In 2006, upset with a number of things, not the least of which was the growth in the Federal budget deficit under the Bush administration, the voters turned control of the congress back to the Democrats.  The Democrats had – among other platform promises – made the pledge to put the country’s spending on a “pay as you go” basis.  Fast forward to June 2007, and the Democrat-controlled congress pledges to make college tuitions more affordable by installing a cap on the rate for government student loans of 3.2%.  Part of the rationale was that, since the program would be funded by borrowing (yes, Uncle Sam borrows the money that it lends to students) the interest rate should at least cover the cost of capital and the associated administrative expenses.  Acknowledging that interest rates could rise in the future, the legislation kept the3.2% rate until July 2012, and then had it double to the fiscally sound rate of 6.4%.  Why they chose only a five-year period is open to conjecture, but it is interesting that the automatic rate increase would come only four months before a national election, making any steps to allow the rate to rise end up looking like a ”tax hike”. Nonetheless, to keep things fair, the rate hike would only apply to those loans originated after the July 2012 date.  So much for phase 1 of the history, now on to phase 2.

As part of the Patient Protection and Affordability Care Act (Obamacare) passed by the Congress in 2010, the Federal government took over the 4/5ths of the student loan program that is Federally-backed.  The excess revenue expected to be generated by student loans originated after July 2012 then went into the pot as part of the Congressional Budget Office’s scoring of the legislation’s cost.  So there you have the rub.  If the annual rate is allowed to go to a more realistic 6.4% (fixed), the flow of cash back to the government will be part of the revenue side of the Patient.  If it does not go up, then the positive side of the cash ledger takes a hit, and Obacare’s cost to the nation becomes uglier.

Now for the mechanics -As cited above, the rate will go up on only those loans that are Federal controlled (about 4/5ths of the $1 Trillion total), but only for those which are originated after July 2012.   No effect one way or the other on the $1 Trillion already out there.  Now for some other inconvenient truths:

1. The average debt for those students who currently have loans outstanding is somewhere in the $23,300 range according to the Federal Reserve.   This includes all those who are pursuing post graduate work – doctors, lawyers, English literature PhD candidates, etc.
2. The median debt for those students who currently have loans outstanding is somewhere in the $12,800 range.  Median debt means that one-half of all loans are for less than $12,800, and one-half are for more than $12,800.  Why the difference?  Many of the loans are for only a portion of the tuitions, and many are for qualified post-high school education other than at a four-year college.  The bottom line is that while there is a tremendous amount of debt out there, not all of those who have a debt are carrying more than the equivalent of a car loan.
3. The US Department of Education and the White House have stated that, based on the $23,000 average, keeping the interest rate at 3.2% will save the student a little over $1,000 in interest payments over the life of the loan.
4. Sallie Mae (the Federal issuer of such loans) says that atypical term for such a loan is about ten (10) years.  Doing the math, if the interest rate is not kept at 3.2%, that additional $1,000 expense would burden the typical student loan holder with an additional payment of approximately eight dollars ($8.33)per month.   If that holder of the student loan was enrolled in a four-year college, and graduated on time, he would have to start paying this burdensome additional $8.33/month in July of 2017.

This is a manufactured political issue being raised in an election year to pander to voters who are unwilling to examine the facts.

     Forty years ago, The Limits to Growth, a report to the Club of Rome was released  with great fanfare at t conference at the Smithsonian institution.  The study was based on a computer model developed by researchers at the Massachusetts Institute ofTechnology (MIT) and designed "to investigate five major trends of global concern - accelerating industrial development, rapid population growth, widespread malnutrition, depletion nonrenewable, and deteriorating environment." . . . In 1972, the Limits researchers estimated known global oil reserves at 455 billion barrels.  Since then the world has produced very nearly 1 trillion barrels of oil and current know reserves hover around 1.2 trillion barrels, a 40-year supply at current consumption rates.  With regard to natural gas supplies, the International Energy Agency las year issued a report asserting, "conventional recoverable resources  are equivalent to more thatn120 years of current global consumption, while total recoverable resources could  sustain today's production for over 250 years."

Anyway, the numbers for the first full year of its impact were released and they show that Britain's richest taxpayers are simply shifting their incomes, or themseles, offshore.  Arthur Laffer validated once again.  When the tax base is mobile and has choices, as tax rates go up, tax revenues ultimately will go down.

Anyway, Senator Schumer proposes giving corporations a one-year break by reducing the US corporate tax rate for repatriated profits to 5.25%.  Economists estimate that there are north of $1 trillion in profits abroad that could be repatriated.  Under this scenario this could net the US Treasury $525 billion in tax receipt revenues.    This is not the first time that such a proposal was tried.  In 2004, a similar one-year break was put in effect.  According to the IRS more than 800 firms repatriated over $360 billion in profits and delivered a windfall of $18 billion in federal tax revenue.  Could it be that the Laffer Curve is once again validated, and a decrease in a tax rate could result in an increase in tax revenue?

Today I received my new card and activated it as directed.  I then attempted to notify two of the three organizations that charge their monthly bills to it.  They made the changes practically instantaneously.  Then I tried to do the same for the monthly Sprint bill for our “family plan.”  I must note that my wife – that named account holder – and two of my children are no longer on the plan.  They have all found providers they prefer and have gone elsewhere.  Primarily out of laziness I suppose, my son and I still have cell phone service with Sprint.  Not having the requisite usernames and passwords to do it on line, I called customer service.  I explained my situation and asked that the bill now go to my new credit card since the old one would reject the charges for Sprint service.  No one could help me the account was not in my name and I did not know the PIN.   I explained the circumstances and offered all other means of identification.  I repeatedly stated that I just wanted to arrange for Sprint to be paid as before, but with the new card- all to no avail. 

I was told that Sprint could send me a form through the US mail and that I could fill it out and that it would take effect in thirty to sixty days. I noted to the Sprint representative that the thief who had stolen my earlier card numbers managed to acquire five Cricket accounts and one T-Mobile account all in the space of a few hours.  I also pointed out that I could go into a Sprint store today, close the current account, walk across the mall and open a new account in less time than I had been kept on hold for that phone call.  This only resulted in me being escalated to a higher level in the Sprint customer service food chain, but with a representative who had a nicer voice.  The same scenario was then repeated.  I was then sent up another rung in the customer service ladder – again a nicer voice, but with the same result.  I finally made it to the fourth level.  Apparently that is where Sprint keeps it most solicitous and sweet-voiced representatives.  That being said, the same scenario played out as at the other three levels.  I can only surmise that Sprint’s method of dealing with dissatisfied customers is to offer ever-increasingly dulcet tones of non-cooperation.

The result is that I am paying off the outstanding Sprint bill directly, and am sharing this experience with you in the hope that you will share it with others.  Maybe if Sprint loses enough customers they will actually start trying to do right by them.  Oh, by the way, I am switching cell phone carriers.  Any suggestions?

I still believe that the government is understating the real inflation rate, and that commodities of many varieties will be generating some significant returns again this year.   Have you been to the gas pump or grocery store lately?    As a result I have placed orders for the following two additional purchases.  First is Schlumberger NV, (SLB) an international company that pretty much leads the world in oil exploration technology.  The second is a very small Canadian company that recently acquired the sole license to one of the largest rare earth element mines outside of China functioning in the world.  It concurrently acquired the license to operate the co-located refining operation.  These are located in Kyrgyzstan, one of the former republics of the Soviet Union.    This one is a bit risky and I limited my exposure because it could all go down the toilet in that turbulent region.  That said, the potential size of the reward is comparable to the potential risk.  Mitigating the risk is the change in government there over the past year, its continuation of a lease to the US for an airbase there, and relative strong balance sheet of the Canadian company.  Once again, it is a small cap high risk stock, and not for the squeamish. It is Stans Energy Corporation (STZYF).   So I am making one conservative play and one aggressive one.  I’ll keep you informed as the year goes by.

With regard to my portfolio, I am not too sanguine about the continued near term outlook for Bank of America (BAC).  The hubbub of the holidays has clouded the view of a lot of economic straws in the wind that give me concern.  I think that foreclosures will heat up again and BAC will take some hits to its balance sheet in the process.  Ultimately this will be a good thing, and overdue.  While I still think that BAC is underpriced, I expect the market psychology may cause a drawback in financial stocks with large consumer exposure.  BAC is waist deep in the private mortgage market and we have not seen the bottom yet in my opinion. As a result, I expect to put in a sell order on my BAC holdings and take a profit in the early part of 2011.  Where will I redeploy?  Right now I am looking at commodities, metals, mining and energy stocks.  If I had the cash available last fall I would have taken a position in SPDR Gold Shares (GLD) and exchange traded fund.  At the end of September it was trading at $128.91.  It closed out the year at $138.72.  That amounts to a 7% gain in 90 days. It was pretty much the same story for all of the gold ETFs.  They had an average run up of 30% this year.  I wonder if there is still some more room there?