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How does debt cancellation affect the economy?

According to a 2018 paper from the Levy Economics Institute of Bard College, canceling the entire student debt balance — which was $1.4 trillion at the time — would have positive effects on the economy. It would boost real GDP by an average of $86 billion to $108 billion per year over a decade and reduce the unemployment rate.

However, Schiff, who famously predicted the 2008 financial crisis, is clearly concerned about the negative impact of debt cancellation.

His argument, squeezed into a 49-word post on X, is that the “money not used to repay loans” — due to the Biden administration’s significant student debt cancellation — is staying in Americans’ wallets and, consequently, fueling inflation.

The money is “freed up to buy goods and services,” which he claims is “bidding up prices.”

On the surface, Schiff’s argument checks out. When people have more money, their demand for products and services can rise, which will to pull up prices if production output doesn't keep up. However, the magnitude of any inflationary effect from student debt cancellation is debated by economists.

For instance, the Levy Economics Institute paper goes as far to say the inflationary effects of canceling all student debt would be “macroeconomically insignificant,” and a 2022 analysis from the nonpartisan Committee for a Responsible Federal Budget estimated that it would increase the inflation rate by between 10 and 50 basis points (0.1 to 0.5 percentage points) in the first year.

So far, most of the federal student loan relief has targeted low- to middle-income Americans — many of whom have really felt the pinch of high interest rates and inflation in recent years.

“Aren’t the only loans forgiven the ones who have good standing after 10 long grueling years of punishing interest rates?” one X user wrote in response to Schiff’s post. “I’m not saying all loans should be forgiven, but millions are paying student loans well into their 40s. Forgiveness is a good thing sometimes.”

It's possible such a targeted approach won't swing the inflation needle much, but time will tell.

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In a separate tweet this week, Schiff also complained that the Federal Reserve isn't doing enough to cool inflation.

He wrote: “Despite claims to the contrary by Fed officials, current monetary policy is not restrictive. It's not restricting consumer or government borrowing and spending. It's not restricting the stock market. Instead, the Fed's policy is stimulating borrowing, spending and asset prices.”

Schiff has predicted that instead of falling down to the Fed’s target of 2%, “it's far more likely that inflation rises back up to 9%." He added that the Fed and investors “have the inflation story completely wrong” and advised investors to buy gold.

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Bethan Moorcraft is a reporter for Moneywise with experience in news editing and business reporting across international markets.

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