October 17, 2025 • 30 mins
Debt is the real factor that drives both economic growth and financial crises from recessions to extreme inequality. In order to understand this paradox, we need to address why a certain amount of private debt is vital to the economy. On this episode, we're talking to Richard Vague, an author, Former Secretary of Banking for Pennsylvania, and former CEO of two banks. His book "Paradox of Debt" reveals the role that debt plays in our lives, and how we can make better use of it without leading to crisis.
Mark as Played
Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:08):
Welcome to Virginia Focus. I'm Rebecca Hughes of the Virginia
News Network. Debt is the real factor that drives both
economic growth and financial crises, from recessions to extreme inequality.
In order to understand this paradox, we need to address
why a certain amount of private debt is vital to
the economy. On this episode, we're talking to Richard Vague,
an author, former Secretary of Banking for Pennsylvania, and former
CEO of two banks. His new book, Paradox of Debt
(00:31):
reveals the role that debt plays in our lives and
how we can make better use of it without leading
to a crisis. Welcome to the show. I'm looking forward
to speaking with you today.
Speaker 2 (00:39):
Thank you so much for having me today.
Speaker 1 (00:41):
We're talking about the importance of debt, and of course
it's very timely with all the news about the national
debt and the debt ceiling and most recently the basically
the nation's credit rating being affected. Why don't you tell
us a little bit about your background and what makes
you basically an expert in this area.
Speaker 2 (01:03):
Well, my background is in banking, so I was a
career lender and was a lender during the eight crisis,
and that got me very interested in understanding much more
about debt, because it was the rapid accumulation of ill
advised mortgage loans that brought that crisis. And so since
(01:25):
that time we have spent really all our time focusing
on total debt and the US on the government side
and the private sector side, but also the six other
largest countries in the world. So we've developed quite a
data set around that and have published a number of
books on it, including this most recent one, Paradox of Debt.
Speaker 1 (01:48):
Okay, And of course, I mean if we're talking individual debt,
there's different trains of thought on that. A lot of
people say, you know, it's best, as an American, if
you're not a business owner or whatever, just try to
avoid debt altogether, pay everything off as soon as possible,
and live debt free. Other people say, no, that's not
how the millionaires do it. They just are constantly switching
(02:11):
their debt around to different banks and floating this debt
to that bank, so forth, so on. Is it true
that debt is part of what feeds and runs capitalism.
Speaker 2 (02:24):
Well, that's absolutely right. And before I speak to what
an individual business owner may or may not do. Let
me speak globally for a moment in the pandemic, which lasted,
let's say from twenty through twenty two. So that three
(02:44):
year period, government debt increased by six trillion dollars. That
was all the pandemic relief programs and other related items.
During that same three year period, household wealth increased by
thirty trillion. And that's something that surprises most folks. But
(03:05):
when the government spends money, it's actually income to households.
And then the flood of money that came into the
US during that period actually pushed up the value of
stocks and real estates, and that's what created this massive
thirty trillion dollar increase in household wealth. And it is
absolutely true that the US economy or any economy, only
(03:30):
grows as debt grows, and that's government and private sector debt.
So when a company wants to build a factory, when
an individual wants to buy a new home, build a
new home, anything, when a company wants to expand its inventory,
(03:51):
that generally usually boils down to increase debt levels. That's
what makes the economy go there. It's pervasive and its
all encompassing. Now, your advice, even in spite of that,
and in that context is sound advice. It's best, I think,
for individuals to be as conservative as they can realistically
(04:12):
be in their own practices. And when folks talk about,
you know, millionaires, you know use of debt. My own
observation is the wealthiest and most successful folks out there
are still nevertheless conservative, if only in making sure that
(04:32):
they don't personally guarantee debt and that they have covenants
in those debt agreements that are favorable to them, so
irrespective of the outcome, they come out ahead. So they're
experts I think in.
Speaker 1 (04:45):
That okay, obviously, so having debt is one of those things,
especially in today's day and age. It's unavoidable for the
most part. But there's something to be said for having
too much debt, or even not enough debt. I mean,
if you don't have enough debt, so to speak, you
don't have a very good credit score. Help us understand
(05:08):
where those lines are and how to know what we
need to do individually.
Speaker 2 (05:13):
Well, My general guideline is that debt that is incurred
to acquire an asset, and the most common one is
a mortgage to buy a home, can be a useful thing.
That does create Well, you got to make sure you
don't overpay for the home. But use of debt in
(05:34):
that context I think is very useful. And however, use
of debt for mere spending, such as borrowing to go
on a vacation, tends to be the kind of thing
that gets folks into trouble. And I think that's where
personal discipline comes into play and where you know, folks
(05:56):
ought to use that as infrequently as possible.
Speaker 1 (06:01):
Yeah, I agree with that. You hear about people putting
their vacation on credit cards. I think that's a horrible idea.
So what do you think as far as today's just
crazy amount of debt? How do you think we got here?
And do you think it was absolutely necessary or do
you think things could have been should have been done differently.
Speaker 2 (06:22):
Well, one of the things we spend quite a bit
of time on in the book is talking about the
inevitability of increased debt in the US as one example,
and this is true of all major developed countries, not
just the US, but in the US, our total debt
that's government debt plus household plus business debt, was about
(06:44):
one hundred and twenty five percent of GDP today, it's
about two hundred and sixty and that was in nineteen eighty,
let me clarify, and today it's the two hundred and
sixty percent of GDP, So it's more than doubled in
relation to the economy in that short period of time. Now,
let's get back to what we were saying just a
moment ago. You know, part of the reason for that,
(07:04):
a big part of the reason for that. In fact,
the main reason for that is because it takes debt
to grow, and so there is it's not a bug
in the system, it is a feature of the system.
The increase in debt relative to GDP is structural and
really one of the big big things we explore in
this book.
Speaker 1 (07:26):
Okay, so what happens. I mean, we've seen that nationally
when you get your debt to income ratio out of whack,
it affects your credit score, just like it does for individuals.
But you know, I don't think the average person understands
that that could also translate into even higher interest rates
(07:47):
and things like that and possibly prolonged inflation. Is that correct?
Speaker 2 (07:54):
You know, it's that's an area of controversy. But if
you look at the period from nineteen eighty one to
the present. Interest rates in nineteen eighty one were close
to twenty percent. Today they're around five percent. So that's
a massive reduction in the exact period in which we've
(08:18):
seen debt double in relationship to the economy. So I
think if you were going strictly on an empirical basis,
you would conclude, and this is not just again in
the US, We see this in economy surround the world
uniformly and consistently, you would say, the more debt you have,
the more likely it is the interest rates would actually
(08:39):
be lower. That's kind of that's not what's in your textbooks. However,
if you look at the evidence directly, that's what it
would suggest.
Speaker 1 (08:47):
Okay, all right, So you know during the pandemic you
talked about it it affected the economy. What comes after
all that spending and all that increased at I mean,
we've learned that a lot of that unfortunately, that money
went to fraudulent things. People are still being prosecuted three
(09:09):
years later, you know, for claiming fake companies and fake
employees and things of that nature. What kind of effect
on our overall economy does all that spending have?
Speaker 2 (09:24):
You know, if you look through history, anytime you see
a rapid, massive mobilization of any sort, it is replete
with mistakes, fraud, you name it. So that certainly was
true in the pandemic, but that was true in the
(09:44):
build up to World War two, that was true in
the build up to World War One. It's just very
difficult to do anything large scale and have everything completely
buttoned down. You know. My own view is that by
and large the efforts with the pandemic were productive, and
I think the evidence of that is the fact that
(10:04):
today our economy is well over twenty five trillion dollars
in size, and that's where we would have been anyway
if the pandemic had never occurred. So I think it's
something of a minor miracle, frankly, that the actions of
Congress and the FED and others were so forceful and
(10:24):
came so quickly and brought us back to where we
would have been anyway. You know, in the dark spring
of twenty twenty, I'm not sure any of us would
have bet that. And it is a better performance than
other major countries around the world. We were just looking
pretty carefully at the rebound in France and Germany and
(10:45):
the UK and they have not done as well as
the US, nor were they as forceful in addressing the
problem as the US. So now your question was what
happens now, and I think we're somewhat in a period
of gestation. You know that their government programs, relief programs
have gone away. Growth in private sector debt is we're
(11:08):
not declining, thank goodness, but it's not as robust as
it has been. So you almost I almost feel like
we're in a period of where we're going to go
sideways for a bit. We're not going to I don't
think we're not going to have a bad recession, nor
are we going to have you know, the kind of
growth that you would deem to be exciting. I think
(11:29):
we're going to be somewhere in the middle at least
for a while.
Speaker 1 (11:32):
Okay, So would your advice to people who were possibly
looking at buying a home, is your advice to just
keep moving forward that with that as well as people
who were looking to sell their homes, because obviously right
now everybody's kind of a little bit panicked and we
have a shortage of inventory in the home buying market.
Speaker 2 (11:54):
Well, that's actually one of the most important facts in
all of the economy. You know, I think it's one
of one of the central things you can ever know
about an economy is what the unsold housing inventory level is.
And right now we have about eight hundred and eighty
thousand unsold homes, which is very low, probably the lowest
(12:16):
ever on a per capita basis. In two thousand and
seven as an example, two thousand and two thousand and
seven and eight, we had four million unsold homes, over
four times as many. And that's, frankly, why it took
us so long to recover is that, you know, it
took years for the natural buying activity to absorb the
(12:38):
overbuilding that had already occurred. If you look historically, probably
about two million homes unsold inventory would be about right
and about typical in the economy. So you can see
that at eight hundred and eighty thousand homes, we got
a long way to go. And I think that that's
kind of the favorable under pinning of what's going to
(13:01):
happen in the economy over the next couple of years.
You know, the the industry has to build homes to
build that inventory back up, and that's fundamentally good news.
So I think, you know, if if you're a you know,
the the adverse circumstance, of course is high interest rate.
So you now have you know, short term rates at
(13:22):
five and a quarter and mortgage rates you know, well
above that, so that dampens the activity. You know, there's
kind of no way around it. My own personal expectation
is that rates are going to within the next one
to two years, rates are going to start coming down again.
Short term rates, you know, I mean, longer term rates
have never gone as high as short term rates in
(13:44):
the US bond market. So you know, I think if
you're a seller, you're still in a better situation than
you are as a buyer, and that's going to be
true for a while.
Speaker 1 (13:56):
Okay, So what would you say, are the real reasons
behind high end prolonged inflation that we've seen over the
past year two.
Speaker 2 (14:07):
Well, we've had recent very good news. You know. The
number that came out last month was that inflation year
over year was only three percent, and that's down from
a peak of nine percent early last summer. And in fact,
we've had twelve months of low or what I would
(14:28):
call moderate inflation. The last twelve months on average has
been about three percent. So you know, our inflation really
came from the disruption of COVID. You know, folks simply
weren't in factories and processing plants and distribution centers, so
we had an undersupply. And that's typically the culprit in
(14:50):
inflation is reduced or decimated or constrained supplies. Well, we've
largely overcome that, not completely, but largely. The additional complication,
of course, was the war which between Russia and Ukraine.
They're among the world's biggest suppliers of oil, natural gas,
and wheat and lots of other things too, and those
(15:13):
are some of the most important commodities out there as
relates to inflation, and they all shot up at the
beginning of the war. They've come back down somewhat now,
and that's part of our good news. They haven't really
come down that much in Europe. You know, our our
cost for natural gas is two dollars per million BPUS,
and in Europe it's ten dollars per million BTUs. That's
(15:37):
why they're still suffering inflation. I would expect our inflation
to continue in the kind of the three to four
percent range for a while, hopefully come down a little
bit from there, you know, the targets that the FED
has established is two percent. But we're not going to
see you know, eight or nine percent again like we
did last summer.
Speaker 1 (15:56):
Okay, well, that's good news. So I venture to say,
a lot of the younger generation, and I don't know
what the percentage is, but I know there's quite a
few of the younger generation that they just have decided
they don't like capitalism, and they think that other countries
with different economies and different you know, leadership styles whatever,
(16:19):
are in some way better than ours. And they cite
things like, you know, guaranteed long term maternityly even you know,
guaranteed public health care and all these other kinds of things.
How does our model here in the US, as far
as the way we do things in our economy and everything,
how does that compare with other countries?
Speaker 2 (16:40):
You know, the United States is in a very favorable
position relative to the rest of the world right now.
You know, we we look very carefully at what we
call the Big Seven, the seven largest economies in the
world that collectively represent sixty five percent of world GDP.
That's China, Japan, India, Germany, France, the UK, and the
(17:02):
United States. So we're in the best position of all
those folks in our view, as it relates to debt,
as relates to GDP growth, in any other number of factors.
That doesn't mean that there's not room for improvement. And
(17:22):
you know, I have great empathy with a lot of
folk the criticisms that we received, and I think we
ought to be thoughtful about those things and address them
where we can. You know, out of the when you
think back on the Great Financial Crisis of eight it
is it is largely true that the government acted to
(17:43):
bail out the large financial institutions. It didn't help you know,
the folks, you know, the some fifteen million folks who
had mortgages that were underwater. And I think that contributed
to a decade of unrest as folks tried to struggle
through those issues. So I think there are things that
(18:04):
could have been done. Then I think there are things
could be done now. That doesn't speak to fundamental changes
in the way our country and our capitalism operates, but
it does call for us to be thoughtful and examined
problems as they occur.
Speaker 1 (18:19):
Okay, So that being said, what would you if you
were in charge of the entire country and deciding what
we're going to do to address this lowered credit rating.
What would you suggest be done to kind of get
us back in the best standing possible.
Speaker 2 (18:37):
You know, I'm not that worried about government levels of debt.
You know, as we just said, increased government debt actually
increases household well, when the government spends money, it doesn't disappear,
it goes into household bank account. So I repeat what
I said earlier, which is six trillion, and new government
debt created thirty trillion a new household wealth in the
(18:58):
three years of the pandemic. The problem I see as
being more relevant is a debt on the household side.
And you have a few areas that you know are
particularly problematic now. One of them, as you know, the
headlines have have cried out, you know, for the last
couple of years. One of them student debt. We have
(19:20):
forty three million Americans that have some level of remaining
student debt, and a lot of those folks are struggling.
I don't think, you know, I don't think that a
blanket forgiveness of student debt is the correct policy, because
there's so much unfairness in doing something like that, you know,
you know, two folks side by side, and one of them,
(19:42):
you know, was disciplined and paid their student debt off
in ten years, and the other one, you know, took
the took the part time jobs and did the extra
work to pay it off. And the person side by
side to them did not made the minimum payments and
still has a lot of debt outstanding. Then the government
comes along and wipes out the debt of that second person.
(20:02):
That's fundamentally unfair to that first person, right well, and.
Speaker 1 (20:06):
Not to mention the people that didn't go to school
at all. Like my husband is one of those. He's
a blue collar guy. He didn't go to college. He
went to technical schools and got scholarships and you know
for that little amount that he's paid, and some people
don't even go that far. They use apprenticeships. And so
I know, speaking for him, he thinks that it's unfair.
(20:26):
You know, if I didn't incur any debt, why did
my taxes have to go to pay for it.
Speaker 2 (20:31):
I think that's exactly right. The I think in any
government policy, the issue of fairness is frankly one of
the most important issues. But I think there are ways
for us to be thoughtfully creative around that. So we've
you know, you can get relief on student debt through
military service, through Peace Corps service, through working a government job.
(20:53):
If you do that any number of years, you get
relief just of some part of your debt. We think
we could extend that idea to folks in the private
sector by saying, you know, you know, several hundred hours
of community service might give you some level of relief
on your student debt. So you're not doing blanket forgiveness,
(21:14):
but you are giving folks another path that they can
elect to pursue.
Speaker 1 (21:20):
Okay, So what would you say for mortgage debt or
bankruptcy law, those types of things. What are some creative
ways that we could address that.
Speaker 2 (21:32):
Well, mortgage debt is an interesting one. Where As I said,
we had some fifteen million Americans who's the value of
their homes had fallen below the value of their mortgage
in two thousand and nine, in twenty and ten, and
it was it was a huge societal problem at that point.
(21:53):
And the idea we've put forward is to allow the
bar were at their option and own at their option,
to go to the lender and uh in exchange for
you know, to get a reduction in their mortgage amount
and their payment payment amount in exchange for giving that
(22:14):
lender part of the upside when the home is eventually sold.
So it's in essence kind of a debt for equity swap.
Now you can you can make this more feasible. It's
at the regulatory level and micro after at my career
in banking. So at the regulatory level, you allowed the
bank to or the lender to amortize the costs of
(22:37):
that write down over multiple years instead of having to
take it all at once. It is kind of a
way to facilitate that kind of thing so that you
could apply that today. There's a lot of folks who
got behind on their mortgages in the pandemic and the
lenders kind of simply tacking the mispayments onto the back
end of the mortgage, effectively, you know, a negative ammorgation
(23:00):
of the mortgage if you will. And I think the
same thing could be done there, you know, kind of
a debt equity swap to get relief to your current
mortgage payment amount.
Speaker 1 (23:10):
Okay, have you ever heard of the Day of Jubilee?
It was a Hebrew thing way back.
Speaker 2 (23:19):
Absolutely, it's thanks for bringing that up. I mean it's
it's one of the things that we discovered in our research.
Other's a lot of other folks already knew this, but
you know, we found it through our research. Is that
the accumulation of debt, personal debt is a problem that
has been with us really since the beginning of civilization,
(23:42):
you know, way back in the time of the ancient
Egyptians and Babylonians and others, and they dealt with it
through debt amnesty declared by the king if debt levels
got so high that they were harmful to that nation.
The king Hammurabi did this four times in his somewhat
(24:04):
you know, I think it was a fifty year reign,
and it gave everybody kind of a fresh start. And
in Israel they took it the next step to actually
take it from being kind of an ad hoc thing
to a calendarized thing. And that's the day of Jubilee
that you refer to, that after seven periods of seven years,
(24:25):
that jubilee would be declared through the land, which included
the forgiveness of these you know, householder personal debts. And
it was a very important concept that really disappeared somewhere
along the line. But it's an idea that I think
we can draw at least some knowledge and inspiration from.
Speaker 1 (24:44):
Do you think it's something that could ever be adapted
into modern day philosophies and even action, or is it
just something that you know won't forever be back in
the you know, anals of history.
Speaker 2 (24:58):
Well, I think the two programs I just described for
student debt and mortgage debt are in that spirit. You
know we' you know. What was different then is all
the debt was the kings, so you know, the king
was could easily forgive his own debt. But today that
debt's held by pension funds and banks and insurance companies
and individuals in the form of their investment in funds
(25:22):
that hold securitizations. So you'd be if you forgave that debt,
you'd be wiping out an equivalent amount of wealth, much
of which is held by those you know, households too.
So it's a much more complicated proposition, and I think
we can't do it, but we can take it as
(25:43):
inspiration and think about ways to help households that are
struggling with debt. You know another a you alluded to this,
but another area that we think that there could be
improvement is in bankruptcy law. Uh you know, but most
the vast majority of bankruptcies or folks and had an
unexpected medical expense, or a household divorce, or an unexpected
(26:07):
job loss. You know, it's not folks just out being
misbehaving for the sake of misbehaving. And I think the
most productive thing we can do theirs have bankruptcy laws
that give them a realistic path back to full participation
in the economy. So uh you know, we think, uh
(26:27):
you know, right now they can't. You can't if you
have a car, you can't even buy that at fair
market value in the bankruptcy proceeding. And so a lot
of folks end up no longer having a way to
get to work and make a paycheck. Uh they can
you're prohibited from working with your lender to stay in
your house at some negotiated uh rate. You know that
those things actually complicate the process, hurt both the bar
(26:52):
and the lender I think as a career lender, uh
and and make it tougher for those individuals to become,
you know, back to full financial health.
Speaker 1 (27:04):
Right now, this question is going to be asked with
the assumption that you included salaries and salary changes things
like that in the things that you were researching. But
I know there's speculation out there that, you know, a
lot of the reason personal debt has increased so much
is because I think in every industry mine, I can
(27:24):
say for sure we went from having you know, so
many people that it took to get my job done,
and now I do all of it by myself and
don't even get paid a fraction of what one of
those people used to get paid on that team of people.
And I'm sure, like I said, there are other industries
that are just as the same way. I'm sure everybody
(27:46):
has felt that same crunch. What are your thoughts on that,
is the salaries not keeping up with everything else? Is
that part of our problem with debt?
Speaker 2 (27:59):
You know? I think it is. If you look at
wage growth in the United States, it was a lot
more robust in the fifties and sixties, and then you know,
really starting in the eighties and nineties, wage growth has
really barely kept up with inflation. So real wage growth
has been you know, there's been a little bit of it,
(28:21):
but not much. And I think a lot of folks
do see that as one of the reasons that folks
have become so much more reliant on debt. If you
are trying to sustain a certain lifestyle and your wages
aren't keeping up, a lot of folks inevitably resort to
credit cards and things like that. So you know, I'm
(28:42):
very much in favor of anything that will boost wages
in the US. In the book, we talk about, you know,
a very large scale job training programs. We talk about reshoring, manufacturing,
we talk about other things that put people in a
position to earn or maybe accumulate some Well.
Speaker 1 (29:03):
Okay, I think we're pretty much come to the end
of our time, but I want to make sure that
you feel like we've covered all that we need to
talk about today.
Speaker 2 (29:12):
We have. Indeed, you did a great job.
Speaker 1 (29:14):
Okay, great, I'm excited. I learned a lot today. I
really appreciate your time, and I'm looking forward to reading
your book.
Speaker 2 (29:22):
I'm so grateful that you would have me. Best wishes
to you.
Speaker 1 (29:26):
I hope you have enjoyed today's show. Thanks for tuning
into the show on your favorite local radio station. You
can now listen to this show or past shows through
the iheartapp or on iHeart dot com Just search for
Virginia Focus under podcasts. I'm Rebecca Hughes with a Virginia
news network, and I will be here next week on
Virginia Focus
Welcome to Virginia Focus. I'm Rebecca Hughes of the Virginia
News Network. Debt is the real factor that drives both
economic growth and financial crises, from recessions to extreme inequality.
In order to understand this paradox, we need to address
why a certain amount of private debt is vital to
the economy. On this episode, we're talking to Richard Vague,
an author, former Secretary of Banking for Pennsylvania, and former
CEO of two banks. His new book, Paradox of Debt
(00:31):
reveals the role that debt plays in our lives and
how we can make better use of it without leading
to a crisis. Welcome to the show. I'm looking forward
to speaking with you today.
Speaker 2 (00:39):
Thank you so much for having me today.
Speaker 1 (00:41):
We're talking about the importance of debt, and of course
it's very timely with all the news about the national
debt and the debt ceiling and most recently the basically
the nation's credit rating being affected. Why don't you tell
us a little bit about your background and what makes
you basically an expert in this area.
Speaker 2 (01:03):
Well, my background is in banking, so I was a
career lender and was a lender during the eight crisis,
and that got me very interested in understanding much more
about debt, because it was the rapid accumulation of ill
advised mortgage loans that brought that crisis. And so since
(01:25):
that time we have spent really all our time focusing
on total debt and the US on the government side
and the private sector side, but also the six other
largest countries in the world. So we've developed quite a
data set around that and have published a number of
books on it, including this most recent one, Paradox of Debt.
Speaker 1 (01:48):
Okay, And of course, I mean if we're talking individual debt,
there's different trains of thought on that. A lot of
people say, you know, it's best, as an American, if
you're not a business owner or whatever, just try to
avoid debt altogether, pay everything off as soon as possible,
and live debt free. Other people say, no, that's not
how the millionaires do it. They just are constantly switching
(02:11):
their debt around to different banks and floating this debt
to that bank, so forth, so on. Is it true
that debt is part of what feeds and runs capitalism.
Speaker 2 (02:24):
Well, that's absolutely right. And before I speak to what
an individual business owner may or may not do. Let
me speak globally for a moment in the pandemic, which lasted,
let's say from twenty through twenty two. So that three
(02:44):
year period, government debt increased by six trillion dollars. That
was all the pandemic relief programs and other related items.
During that same three year period, household wealth increased by
thirty trillion. And that's something that surprises most folks. But
(03:05):
when the government spends money, it's actually income to households.
And then the flood of money that came into the
US during that period actually pushed up the value of
stocks and real estates, and that's what created this massive
thirty trillion dollar increase in household wealth. And it is
absolutely true that the US economy or any economy, only
(03:30):
grows as debt grows, and that's government and private sector debt.
So when a company wants to build a factory, when
an individual wants to buy a new home, build a
new home, anything, when a company wants to expand its inventory,
(03:51):
that generally usually boils down to increase debt levels. That's
what makes the economy go there. It's pervasive and its
all encompassing. Now, your advice, even in spite of that,
and in that context is sound advice. It's best, I think,
for individuals to be as conservative as they can realistically
(04:12):
be in their own practices. And when folks talk about,
you know, millionaires, you know use of debt. My own
observation is the wealthiest and most successful folks out there
are still nevertheless conservative, if only in making sure that
(04:32):
they don't personally guarantee debt and that they have covenants
in those debt agreements that are favorable to them, so
irrespective of the outcome, they come out ahead. So they're
experts I think in.
Speaker 1 (04:45):
That okay, obviously, so having debt is one of those things,
especially in today's day and age. It's unavoidable for the
most part. But there's something to be said for having
too much debt, or even not enough debt. I mean,
if you don't have enough debt, so to speak, you
don't have a very good credit score. Help us understand
(05:08):
where those lines are and how to know what we
need to do individually.
Speaker 2 (05:13):
Well, My general guideline is that debt that is incurred
to acquire an asset, and the most common one is
a mortgage to buy a home, can be a useful thing.
That does create Well, you got to make sure you
don't overpay for the home. But use of debt in
(05:34):
that context I think is very useful. And however, use
of debt for mere spending, such as borrowing to go
on a vacation, tends to be the kind of thing
that gets folks into trouble. And I think that's where
personal discipline comes into play and where you know, folks
(05:56):
ought to use that as infrequently as possible.
Speaker 1 (06:01):
Yeah, I agree with that. You hear about people putting
their vacation on credit cards. I think that's a horrible idea.
So what do you think as far as today's just
crazy amount of debt? How do you think we got here?
And do you think it was absolutely necessary or do
you think things could have been should have been done differently.
Speaker 2 (06:22):
Well, one of the things we spend quite a bit
of time on in the book is talking about the
inevitability of increased debt in the US as one example,
and this is true of all major developed countries, not
just the US, but in the US, our total debt
that's government debt plus household plus business debt, was about
(06:44):
one hundred and twenty five percent of GDP today, it's
about two hundred and sixty and that was in nineteen eighty,
let me clarify, and today it's the two hundred and
sixty percent of GDP, So it's more than doubled in
relation to the economy in that short period of time. Now,
let's get back to what we were saying just a
moment ago. You know, part of the reason for that,
(07:04):
a big part of the reason for that. In fact,
the main reason for that is because it takes debt
to grow, and so there is it's not a bug
in the system, it is a feature of the system.
The increase in debt relative to GDP is structural and
really one of the big big things we explore in
this book.
Speaker 1 (07:26):
Okay, so what happens. I mean, we've seen that nationally
when you get your debt to income ratio out of whack,
it affects your credit score, just like it does for individuals.
But you know, I don't think the average person understands
that that could also translate into even higher interest rates
(07:47):
and things like that and possibly prolonged inflation. Is that correct?
Speaker 2 (07:54):
You know, it's that's an area of controversy. But if
you look at the period from nineteen eighty one to
the present. Interest rates in nineteen eighty one were close
to twenty percent. Today they're around five percent. So that's
a massive reduction in the exact period in which we've
(08:18):
seen debt double in relationship to the economy. So I
think if you were going strictly on an empirical basis,
you would conclude, and this is not just again in
the US, We see this in economy surround the world
uniformly and consistently, you would say, the more debt you have,
the more likely it is the interest rates would actually
(08:39):
be lower. That's kind of that's not what's in your textbooks. However,
if you look at the evidence directly, that's what it
would suggest.
Speaker 1 (08:47):
Okay, all right, So you know during the pandemic you
talked about it it affected the economy. What comes after
all that spending and all that increased at I mean,
we've learned that a lot of that unfortunately, that money
went to fraudulent things. People are still being prosecuted three
(09:09):
years later, you know, for claiming fake companies and fake
employees and things of that nature. What kind of effect
on our overall economy does all that spending have?
Speaker 2 (09:24):
You know, if you look through history, anytime you see
a rapid, massive mobilization of any sort, it is replete
with mistakes, fraud, you name it. So that certainly was
true in the pandemic, but that was true in the
(09:44):
build up to World War two, that was true in
the build up to World War One. It's just very
difficult to do anything large scale and have everything completely
buttoned down. You know. My own view is that by
and large the efforts with the pandemic were productive, and
I think the evidence of that is the fact that
(10:04):
today our economy is well over twenty five trillion dollars
in size, and that's where we would have been anyway
if the pandemic had never occurred. So I think it's
something of a minor miracle, frankly, that the actions of
Congress and the FED and others were so forceful and
(10:24):
came so quickly and brought us back to where we
would have been anyway. You know, in the dark spring
of twenty twenty, I'm not sure any of us would
have bet that. And it is a better performance than
other major countries around the world. We were just looking
pretty carefully at the rebound in France and Germany and
(10:45):
the UK and they have not done as well as
the US, nor were they as forceful in addressing the
problem as the US. So now your question was what
happens now, and I think we're somewhat in a period
of gestation. You know that their government programs, relief programs
have gone away. Growth in private sector debt is we're
(11:08):
not declining, thank goodness, but it's not as robust as
it has been. So you almost I almost feel like
we're in a period of where we're going to go
sideways for a bit. We're not going to I don't
think we're not going to have a bad recession, nor
are we going to have you know, the kind of
growth that you would deem to be exciting. I think
(11:29):
we're going to be somewhere in the middle at least
for a while.
Speaker 1 (11:32):
Okay, So would your advice to people who were possibly
looking at buying a home, is your advice to just
keep moving forward that with that as well as people
who were looking to sell their homes, because obviously right
now everybody's kind of a little bit panicked and we
have a shortage of inventory in the home buying market.
Speaker 2 (11:54):
Well, that's actually one of the most important facts in
all of the economy. You know, I think it's one
of one of the central things you can ever know
about an economy is what the unsold housing inventory level is.
And right now we have about eight hundred and eighty
thousand unsold homes, which is very low, probably the lowest
(12:16):
ever on a per capita basis. In two thousand and
seven as an example, two thousand and two thousand and
seven and eight, we had four million unsold homes, over
four times as many. And that's, frankly, why it took
us so long to recover is that, you know, it
took years for the natural buying activity to absorb the
(12:38):
overbuilding that had already occurred. If you look historically, probably
about two million homes unsold inventory would be about right
and about typical in the economy. So you can see
that at eight hundred and eighty thousand homes, we got
a long way to go. And I think that that's
kind of the favorable under pinning of what's going to
(13:01):
happen in the economy over the next couple of years.
You know, the the industry has to build homes to
build that inventory back up, and that's fundamentally good news.
So I think, you know, if if you're a you know,
the the adverse circumstance, of course is high interest rate.
So you now have you know, short term rates at
(13:22):
five and a quarter and mortgage rates you know, well
above that, so that dampens the activity. You know, there's
kind of no way around it. My own personal expectation
is that rates are going to within the next one
to two years, rates are going to start coming down again.
Short term rates, you know, I mean, longer term rates
have never gone as high as short term rates in
(13:44):
the US bond market. So you know, I think if
you're a seller, you're still in a better situation than
you are as a buyer, and that's going to be
true for a while.
Speaker 1 (13:56):
Okay, So what would you say, are the real reasons
behind high end prolonged inflation that we've seen over the
past year two.
Speaker 2 (14:07):
Well, we've had recent very good news. You know. The
number that came out last month was that inflation year
over year was only three percent, and that's down from
a peak of nine percent early last summer. And in fact,
we've had twelve months of low or what I would
(14:28):
call moderate inflation. The last twelve months on average has
been about three percent. So you know, our inflation really
came from the disruption of COVID. You know, folks simply
weren't in factories and processing plants and distribution centers, so
we had an undersupply. And that's typically the culprit in
(14:50):
inflation is reduced or decimated or constrained supplies. Well, we've
largely overcome that, not completely, but largely. The additional complication,
of course, was the war which between Russia and Ukraine.
They're among the world's biggest suppliers of oil, natural gas,
and wheat and lots of other things too, and those
(15:13):
are some of the most important commodities out there as
relates to inflation, and they all shot up at the
beginning of the war. They've come back down somewhat now,
and that's part of our good news. They haven't really
come down that much in Europe. You know, our our
cost for natural gas is two dollars per million BPUS,
and in Europe it's ten dollars per million BTUs. That's
(15:37):
why they're still suffering inflation. I would expect our inflation
to continue in the kind of the three to four
percent range for a while, hopefully come down a little
bit from there, you know, the targets that the FED
has established is two percent. But we're not going to
see you know, eight or nine percent again like we
did last summer.
Speaker 1 (15:56):
Okay, well, that's good news. So I venture to say,
a lot of the younger generation, and I don't know
what the percentage is, but I know there's quite a
few of the younger generation that they just have decided
they don't like capitalism, and they think that other countries
with different economies and different you know, leadership styles whatever,
(16:19):
are in some way better than ours. And they cite
things like, you know, guaranteed long term maternityly even you know,
guaranteed public health care and all these other kinds of things.
How does our model here in the US, as far
as the way we do things in our economy and everything,
how does that compare with other countries?
Speaker 2 (16:40):
You know, the United States is in a very favorable
position relative to the rest of the world right now.
You know, we we look very carefully at what we
call the Big Seven, the seven largest economies in the
world that collectively represent sixty five percent of world GDP.
That's China, Japan, India, Germany, France, the UK, and the
(17:02):
United States. So we're in the best position of all
those folks in our view, as it relates to debt,
as relates to GDP growth, in any other number of factors.
That doesn't mean that there's not room for improvement. And
(17:22):
you know, I have great empathy with a lot of
folk the criticisms that we received, and I think we
ought to be thoughtful about those things and address them
where we can. You know, out of the when you
think back on the Great Financial Crisis of eight it
is it is largely true that the government acted to
(17:43):
bail out the large financial institutions. It didn't help you know,
the folks, you know, the some fifteen million folks who
had mortgages that were underwater. And I think that contributed
to a decade of unrest as folks tried to struggle
through those issues. So I think there are things that
(18:04):
could have been done. Then I think there are things
could be done now. That doesn't speak to fundamental changes
in the way our country and our capitalism operates, but
it does call for us to be thoughtful and examined
problems as they occur.
Speaker 1 (18:19):
Okay, So that being said, what would you if you
were in charge of the entire country and deciding what
we're going to do to address this lowered credit rating.
What would you suggest be done to kind of get
us back in the best standing possible.
Speaker 2 (18:37):
You know, I'm not that worried about government levels of debt.
You know, as we just said, increased government debt actually
increases household well, when the government spends money, it doesn't disappear,
it goes into household bank account. So I repeat what
I said earlier, which is six trillion, and new government
debt created thirty trillion a new household wealth in the
(18:58):
three years of the pandemic. The problem I see as
being more relevant is a debt on the household side.
And you have a few areas that you know are
particularly problematic now. One of them, as you know, the
headlines have have cried out, you know, for the last
couple of years. One of them student debt. We have
(19:20):
forty three million Americans that have some level of remaining
student debt, and a lot of those folks are struggling.
I don't think, you know, I don't think that a
blanket forgiveness of student debt is the correct policy, because
there's so much unfairness in doing something like that, you know,
you know, two folks side by side, and one of them,
(19:42):
you know, was disciplined and paid their student debt off
in ten years, and the other one, you know, took
the took the part time jobs and did the extra
work to pay it off. And the person side by
side to them did not made the minimum payments and
still has a lot of debt outstanding. Then the government
comes along and wipes out the debt of that second person.
(20:02):
That's fundamentally unfair to that first person, right well, and.
Speaker 1 (20:06):
Not to mention the people that didn't go to school
at all. Like my husband is one of those. He's
a blue collar guy. He didn't go to college. He
went to technical schools and got scholarships and you know
for that little amount that he's paid, and some people
don't even go that far. They use apprenticeships. And so
I know, speaking for him, he thinks that it's unfair.
(20:26):
You know, if I didn't incur any debt, why did
my taxes have to go to pay for it.
Speaker 2 (20:31):
I think that's exactly right. The I think in any
government policy, the issue of fairness is frankly one of
the most important issues. But I think there are ways
for us to be thoughtfully creative around that. So we've
you know, you can get relief on student debt through
military service, through Peace Corps service, through working a government job.
(20:53):
If you do that any number of years, you get
relief just of some part of your debt. We think
we could extend that idea to folks in the private
sector by saying, you know, you know, several hundred hours
of community service might give you some level of relief
on your student debt. So you're not doing blanket forgiveness,
(21:14):
but you are giving folks another path that they can
elect to pursue.
Speaker 1 (21:20):
Okay, So what would you say for mortgage debt or
bankruptcy law, those types of things. What are some creative
ways that we could address that.
Speaker 2 (21:32):
Well, mortgage debt is an interesting one. Where As I said,
we had some fifteen million Americans who's the value of
their homes had fallen below the value of their mortgage
in two thousand and nine, in twenty and ten, and
it was it was a huge societal problem at that point.
(21:53):
And the idea we've put forward is to allow the
bar were at their option and own at their option,
to go to the lender and uh in exchange for
you know, to get a reduction in their mortgage amount
and their payment payment amount in exchange for giving that
(22:14):
lender part of the upside when the home is eventually sold.
So it's in essence kind of a debt for equity swap.
Now you can you can make this more feasible. It's
at the regulatory level and micro after at my career
in banking. So at the regulatory level, you allowed the
bank to or the lender to amortize the costs of
(22:37):
that write down over multiple years instead of having to
take it all at once. It is kind of a
way to facilitate that kind of thing so that you
could apply that today. There's a lot of folks who
got behind on their mortgages in the pandemic and the
lenders kind of simply tacking the mispayments onto the back
end of the mortgage, effectively, you know, a negative ammorgation
(23:00):
of the mortgage if you will. And I think the
same thing could be done there, you know, kind of
a debt equity swap to get relief to your current
mortgage payment amount.
Speaker 1 (23:10):
Okay, have you ever heard of the Day of Jubilee?
It was a Hebrew thing way back.
Speaker 2 (23:19):
Absolutely, it's thanks for bringing that up. I mean it's
it's one of the things that we discovered in our research.
Other's a lot of other folks already knew this, but
you know, we found it through our research. Is that
the accumulation of debt, personal debt is a problem that
has been with us really since the beginning of civilization,
(23:42):
you know, way back in the time of the ancient
Egyptians and Babylonians and others, and they dealt with it
through debt amnesty declared by the king if debt levels
got so high that they were harmful to that nation.
The king Hammurabi did this four times in his somewhat
(24:04):
you know, I think it was a fifty year reign,
and it gave everybody kind of a fresh start. And
in Israel they took it the next step to actually
take it from being kind of an ad hoc thing
to a calendarized thing. And that's the day of Jubilee
that you refer to, that after seven periods of seven years,
(24:25):
that jubilee would be declared through the land, which included
the forgiveness of these you know, householder personal debts. And
it was a very important concept that really disappeared somewhere
along the line. But it's an idea that I think
we can draw at least some knowledge and inspiration from.
Speaker 1 (24:44):
Do you think it's something that could ever be adapted
into modern day philosophies and even action, or is it
just something that you know won't forever be back in
the you know, anals of history.
Speaker 2 (24:58):
Well, I think the two programs I just described for
student debt and mortgage debt are in that spirit. You
know we' you know. What was different then is all
the debt was the kings, so you know, the king
was could easily forgive his own debt. But today that
debt's held by pension funds and banks and insurance companies
and individuals in the form of their investment in funds
(25:22):
that hold securitizations. So you'd be if you forgave that debt,
you'd be wiping out an equivalent amount of wealth, much
of which is held by those you know, households too.
So it's a much more complicated proposition, and I think
we can't do it, but we can take it as
(25:43):
inspiration and think about ways to help households that are
struggling with debt. You know another a you alluded to this,
but another area that we think that there could be
improvement is in bankruptcy law. Uh you know, but most
the vast majority of bankruptcies or folks and had an
unexpected medical expense, or a household divorce, or an unexpected
(26:07):
job loss. You know, it's not folks just out being
misbehaving for the sake of misbehaving. And I think the
most productive thing we can do theirs have bankruptcy laws
that give them a realistic path back to full participation
in the economy. So uh you know, we think, uh
(26:27):
you know, right now they can't. You can't if you
have a car, you can't even buy that at fair
market value in the bankruptcy proceeding. And so a lot
of folks end up no longer having a way to
get to work and make a paycheck. Uh they can
you're prohibited from working with your lender to stay in
your house at some negotiated uh rate. You know that
those things actually complicate the process, hurt both the bar
(26:52):
and the lender I think as a career lender, uh
and and make it tougher for those individuals to become,
you know, back to full financial health.
Speaker 1 (27:04):
Right now, this question is going to be asked with
the assumption that you included salaries and salary changes things
like that in the things that you were researching. But
I know there's speculation out there that, you know, a
lot of the reason personal debt has increased so much
is because I think in every industry mine, I can
(27:24):
say for sure we went from having you know, so
many people that it took to get my job done,
and now I do all of it by myself and
don't even get paid a fraction of what one of
those people used to get paid on that team of people.
And I'm sure, like I said, there are other industries
that are just as the same way. I'm sure everybody
(27:46):
has felt that same crunch. What are your thoughts on that,
is the salaries not keeping up with everything else? Is
that part of our problem with debt?
Speaker 2 (27:59):
You know? I think it is. If you look at
wage growth in the United States, it was a lot
more robust in the fifties and sixties, and then you know,
really starting in the eighties and nineties, wage growth has
really barely kept up with inflation. So real wage growth
has been you know, there's been a little bit of it,
(28:21):
but not much. And I think a lot of folks
do see that as one of the reasons that folks
have become so much more reliant on debt. If you
are trying to sustain a certain lifestyle and your wages
aren't keeping up, a lot of folks inevitably resort to
credit cards and things like that. So you know, I'm
(28:42):
very much in favor of anything that will boost wages
in the US. In the book, we talk about, you know,
a very large scale job training programs. We talk about reshoring, manufacturing,
we talk about other things that put people in a
position to earn or maybe accumulate some Well.
Speaker 1 (29:03):
Okay, I think we're pretty much come to the end
of our time, but I want to make sure that
you feel like we've covered all that we need to
talk about today.
Speaker 2 (29:12):
We have. Indeed, you did a great job.
Speaker 1 (29:14):
Okay, great, I'm excited. I learned a lot today. I
really appreciate your time, and I'm looking forward to reading
your book.
Speaker 2 (29:22):
I'm so grateful that you would have me. Best wishes
to you.
Speaker 1 (29:26):
I hope you have enjoyed today's show. Thanks for tuning
into the show on your favorite local radio station. You
can now listen to this show or past shows through
the iheartapp or on iHeart dot com Just search for
Virginia Focus under podcasts. I'm Rebecca Hughes with a Virginia
news network, and I will be here next week on
Virginia Focus
Popular Podcasts
Las Culturistas with Matt Rogers and Bowen Yang
Ding dong! Join your culture consultants, Matt Rogers and Bowen Yang, on an unforgettable journey into the beating heart of CULTURE. Alongside sizzling special guests, they GET INTO the hottest pop-culture moments of the day and the formative cultural experiences that turned them into Culturistas. Produced by the Big Money Players Network and iHeartRadio.
The Joe Rogan Experience
The official podcast of comedian Joe Rogan.
Stuff You Should Know
If you've ever wanted to know about champagne, satanism, the Stonewall Uprising, chaos theory, LSD, El Nino, true crime and Rosa Parks, then look no further. Josh and Chuck have you covered.