Purchasing Power Equals Debt in This Economy

Education — especially college education — has seen the greatest inflationary spiral of any major sector in the last three decades, killing not only the echo boomer’s purchasing power, but also that of the baby boomer’s.

Tuition costs have risen 9.8 times or 878% since 1980!

In comparison, health care costs have “only” risen 507% while overall consumer inflation is up 203% over that same time frame.

In the last 14 years alone, tuition costs have more than doubled!

We can blame much of the inflation on educational institutions’ insistence on major investments in facilities and campuses during the real estate bubble. The more expensive the building, the more students must fork out for their education.

The thing is: this situation in the education sector is completely and utterly unsustainable… an extreme bubble, just like everything else these days… and it cannot — and will not — last much longer.

A massive shake-out is coming…

Education is Killing Our Purchasing Power

Like everything else in the economy, college education has its own predictable demographics.

Look at this chart. It shows a 51-year lag on the immigration-adjusted birth index for the peak in spending on college tuitions.

Why a 51-year lag? Because on average, we spend the most on college education when we’re 51 years old. The average kid is born to the average parent at age 28 to 29 and they’ll graduate from college at age 22 — when mom and dad have passed the big five-o milestone.

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As you can see, the peak in education occurred already in 2012.

This peak is confirmed by a look at the echo-boom birth rates, which first peaked in 1990. A 22-year lag on that index (for the average age at which kids graduate from college) also shows the peak at 2012.

Now there will be a seven-year decline in graduations into 2019 until the second wave of echo boomers, which peaked in 2007, push their way through the education system, creating another peak in 2029.

That first decline — the one we see happening now — coincides with my four key long-term cycles, all of which show a trend downward until 2019 or 2020.

And that tells me a perfect storm is developing over education, especially colleges and universities, which will violently shake out the sector, transforming it in the process.

The truth is that colleges and universities have had the average, more affluent household over a barrel for decades. Heads of such households want nothing more than to get their kids into the best colleges to give them the edge in the future.

Yet upward mobility has declined in the U.S. due to the high costs of getting kids into college, and the rise of student loans have burdened those less fortunate, making it harder for them to even afford a house. (Rodney Johnson wrote a piece not too long ago on purchasing power and how our cost of living is changing — whether you realize it or not.)

Balancing Purchasing Power and Education

Clayton Christensen is a professor at Harvard Business School (my alma mater) and author of The Innovator’s Dilemma, a book I’ve always loved.

He sees a revolution in education coming over the next 15 years that will put many colleges out of business unless they jump onto the online education bandwagon.

In particular, he believes our prestigious school faces an innovator’s dilemma of its own. Does it offer an online equivalent of its infamous case-method approach to teaching (the best thing I ever went through in education) to head off the competition ahead? Or does it stay offline and fight an almost impossible-to-win fight?

Michael Porter, the most famous business strategy professor there, believes the institution should have a limited, pre-MBA online course that helps prospective students get into Harvard’s two-year, on-campus, case-method course (which is, of course, very expensive).

Christensen, on the other hand, believes Harvard should move the entire course online.

I can tell you now that Harvard will follow Porter’s approach because it will stubbornly protect its high-end model for as long as possible. That’s a natural response. But it’s also likely a mistake, and one that Harvard could pay for dearly down the road.

Personally, I believe a hybrid model for college education would be ideal. Certain basic classes that require more interaction among students and professors can be on campus, while the best technical classes and expertise from around the globe are taken online.

Regardless of how it happens, or what it ends up looking like, expect a major revolution in education to occur during the next six to 10 years.

This will make higher education affordable again, and be the straw on the camel’s back that will eventually break the upper-class lock on this powerful sector.

As we move through this education revolution, we will be on the lookout for opportunities that will allow you to maximize your benefits from the changes.

Stay tuned.

In the meantime, I suggest you prepare for a shakeout that could hit us far sooner than the education one I see ahead. I call it the “safe-asset slaughter,” and it’s a life-altering event you want to prepare for as soon as possible — or at least be aware of. Knowing is half the battle — especially in this economy.

Harry

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Categories: Economy

About Author

Harry studied economics in college in the ’70s, but found it vague and inconclusive. He became so disillusioned by the state of the profession that he turned his back on it. Instead, he threw himself into the burgeoning New Science of Finance, which married economic research and market research and encompassed identifying and studying demographic trends, business cycles, consumers’ purchasing power and many, many other trends that empowered him to forecast economic and market changes.