Will student debt add up to more inflation?

This is an audio transcript of the FT News Briefing podcast episode: Will student debt add up to more inflation?

Marc Filippino
Good morning from the Financial Times. Today is Wednesday, August 31st, and this is your FT News Briefing.

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ExxonMobil is taking on Russian President Vladimir Putin. We’ll see how far it goes. The world’s second biggest cinema chain is on the brink of bankruptcy and struggling to figure out its own corporate structure. Plus, US President Joe Biden has announced a student loan forgiveness plan. Many economists think it will add up to more 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 cinema chain is about to file for Chapter 11 bankruptcy in the US. Cineworld is trying to restructure its nearly $9bn in debt and lease liabilities. The company borrowed heavily to expand and compete with its US rival AMC. It bought up chains in the UK and in the US and tried to buy a Canadian chain as well. But the business unravelled during the coronavirus pandemic. Now the FT has learned that Cineworld corporate structure is so complex, the company incorrectly reported the identity of its largest shareholder in its latest annual report. Cineworld web of holding companies have raised a ton of debt against its shares, which are down 90 per cent this year.

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ExxonMobil could be heading towards a big legal showdown with Moscow. Earlier this month, Russia’s President Vladimir Putin signed a decree barring energy companies from shifting 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 exit Russia in the wake of Moscow’s invasion of Ukraine. Here’s the FT’s Houston correspondent Justin Jacobs on Exxon’s response.

Justin Jacobs
So they put forward something called a notice of difference. And basically what this does is it kicks off a round of negotiations between Exxon officials and Russian officials, and things are pretty interesting. We are looking at a fight between Exxon, the biggest western oil major, and Putin right now.

Marc Filippino
Now Justin, how much a leverage does Exxon have in this fight?

Justin Jacobs
Not a lot, to be honest. They’ve written down the value of their projects in Russia, it was about $4.6bn. I mean, one, you know, issue is this project, it’s on Sakhalin Island in Russia’s far east. And this project provides electricity and power and heating actually to local communities around the area. And, you know, one of the issues raised by Exxon is that they don’t want to have to shut it down before winter comes and leave local communities without power. So I think that’s an issue that they’ll raise in negotiations and try to get Russia to move forward.

Marc Filippino
OK, but how much of this is just to show shareholders that they’re not going to roll over and give in to Moscow without putting up some kind of fight, right?

Justin Jacobs
Yeah, I think so. I think they have to follow a process and show the shareholders that they’re getting out in a correct way. This is a huge project. It’s extremely technically complicated. It’s, you know, a difficult project to manage. It’s in inhospitable climates. So it’s a difficult project for them to pull out of. They can’t just kind of hand over the keys to, to anybody. So I think that they, you know, want to show their shareholders that they’re doing it right. And, you know, if this process continues on and they don’t find a resolution here in the next month or two with the Russian government, and I think it’s very likely that they’ll move it into international courts and try to get in arbitration where, you know, they could end up suing Moscow for financial damages as well.

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

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Tens of millions of Americans are weighed down by debts they took on to pay for higher education. Collectively, they owe more than one and a half trillion dollars in student debt. But last week, US President Joe Biden said he was going to cancel up to $10,000 in student debt for those under a certain income level. Many cheered the move, others condemned it. And economists are debating the effect it will have on inflation. Our Washington correspondent Kiran Stacey looked into this and joins me now. Hey, Kiran.

Kiran Stacey
Hey, Marc. How’s it going?

Marc Filippino
It’s going well. So Kiran a lot of people around the world already know that US higher education is shockingly costly. How big of a problem is this for Americans?

Kiran Stacey
The level of indebtedness thanks to student loans is massive in the US. Lots of people owe more than they ever borrowed in the first place. The burden falls disproportionately heavily on poorer people and on black borrowers as well. If you think about, for example, a poor borrower starting higher education, taking out a loan, they typically pay higher interest rates because they have fewer assets to begin with. So they’re a slightly riskier bet for the bank. Therefore, they’re paying higher interest rates that accumulate throughout their lives. There is a social problem here.

Marc Filippino
OK, so that’s the social problem with high tuition for higher education. But the economic problem that’s being debated right now is whether debt cancellation will make inflation worse. I want to hear from Marc Goldwein now. He’s with a non-partisan public policy organisation in Washington, DC called the Committee for a Responsible Federal Budget.

Marc Goldwein
When economy is saturated as is, as it is right now, any new spending is going to lift price levels. So if you tell people you no longer have to pay down your debt and instead you can use that money to go out and spend in the economy, that’s going to worsen inflation and it’s going to mean higher prices at the grocery store, at the gas pump, for furniture, you name it.

Marc Filippino
OK so what he’s saying is that this programme is just not coming at the right time with inflation running so high, right?

Kiran Stacey
I think that’s one of the reasons that this has been more controversial than maybe some Democrats thought it was going to be. Because the problem that the president had when he announced it is all the things that would flow from this, that was supposed to be beneficial, in this economy might actually not be a great thing. So when he’s talking about freeing up money so that people can start their own businesses, buy their own homes, pay for things they want, in normal times, that’s all great. But when inflation’s already very high, this is where economists start to worry. Wait a second, if people just take this money and go out and spend it, that could just further fuel inflation.

Marc Filippino
Now, on the other hand, there is a report out from Goldman Sachs that says student loan forgiveness 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 is going to have zero impact on inflation, in part because we’re going to restart loan payments at the same time, and in part because loan payments on these debts that are being cancelled would have been stretched out over 20 years. So the amount of increased discretionary income that folks are going to have and the amount of additional borrowing capacity that they’re going to have is very little. And we know that folks tend to save when they, for building wealth, when they have this kind of debt cancellation. They don’t tend to go on a spending spree or go take out additional loans to spend more.

Marc Filippino
OK so that sounds logical. But the opposing argument also seems to have something to it. And we actually did ask economist Marc Goldwein not just if there would be inflation from all this, but how much and when we would see that inflation. And he estimated it would be a quarter of a per cent over a year from when the student loan forgiveness programme went into effect, which doesn’t seem like much, but he said it could be meaningful.

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

Marc Filippino
And Kiran, what do other economists say.

Kiran Stacey
Every little bit added on to inflation makes a difference. Most economic analysts don’t believe it will have zero impact on inflation. They believe it will have some impact on inflation. Now, the question is, will it be inflationary enough for us actually to notice it or will the impact on the underlying inflation numbers be so small that it’ll be a policy well worth taken. I think that is an argument worth having, but there’s no point in saying it will have zero impact because that’s misleading. And that’s the argument that Marc Goldwein makes. He’s not claiming that it’s going to have a huge impact, but he’s claiming that it will have some impact and that could make a difference in terms of what the Federal Reserve has to do in the next year.

Marc Filippino
Kiran Stacey is our Washington correspondent for the FT. Thanks, Kiran.

Kiran Stacey
Thank you, Marc.

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Marc Filippino
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 the FT Weekend podcast will be there in person. They’ll even have a table set up with microphones so you could end up on the show. FT Weekend Festival is this Saturday, September 3rd. Tickets are on ft.com/ftwf. That link and a discount code are in the show notes.

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You can read more on all of these stories on FT.com. This has been your daily FT News Briefing. Make sure you check back tomorrow for the latest business news.

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