Another Economic Headwind

The mainstream media continue to push the narrative that the US and Canadian economies are strong. Unemployment is low and the service sector of the economy is doing great. 

This is what is driving the soft landing hypothesis. 

But what is being overlooked is the economic headwind that is about to hit the US economy 

The US government is low on tax revenue this year. We have reported on the fact that the US Treasury has experienced as massive fall in tax collections this year. We know that there have not been any massive tax cuts announced for this year. So there is no way that the amount of personal income tax collected in 2023 can be down and the economy is growing at the same time. Those two numbers need to track each other very closely. 

Effective September 1, in less than two weeks, US student loans become due again. 

The US has 45 million people with student debt. Over the past three years, about 60% of the borrowers with student loans took advantage of a pandemic forbearance offer on student loans. That comes to 25.6 million people. The Biden administration attempted to extend this forbearance even further and this executive order was struck down by the Supreme Court. The power of the purse, that is government spending and tax collection is vested with the Congress and not the executive branch of government which is the President’s office. 

Effective Sept 1 the interest will start accruing again on these 25.6 million loans and the average payment of $300 per month will need to start coming out of bank accounts on October 1. 

For the last quarter of the year, that amounts to approximately 23B dollars that will be pulled out of the economy. Now that might not sound like a huge sum of money within the context of the entire US economy. 

But the impact is larger than just 23B. Remember that when money is spent in the economy, it tends to recirculate. This is called velocity of money, the notion that money circulates in the economy. But when a loan is repaid, the velocity associated with that transaction is zero. Those funds go to money heaven.