In this iconoclastic book, Richard Vague examines the assets, liabilities, and incomes of the American economy as a whole, not just of the government. The book shows that debt growth in excess of GDP growth is a feature of modern economic systems, not a bug – and thus, ever-increasing leverage is built into the very structure of the economy.
In these times of conflicted narratives, it would seem clear that we need more data-driven analyses regarding a wide range of public policy issues. Toward such lofty aims, Richard Vague weighs in by addressing a series of arcane matters with the goal of making them comprehensible to larger audiences in the aptly titled ‘The Paradox of Debt.’
Vague begins by explaining the fundamental difference between public and private debt and that economists spend far too much of their time focused on the former at the latter’s expense. Yet throughout history, most of the financial crises that have occurred resulted from runaway lending in the private sector, not the public realm. He expands his thesis by pointing out that while rising debt is associated with GDP growth, it also increases inequality levels. Along those lines, Vague sides with economists Michael Hudson and Steve Keen, as well as anthropologist David Graeber, in advocating for debt jubilees – a widespread clearance of debt, with ample historical precedent – since the biggest part of private debt burdens fall on low- and middle-income households.
Debt can juice an economy ahead of competitors, as China has done since 1978. Debt can also be held in reserve, either intentionally or inadvertently, as is the case with India. Either way, however, leverage has its limits. Too little debt stunts GDP growth. Too much debt leads to financial catastrophe. The happy medium is the path Vague suggests we follow. To his credit, he does not speak in terms of abstract theory but rather as a practitioner, one well-acquainted with the real world in which most of us – economists aside – reside.
Concerning inflation, Vague takes on some of Milton Friedman’s specious arguments to good effect. No doubt Friedman was a brilliant thinker, but he was equally a clever linguist able to twist arguments in his favor like few others. For example, Vague challenges Friedman’s oft-quoted line: “Inflation is always and everywhere a monetary phenomenon.” On its face, the statement appears obvious and factually correct. However – as with so many things macroeconomic – what would seem to be apparent conflicts with evidence-based approaches. To his credit, Vague demonstrates the many instances in which an increase in the money supply did not result in inflation. Further, raising interest rates to quell inflation is indeed a blunt and painful tool, as we are re-learning today.
Vague correctly notes that this recent run-in with inflation came about because of COVID demand shocks. Building products in the face of the rising desirability of home offices, Pelotons, PPE, and other demand spikes pushed up prices for many goods and services as people stayed home. Once folks started getting out again, demand in other areas picked up, with corresponding increases in prices. The second inflationary event was the Russia-Ukraine war because both countries exported significant quantities of wheat and fertilizer. Disruptions in these key supply chains also pushed prices up. Further, Russia and Ukraine also supply substantial amounts of neon, used in the lasers that etch semiconductor chips – essential to modern living.
A somewhat novel concept introduced in the book is the use of perpetuals – securities issued by the government that do not pay interest or have a maturity date. Vague warns that their use would require discipline but could also be an effective way to mitigate risk. A combination of money created in the form of perpetuals combined with traditional debt instruments holds the promise of greater economic stability.
‘The Paradox of Debt’ contains useful policy prescriptions worth consideration – after all, legislators experiment all the time, as in the case of the recently enacted Inflation Reduction Act, which seeks to raise government revenues through a minimum corporate tax and closing the carried interest loophole. Vague’s prescriptions for bolstering spending on workforce training and using innovative financial products such as perpetuals constitute alternative strategies.
Another helpful recommendation by Vague deals with reshoring and nearshoring manufacturing – a process already underway and likely to continue in earnest for at least five to ten years. COVID-19 exposed the inherent weaknesses and vulnerabilities of tightly-coupled supply chains clearly for all to see. Resilience, adaptability, and reliability now take precedence over network designs focused on the lowest cost and highest efficiency, which are subject to unexpected disruptions from any number of quarters.
As Vague concludes, debt creates and destroys – his call for a better understanding of private lending’s role in shaping economies and the potential for crisis should not go unheeded. ‘The Paradox of Debt’ provides useful and actionable insights into the private debt markets that policymakers and their economists too often fail to appreciate.
Available in Bookstores July 11th
