. 2023. Richard Vague. University of Pennsylvania Press.
In 2004, Vice President Dick Cheney received no small amount of ridicule when he said: “[President Ronald] Reagan proved that deficits don’t matter.” Richard Vague suspects that Cheney could have been right.
In: Vague – banker, enterprise capitalist and Pennsylvania Secretary of Finance and Securities – makes a giant contribution to the argument. The book’s postcard version of the “paradox” is that there could be no growth without debt and that growing economies organically generate inexorably rising government and personal debt. There’s nothing particularly bad about such step by step increasing debt, claims Vague; They are a standard a part of the increasing prosperity that comes from technological progress, which requires increasingly more financial resources. Yes, occasionally excessive debt results in a crisis, but only under certain conditions.
The added value that Vague adds to this unconventional concept is his detailed study of national money flows between the various sectors: households, financial sector, non-financial corporations, government and what he piquantly calls ROW (Rest of the World). For example, the huge federal stimulus measures in 2021 resulted in income “gains” of $1.77 trillion, $0.86 trillion, and $0.30 trillion, respectively, to the private sectors, the ROW, and accrued to the non-financial corporate sector and were almost entirely offset by the “loss” borne by the state sector.
The writer is just not a fan of Milton Friedman’s claim that inflation is “always and everywhere a monetary phenomenon.” He claims that price increases in each the Seventies and up to date years were more likely as a result of supply shocks. Vague adds that a more systematic examination of the connection between inflation and money supply “shows that periods of low inflation are sometimes preceded by high money growth, and that episodes of high inflation often occur without high money growth.” He also notes that the cash supply exploded when the Inflation eventually fell to 2% in 1986. Vague expects that with today’s higher debt levels, monetary tightening will likely be way more painful than within the Volcker era, a prediction that has not yet been confirmed.
In keeping with the title, much of the book deals with the “paradox of debt,” the stress between debt because the lifeblood of a growing economy and the risks that include an excessive amount of of it, with a deal with exactly what constitutes “too much.” ” Start with essentially the most commonly used measure, the ratio of debt – private and non-private (which incorporates each households and non-financial corporations) and their total debt to GDP. Vague points out that the tolerable values of those metrics should be taken under consideration in relation to the scale of the country’s financial sector. On the one hand, Argentina’s underdeveloped financial sector didn’t tolerate a public debt to GDP ratio of 81% in 2021; On the opposite hand, Japan had a national debt of 221% of GDP in 2021 without breaking a sweat. Although most highschool students learn concerning the U.S. government’s crippling Revolutionary War debt surplus, it only amounted to 25% of the brand new nation’s GDP, which was indeed an enormous problem in a brand new nation with no functioning economic system is.
In Vague’s taxonomy, debt could be further divided into Type I and Type II, that are used to buy latest and existing assets, respectively. Type I debt corresponds to economic growth, and Type II debt, for instance for the acquisition of existing real estate, is added, in order that total debt as a percentage of GDP tends to extend inexorably, as could be seen in just about all developed nations in recent centuries. For example, see the US total debt to GDP ratio within the chart below.
Ratio of total U.S. private and non-private debt to GDP
Source: Tychos group
Growth could be driven by three different sources of debt: government, corporate and household. Is there a option to grow an economy without debt? Yes – with a trade surplus – but even countries with large trade surpluses like Germany and China still finance the lion’s share of their growth largely from private debt. There can also be a positive relationship between debt levels and asset prices. This connection is most clearly demonstrated by the strong bull market within the wake of the huge increase in US national debt because of this of the response to the COVID-19 pandemic. The writer also points out that Germany’s lower private and government debt results in lower stock prices because Germany fuels its economic growth partly through an export surplus.
Vague examines the temporal patterns of private and non-private debt for the United States, the United Kingdom, Germany, France, China, Japan, and India. He develops a compelling cyclical model of the interplay between private and public debt across 4 eras within the United States, each starting with a significant and dear conflict: the Revolutionary War, the Civil War, World War I, and World War II.
All 4 cycles saw the buildup of huge amounts of presidency debt to finance the war effort, followed by a “debt shift” to non-public debt, by which government debt was replaced by private sector debt, which stimulated the economy and paid off the federal government debt contributed. The spectacular rise in private debt to GDP after World War I, shown below, fueled the stock bubble of the Roaring Twenties. Vague, like others, points out that the rapid increase in private debt will likely be followed by a financial collapse, which is accompanied by rapid deleveraging within the aftermath.
Ratio of US national debt to GDP and US private debt to GDP
Source: Tychos group
The end of the primary two cycles, which occurred roughly within the 1840s and the last twenty years of the nineteenth century, saw devastating depressions that were probably as severe as those of the Thirties. There was no government rescue in these first two eras. However, the last two cycles have seen a brand new, fourth phase of presidency bailouts, driven by government debt in the course of the New Deal, after the savings and loan crisis of the late Nineteen Eighties, after the worldwide financial crisis of 2007-2009, and again in response to the COVID-19 pandemic.
Like many observers, Vague identifies the rapid accumulation of personal – and particularly private – debt as a key risk factor for an ensuing financial panic. His data set suggests that any increase in private debt of greater than 15% over a five-year period sets the stage for a self-perpetuating cycle of debt-driven asset price increases and the associated euphoric further increases in debt and asset prices, as shown below.
Five-year increase in U.S. private debt to GDP
Source: Tychos group
Government debt is much less dangerous because governments can print their way out of the crisis (assuming the debt is denominated within the local currency). At this point, the writer addresses Cheney and explains that “there are no limits to the growth of national debt, or at least no limits that would become significant anywhere near as quickly as private debt.” Long before excessive national debt results in systemic fiscal instability, the resulting asset price inflation will result in societal instability arising from wealth and income inequality, in accordance with Vague. The Cure? Debt relief modeled on the debt jubilees repeatedly seen in ancient Mesopotamia, where the 20% rate of interest on silver loans and the 33% rate of interest on grain loans drove small farmers into insolvency faster than you’ll be able to say “compound interest.”
Perhaps Vague is true about all of this, but most readers would still prefer to see a discussion concerning the risk of a sovereign debt spiral, for which Japan is actually the canary within the coal mine, if rising bond yields in that country push servicing costs beyond tolerable limits.
is marred by a more serious – and potentially fatal – omission: it’s greater than strange that such a comprehensive work of macroeconomics doesn’t contain a bibliography or substantive references. For example, although the book outlines Hyman Minsky’s groundbreaking work on leveraging/de-leveraging booms and busts, it doesn’t discover it by its name – the instability hypothesis – let alone provide a citation. One wonders how the acquisitions and structure editors on the venerable University of Pennsylvania Press gave the book such a blatant veneer. Vague names 4 employees but doesn’t discover the organization where he and so they apparently work. If you do a bit research, you will find that Vague and his associates are affiliated with an obscure non-profit organization, Tychos Analytics Group. To be fair, the book does contain appendices, certainly one of which links to the net data files on which the book’s text and graphics (and this review’s exhibits) are based.
This lack of bibliographic referencing is a shame. It is with some trepidation that this reviewer recommends investment professionals read this engaging and provocative volume, but they need to reserve judgment for a greater documented treatment of the book’s fundamental points.
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