. It was your daily life FT press briefing. Be sure to check back tomorrow for the latest trade news.

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