May, 2012 archive

You cannot solve a problem with the same thinking that created the problem.

That quote has been attributed to Albert Einstein. I am not sure in what context he said that, but when it comes to the current escalation of student and parent debt, there could be a lesson to be learned. One does not have to look far to recognize that there is a problem. To solve the problem, therefore, we must NOT rely on the same thinking by the people (or institutions) that created the problem.

When the world was getting back on its feet following World War II there was huge expansion in the US economy.  As in WWI, the nation was not subject to the civilian genocide and property destruction in Europe, Asia and elsewhere. We were seen as the leader of the western world.

In fact, in July of 1944, 760 delegates from 44 countries met in Bretton Woods, New Hampshire at the  Mt Washington Hotel to set monetary policy for the civilized world. The delegates agreed upon a monetary policy that set the US dollar (backed by gold and silver), as the standard for world currency. From that event came the International Monetary Fund (IMF) and the system of exchange rate management was set up.

That system stayed in place until the country overspent during the “guns and butter” decade of the 60’s. The decision was made to take the dollar off the gold standard in 1971. Watch this short historic video when President Nixon announced that action. That marked a significant issuance of fiat currency (money created out of thin air) by the Federal Reserve, a devaluation of the dollar and ever-increasing debt.

I know it may be a fantasy of mine, but I suggest that we teach basic money management in every high school. Many students who major in economics in U.S. colleges do not even understand the exponential value of money. Nor do they know as much as this bright 12 year old has already learned in Canada. I once interviewed a graduate of Harvard for a management position I had. He majored in Economics and when I asked him if he could explain the Rule of 72 as it relates to money, he did not know what I was talking about!

The problem is that we are a society that does not save, we spend. Saving, not spending grows the economy. This is not what we are taught in school. Believing that a college education is a right (or even a necessity) is putting our kids into debt. If college is the next milestone step in a teenager’s life, he or she should understand how that financial decision will impact his or her future. So many college graduates have the rule of 72 working against them rather than for them. Over the last 25 years I have watched college costs escalate at higher than the rate of inflation. As the federal and state governments made more grants and loans available for colleges to use to fill a family’s financial need, the faster college costs went up.

The ONLY college that saw the insanity of what the governments were doing and did something about it, was Grove City College in Pennsylvania. But they had to go all the way to the Supreme Court of the United States to fight and maintain their independence! Unbelievable. Only two other colleges to my knowledge followed their example and the principles of sound economics.

Pop Quiz! Name those two colleges and I will send you in US currency what a dollar is worth in gold.

Therefore, in order to get out of this looming debt crisis, we have to teach our kids real financial literacy beyond how to balance a check book and not rely on government for solutions to an economic challenge including paying for college.