Here is the full transcript of venture capitalist Richard Vague’s talk titled “The Paradox of Debt” at TEDxCapeMay 2023 conference.
Listen to the audio version here:
TRANSCRIPT:
I want to start with a pop quiz. In 2020, with Covid and all the related relief expenses, the US federal government deficit was $3 trillion dollars, and its net worth obviously declined by that staggering amount. What happened to the net worth of households in that exact same year? The net worth of US households rose by $14.5 trillion in 2020.
Government Spending and Household Income
Why? Well, the thing to note is, when the government spends money, it doesn’t disappear. Instead, it goes into household checking accounts. And here we see, in 2019 the government’s deficit was negative 1.37 trillion, and household net income was 870 billion. So not exactly the same, but very simple, similar.
There’s a couple other things going on. By the time you get to 2020, the year we just spoke about, the government’s deficit is negative 3.21 trillion. Household income rose to 2.52 trillion. When the government spends money, it doesn’t disappear. It goes into household checking accounts. Expense has to equal income.
And in case you’re wondering whether that was just 2019 and 2020, here we see US net income as a percent of GDP from 1945 to the present.
Government Deficits and Household Income
And you see, this dark black line is the government’s deficit as a percent of GDP. You can see it ending up here in this black dotted line, polka dot line may… perhaps, is household income, and you can see they are inverted. Whenever the government loses, more households make more. When the government really loses a lot, households make a lot.
There is an inversion between household income and government deficits. And let’s see how that flows into the net worth statements of these entities. This slide is busy obviously, but I’m going to make it easy for you.
Here’s the federal government’s net worth at the end of 2019 is negative 15 trillion. Household net worth in that same year was a positive 116 trillion. Household net worth dwarfs the federal government’s deficit.
Changes in Net Worth
Here, you can see with the $3 trillion loss that we just spoke about, the federal government’s net worth declines to negative 18 trillion. Household net worth climbs all the way to 131 trillion. There’s three components to that.
The first one is financial assets, basically checking accounts. And that goes from 48 trillion to 52 trillion. So you can see the money flowing into household accounts. But the two biggest components of household wealth are real estate and stocks. And the flood of money that came into the economy because of government spending pushed up the value of household real estate and stocks.
Here, you can see, real estate went from 33 trillion to 36 trillion. And the biggest change of all was stocks, where household stocks went from 45 trillion to 52 trillion. And the three things together are what made up that $14.5 trillion gain. And again, we see that not just in those two years but from 1945 forward. Here you can see household net worth as a percent of GDP.
Historical Trends in Net Worth
Way back in 1950, at about 350% of GDP. You can see by the time we get to the present, it has climbed to almost 600% of GDP. It dwarfs what’s happening in government net worth, where in 1950 the government’s network was about negative 40% of GDP, and it gets up to about -84% of GDP.
The gain on the household side overwhelms the increased deficit in net worth on the government side. Looking at the full three years of the pandemic, which, you know, let’s say it ended in December of last year, state and local government net worth went down by 1.7 trillion. The federal government’s portion of that went down 6 trillion.
Household net worth went up $30 trillion in that three year period. So why does that happen? To explain it, we need to first explain that debt always grows.
The Growth of Debt
This is one of the most overlooked, misunderstood facts in all of macroeconomics. Here is the debt, total debt, government, household and business to GDP from 1970, excuse me, to the present. And you can see for the US, which is this dark black line, it goes from about 125% of GDP to 260% of GDP.
In Japan, it goes from 125 to 400. China goes from very little to where it’s almost tied to the US in terms of the amount of debt. Debt outgrows GDP in essentially all economies. Debt growth is a feature of the system, not an aberration. Deleveraging, politicians and economists talk again and again and we’re going to outgrow it. Blah blah blah. Deleveraging essentially never occurs in any economy. When it does, it’s short lived and creates an adverse circumstance.
Debt and Economic Growth
Why does debt grow relative to GDP? Because it takes debt for the economies to grow. If you want to build a new building, if a company wants to build a factory, if you want to build a new house, almost without exception, it requires debt to do that.
And here we have a chart where we plot the growth in GDP, which is the red line to the increase in what I call type one debt. Debt for spending as opposed to debt to acquire an asset like a building or company. So debt for spending powers GDP.
Again, you can see how close that correlation is in this particular chart. Wealth grows because debt grows. As we’ve already mentioned, government spending goes into household accounts.
Debt and Household Net Worth
And government spending impacts the value of real estate and stocks. It floods the market with new money, which pushes those values up. I want to show you a little more clearly the correlation between growth and debt and growth in net worth of households.
Here you see government debt to GDP, and it was essentially flat up until about 1980.