What Economists Aren’t Telling Us About Debt

Guest post by Richard Vague, who is the author of new book The Paradox of Debt, he is an investor and entrepreneur. 

In developed economies, increased government debt increases household wealth. That’s what most economists aren’t telling us. Government money does not disappear when it is spent. Instead, it largely goes into the accounts of households, directly through salaries and other payments and indirectly through the salaries of those who work for vendors of the government.

What Economists Aren’t Telling Us About Debt

As testimony to this, during the three years of the pandemic, 2020 to 2022, UK government debt increased by £602 billion, but UK household wealth increased by a much greater amount, an estimated £1.7 trillion. That increase came from government spending and payments to households, plus the increase in the value of stocks and real estate that came from the flood of increased pandemic-era government debt and spending.

In total, household wealth in the UK, at £12.6 trillion, towers over the £2.5 trillion in government debt, and households own much of that UK government debt as an asset.

There’s a similar story in the US. There has been a massive global boom in the growth of debt since roughly 1980. Since that moment, in the US specifically, total debt—government, business, and household debt combined—has climbed from 134 percent of GDP to 272 percent. But during that exact period, household wealth has climbed from 340 percent to a whopping 574 percent of GDP, the greatest period of increased household wealth in world history.

Household wealth has increased because government spending ends up in household accounts, and because the money unleashed by this debt-fueled spending pushes up the value of real estate and stocks, which are the primary components of household wealth.

But doesn’t excessive government debt cause inflation?

No. For developed economies, there is no compelling evidence that it does. There was no inflation in major Western economies after the massive government debt growth that followed the Global Financial Crisis, nor in Japan after the massive government debt growth that followed its 1998 crisis.

The notorious 1970s bout of inflation was largely a function of the ten-fold increase in the price of oil to $39 a barrel which came with the 1973 Yom Kippur War and the Iranian Revolution in 1979. This inflation was vanquished not by high interest rates, as many believe, but by US domestic oil price deregulation, which drove North American oil production from 12.2 million barrels per day in the late 1970s to 15.3 million barrels per day by 1984, and brought the price of oil to $12 per barrel by 1986 – sending inflation tumbling to 2 percent.

Policymakers and business leaders should look through the misconceptions surrounding government debt and recognize that its growth can bring household wealth and does not lead to inflation. There is room for a strategic increase in key areas of the government budgets, and there are any number of areas that are ripe with opportunity and could readily boost economic growth—from worker training to green energy and infrastructure spending and more.

Developed countries should look to take advantage of that opportunity.

The Paradox of Debt – A New Path to Prosperity Without Crisis by Richard Vague is out now.

Author Biography:
Richard Vague is the author of new book The Paradox of Debt, he is an investor and entrepreneur. He has served as the Secretary of Banking and Securities for the Commonwealth of Pennsylvania and co-founded two US banks – First USA, which was sold to Bank One and Juniper, which was sold to Barclays.

More about the book

When we talk about debt and its impact on our economy, we almost always mean “government debt.” However, this is only a small part of the picture: individuals, private firms, and households owe trillions, and these private debts are vital to understanding the economy.
In this iconoclastic book, Richard Vague examines the assets, liabilities, and incomes of the entire country, private and public sector, to reveal its net worth.

His holistic analysis shows that the real factor that drives both financial crises and spiraling inequality?but also, paradoxically, economic growth?is ever rising private debt. The paradox is that while debt is essential and our economy relies on it, it also brings instability unless it is periodically deleveraged?and that is very hard to do. It can, however, be carefully managed, and Vague ends the book by showing how to do so in policy areas ranging from trade and housing to financial policy and student debt.

Underpinned by pioneering data analysis and the author’s lifetime of experience in the financial world, this book is essential for anyone who wants to understand the deep, underlying dynamics of the American economy.

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