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.
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. And you can see that household net worth was about flat to GDP until 1980. Government debt was actually getting better, but private sector debt was growing in the net was this flatness that we see.
Then in 1981 begins what I call the great debt explosion that is continued to the present. And you can see total debt to GDP goes from the 125% we already talked about to the 260%. That’s when we see the steady upward march in household net worth. Debt growth actually causes growth and household net worth. So if debt always goes up and when it goes up at asset prices, wealth and GDP go up, what’s the problem?
The Problems with Rising Debt
Well, there’s two problems and they’re significant problems. Problem number one is that rising debt tends to increase economic inequality. You can see here the net worth of the top 10% of households from 1989, which is far back as we can get a clear sense of this to the present, goes from 150% of GDP to 300%. That’s a doubling of the net worth of the wealthiest households.
You can see that almost everybody else’s net worth is pretty flat. Here’s why. Most net worth is stocks and real estate. Most net worth is stocks and real estate, and the top 10% of the country holds 65% of all the stocks and real estate in the country. The bottom 60%, that’s six zero, that’s the middle class, only holds 14% of the stocks and real estate in the country.
So as asset prices rise, inequality invariably widens. It’s the central fact driving inequality in our country. The second problem is thinking just about private sector debt, household debt.
The Debt Service Ratio
The more we have, the bigger this number get, the more of people’s incomes has to be diverted to paying interest in principle on their debt. We call that the debt service ratio, the amount you have to pay in interest in principle, in ratio to your disposable income. And from 1950 to the present, for the bottom 50% of the country, that has gone from about 15 to 18% of their disposable income to 20, almost 27%.
That’s why the economy is growing more slowly today than it did in the go go 50s and 60s. We can see for the top 10%, it really barely budges. It’s not an issue for the wealthiest. It’s a material, significant, everyday issue for the middle class and in fact, for most of the country. So that’s the story. If you want to understand inequality, if you want to understand wealth creation, the place to begin is to look to debt.
Conclusion
Then you can start asking legitimate, on target, valid questions about what do we do to rectify the situation. And a lot of our work surrounds that question. It can involve debt restructuring in a much more profound way than we have today.
It can involve periodic strategies for deleveraging, which are really beyond the scope of what we consider today in economic policy. It can involve tax policy. If there’s this much of a disparity, can we use tax incentives to incent stock and real estate ownership?
Can we boost income so that folks can start to accumulate wealth and put it into stocks and real estate? Perhaps we should accelerate job training widely across the country. In any rate, those are our my comments, and I appreciate your time today. Thank you.