This article is part of the MGSN Global Opportunities series.
The NY Fed recently released two reports which underscore the ramifications of educational debt. Millennial are starting to sink under debt loads that commenced the minute they received their diploma.” Total debt balances grew by $394 billion in the fourth quarter of 2022, the largest nominal quarterly increase in twenty years, according to the latest Quarterly Report on Household Debt and Credit from the New York Fed’s Center for Microeconomic Data”
The report identifies trends of late debt payments on varied loan products by younger creditors. The upward trends of default in the New York Fed Report were accompanied by analytical questions on causation. It presents a position that debt lenders have lowered underwriting standards. The report leaves that analytical question as an open point. However, this analytical question should be positioned with another NY Fed Report.Total Household Debt Reaches $16.90 trillion in Q4 2022; Mortgage and Auto Loan Growth Slows
The report’s review of the growing debt issue at the year end of 2022 in the USA “Outstanding student loan debt stood at $1.60 trillion in Q4 2022. Less than 1% of aggregate student debt was 90+ days delinquent or in default in Q4 2022. The sharp drop in the student debt delinquency reflects the beginning of the Fresh Start program, which marked over $34 billion defaulted loans as current, amid the continued repayment pause on student loans.”
It noted both an encouraging metric and a metric of concern. The metric of concern is that as the millennials approach middle- age they are carrying over a trillion dollars in debt. The middle -class segments of the population are the big drivers of a nation’s economy. They are the buyers of a nation’s businesses’ products and service lines. They produce the largest tax contributions and shepherd the next generation into productive and contributing adulthood. This metric should be aligned with the point of the aforementioned analytical question concerning the rising level credit default by millennial borrowers. Debt is a product that financial firms sell. The middle-aged consumers usually have significant income and solid debt profiles.
The millennial debt is the result of an unprecedented and extreme rise in the cost of education, which was traditionally the path to middle and upper class and investment and purchasing power.
How will this key cycle of stability in the US continue when an entire generation is drowning in over a trillion dollars in debt?
As mentioned above the NY Fed report contains an encouraging metric, debt default abated when the young borrowers were presented with the debt restructuring program. The Fresh Start program, which was bitterly opposed by special interest groups, merely restructured debt. Despite the hyperbole, it is not a more viable debt forgiveness program. Nevertheless, the default rates dropped under Fresh Start.
The young Americans are not alone in facing bleak debt barriers to growth. One of Globes largest Millennial and Gen Z population is in the promising AfCFTA (African Continental Free Trade Area) market. The World Bank issued a debt sustainable report on the sovereign debt across the AfCTA market. The Finance Minister across the African continent provided crucial data points that the World Bank utilized in assessing the debt vulnerabilities of the youthful nation’s. The IMF-World Bank identifies a potential debt crisis in a market that will be the center of consumer activity. There are already 8 countries in debt distress and 13 other countries are in risk of debt distress.
Since North America and European markets are facing acute population contraction, it would be in the global interest to restructure the crushing debt that the millennial demographics are facing in the US and in Africa. The benefit of the short-term investment into the restructuring would empower a crucial demographic that is needed to drive growth and innovation.
However, the ferocious battle the creditors and their political allies launched against debt forgiveness or even restructuring in the US underscores the feeble capabilities of a governmental solution.
Financial firms tied into Central Bank regulatory regimes are not in a position to provide the relief that is needed.
The traditional financial institutions and governments have a long history of ignoring human development which would create prosperity in favor of pursuing inflexible regulatory schemes.
An examination of the squandered opportunities in the informal economy in several African markets illuminates the limitations of governmental and financial entities.
The vast majority of employment across the African continent is in the informal economy. According to the International Labor Organization, “Nearly 83% of employment in Africa and 85% in Sub-Saharan Africa is informal, absorbing many of the continent’s young employment seekers.”
Informal Economy is decoupled from any government policy or corporate entity that is registered with a government entity and engaged in the regulatory financial infrastructure. It’s an economy of entrepreneurs that develops out of a means of survival for a young population that is ignored by the well-connected and prosperous sectors of society. It’s an incredible base of dedicated entrepreneurs who take business failures as a setback and moves onto the next venture. The entrepreneurs of the informal economy could not qualify for business loans from structured and regulated banks. These resilient entrepreneurs could not even qualify to open a bank account.
It was in this environment that Fintech emerged as a game changer. The younger population in many of the cities across Africa had embraced mobile phones. The drive and entrepreneurial lifestyle in these cities nurtured the explosive growth of the telecom sector across the continent. By 2007 carriers Vodafone and Safaricom developed M-PESA. This product is a mobile phone wallet system. It was specifically designed for the informal economy based entrepreneurs and workers. The carriers built an agency platform, a new job creation feature. Since most of the young users didn’t have a chance of opening a bank account, the agent would credit the cash given to the agent to the user’s M-PESA account.
The digital storage and transfer features allowed the informal economy entrepreneurs to facilitate credit-based transactions with suppliers. The supplier creditors were able to receive payments by the end of the business day. The success of M-PESA drew the build out model to Tanzania, Mozambique, DR Congo, Lesotho, Ghana and Egypt.
M-PESA has grown into a business that conducts over 300 billion USD annually. This FinTech application has facilitated growth and reduction of poverty in the market that the regulated banks ignored.
However, the commercial success of M-PESA has drawn the attention of investors and competitors from commercial banking.
M-PESA is tied to the local regulated currency-based Fintech. There are several cryptocurrency exchanges that recognize the value offering of this market. These exchanges allow buyers and sellers the capability of using M-PESA.
Take away from the M-PESA development and the failure of government and financial institutions to offer opportunities to the vast informal economy offers a Plan B to the debt barriers that younger generations are facing.
Crypto has so many transactional facets it would take another article to cover these issues. But there is one facet of crypto that is worth developing, a decentralized currency that allows those outside of the regulated market, due to debt or lack of financial opportunities, the ability to conduct consumer and business transactions.
There are digital platforms that facilitate bartering between individuals and businesses, but they typically do not involve a specific digital currency. Instead, they enable users to trade goods or services directly with each other without the need for money.
One example of such a platform is Bartercard, which operates in several countries and allows members to trade goods and services using a digital currency called “Trade Dollars.” These Trade Dollars are not considered a cryptocurrency since they are not based on a blockchain or mined in the same way as cryptocurrencies such Bitcoin.
The Not-For Profit (NFP) model is the means that can provide scalability. It is also a model the young generations can sync up in addressing societal issues. According to a recent study conducted by the Bank of America Philanthropic Solutions,
“Millennials and Gen Z tend to be tech-savvy and entrepreneurial, and they frequently look to engage with nonprofits on multiple levels, preferring to use their unique skill sets as well as their money. Despite being at different stages of their personal and professional lives and perhaps not at the peak of their earning potential, both generations have a desire to make an impact…”
In the next installment of the NEW CURRENCIES FOR A NEW GENERATION, MGSN.net explores the successful history of the young generation who fought back against crushing debt that enveloped their country, during the Euro crisis, with a Fintech based barter product. MGSN will analyze the current models that are rooted in the Not-For-Profit (NFP) model and how a successful buildout will help consumer growth while reducing the obscene debt loads that the worthy pursuit of an education has caused.
Read Part Two.