Hello, my friends and welcome to another episode of Passive Real Estate Investing. I’m your host, Marco Santarelli. It is great having you back. Well, I hope you’ve been having a great 2022 so far. It seems like the last month and holiday passed by very, very quickly. Maybe it’s because we are just all so busy running around in so many different directions. I don’t know about you, but it just seems to me that lately we’ve been having so much more media attention to debt specifically to federal and government debt and inflation. And, you know, Milton Friedman once said that inflation is taxation without legislation. And I also like something that Kevin Brady at once said, and he said, inflation destroys savings, impedes landing, and discourages investment. That means less productivity and a lower standard of living. And that couldn’t be closer to the truth. So, you know, I guess because of just the amount of inflation we’ve been seeing price appreciation and inflation over the last 18 months or more here at Norada Real Investments, the company that I run here for real estate investors, we’ve seen an uptick in investor inquiries for investment real estate.
So, you know, I think to a large degree, that’s probably because there’s more of a flight to safety, safety in the sense that real estate is a true hard asset. It is a natural head against inflation, but I think there’s also maybe some increasing stock market concerns because it actually has been more volatile in the last three to six months. And I think some investors are getting a little nervous and being shaken out of the stock market and they’re moving some of their capital or maybe all of it, you know, towards hard assets like real estate, which is a natural, I hedge an asset that produces income also allows you to gain equity through appreciation and amortization of your mortgage loan, which of course we outsource to our tenants. We don’t pay that ourselves. Our tenants pay off our mortgages for us. So real estate is a fantastic investment.
It’s the most historically proven asset class. And it’s a great way to deal with rising debts and inflation moving forward. You know, we were drowning in record levels of debt before COVID 19 came along as a crisis and we are now deluged in it. The US private sector loans have tripled relative to income since the 1950s and government debt is also at an all time high. These soaring debts burden, most individuals, and it stifles growth. It compounds inequality in this country and it brings falling living standards for millions of Americans. Unless of course, you’re on the right side of that debt equation, which usually involves assets that you can acquire and leverage using debt to benefit you. And we’ll talk about that. Of course, I’ve mentioned it many, many times over the years on the show as well, how you could use debt as a very powerful tool to accelerate your wealth creation.
My guest today, who is Richard Vague argues that contrary to mainstream assumptions, we cannot simply hope that the trend will correct itself. Mounting debt is a feature of our economic system. He argues, and it’s not a bug, so debt’s perpetually grow and compound. And that polarizes and impoverishes countries and economies if it’s not dealt with. And so that seems to be one of the key questions, you know, how do we deal with it or do we just ignore it and leave it alone? Because as he argues, it’s not a bug, it’s just a feature of our current economic system. So with that, let’s get to our guest and explore. Are this mind-bending new perspective on debt and inflation?
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It is my pleasure and honor to introduce Richard Vague to the show. Richard is an American businessman. He’s a venture capitalist, an author, and the acting secretary of Banking and Securities for the Commonwealth of Pennsylvania. Also, he is the former managing partner of Gabriel Investments. The chair of the Governor’s Woods Foundation, co-founder chairman and CEO of Energy Plus, and he has so many other credentials to his name as the bestselling author of a Brief History of Doom and The Next Economic Disaster. Richard has established himself as a clear and independent voice in the ongoing conversation about the role of private sector debt in the global economy. He is also the author of An Illustrated Business History of the United States and his most recent book. The Case for a Debt Jubilee, which will dive into today is a fascinating book that has really got me to pause and rethink how I think about private and public debt. So with that, Richard, welcome to the show.
It’s a real privilege to be here. Thank you very much.
Well, I’m honored to have you here, especially after an interview, I did this week with an Austrian school expert and talking about debt and inflation and how all that plays together. So I think we’re gonna have a very interesting conversation today. Let’s begin. Before we dive into The Case for the Debt Jubilee, I literally just ordered one of your newer books, An Illustrated Business History of the United States . I’m pretty excited to receive it because it’s, it’s, it’s a beautifully done book, but looking back at the last 250 years of wealth creation in the US, what inspired you to write this book? Maybe a few minutes to tell us about this book?
Thank you so much. We, we did a book a few years ago. That was a review of all the financial crises over the last couple of hundred years in the six largest economies in the world. And we found to our surprise that if you got into the early 18 hundreds, especially, but even as late as the early 19 hundreds, there was lot, it was not as much business data available as we expected. It was hard to reconstruct some of this. Now we managed to pulled that together, but it was with a considerable amount of work. And it led me to think, you know, my goodness, nothing much has been written about the early business history of the United States. You know, much less kind of a comprehensive overview of business history of the United States and surely business history is important to consider as other areas. So we just, you know, coming out of that book, we just committed to ourselves that we were gonna give it a shot.
Brilliant. Well, my book should arrive tomorrow, so I’m pretty excited to receive it. It’ll be a great, a fun read, I think. Thank you. And thanks for doing it by the way. I definitely a missing book in many people’s libraries. So I’ve had a really hard time wrapping my head against your case in the book, the case for debt Jubilee, maybe the best place to start is what we’ll just simply call a theory. The modern monetary theory, the whole central idea of MMT is that governments, you know, that control a Fiat currency system and control the money supply and that they can and should create money or as much as they possibly can to meet the needs If that’s a, even a real word here, the needs of currency in the system that they need to fund whatever programs they are funding as well as to keep the economy moving forward. And I just have a hard time grasping that. First of all, does MMT actually work? And does it even work in the long term? Because I always go to the thinking that this is very inflationary.
Well, you’ve asked a lot of questions all bundled into one, so sorry. You know, I, we, we might need to discuss this for a moment, but I think MMT, there are certainly things about the, the literature being produced by the MMT proponents that I don’t agree with, but I think there’s a lot there that is valid. And I think one of the things that’s valid about it and actually very helpful is they bring economic analysis back to accounting and bring it back to the balance sheet. Just like you would analyze a, an individual’s balance sheet or a business’s balance sheet. They look at the country’s balance sheet. And I think that’s very, very healthy. I think a lot of economic analysis is guys think they’re actually physicists and <laugh>. And the thing that really keeps you honest when you do economic analysis is having to balance the debits and credits.
So that’s much to their credit. Now what they also say is the any sovereign economy can’t run outta money because of various things. And when you get into it, when you really dig into it, that’s actually true. So for example, if the government incurs more debt, they sell securities to do that. Mm-Hmm <affirmative> which extracts deposits out of the economy. Let’s say it’s a million to dollars, but they borrowed a spin. So they turn right around and replenish deposits in the system. So the net entry to private sector deposits from a government debt sale is neutral. And folks really don’t think about that. So, you know, and, and, you know, we could elaborate on that discussion a little bit, but it it’s genuinely the, so then you say, well, does that create inflation? And MMT guys seem to put forward an answer to that that says, yes, if you read Randall Ray’s textbook, he doesn’t deny that.
And in fact, he says the limit on the amount of debt that can be issued is inflation. So let’s say you can, you know, when the economy’s slack, you should incur government spending to kind of push the economy back forward. But once you start experiencing inflation, that’s when you should throttle back the amount of deficit spending or, or GDP. So, you know, there’s, there’s an element of realism to that. I, I think there’s a couple of problems with that analysis, but you know, when you read their books, literally they’re kind of separated into two things. One is a technical analysis of how monetary systems operate. And the second is kind of a wish list about if we do deficit money, what should we spend it on? And that’s where they kind of get into certain policies like basic income and things like that, which you know, I think are at least worth considering. But I’ll say one more thing and then I’ll shut up about this.
No, you’re fine. This is great!
So a lot unpack. And then that is that if you really analyze the it carefully, and you look at the four major monetary systems in the world, which is the United States, China, Japan, and Europe. And I think of Europe kind of as a whole. And you look at every bit of monetary history since 1945, which is kind of a line of demarcation to the present, what you would conclude and you can do this at home. You don’t have to mean being an economist. This data’s easy to find that the growth in debt and the growth in money supply is actually inversely correlated to interest rates and inflation, kind of the point of inflection that was kind of debt, total debt. And the economy in any of these four areas was pretty flat up until circa 1980 and since 1980 to the present debt has exploded private and public debt and inflation and interest rates have gone down. So if you were an empiricist and you were honest in your analysis, you would actually conclude that more debt means less inflation and lower interest rates. And frankly, that’s kind of where I am.
So that’s the part that kind of flies the face of what we often hear and that we’ve had our mind wrapped around for so long. And what you hear, you know, all the talking hints talk about is that if the monetary policy is to put more money into the system, quote, unquote, that leads ultimately maybe not right away, but as it trickles through the system and works its way to corporations, people, and citizens that that creates inflation, maybe because it’s creating more liquidity in the economy for people to spend, which is, you know, where consumers help to drive the economy. But to me, that’s inflationary. And you’re saying that there’s no correlation or an inverse correlation to that. This is the part that I have a hard time wrapping my head around.
You know, it’s an easy proposition to test. We have relatively comprehensive data on 47 of the largest 50 economies in the world. Wow. Gather, constitute, you know, let’s call it 90% of global GDP. I mean, it’s, it’s the world. We have all their data. I mean, there’s so three countries that are exclude because we don’t have sufficiently complete data. You can go forward and pick any definition you want for high money supply growth or high debt growth and go through each of those countries and see whether those periods were followed by high inflation or were not high inflation. That’s a pretty straightforward analysis to do. And we’ve done that analysis and the correlation is not compelling.
So is that coincidence or is that showing causation?
I think it’s showing a lack of causation and we’ve, we’ve studied this pretty hard. I think, you know, I think there’s a generation of economists that came up during the very painful years of late 1973 to 1982. And, you know, they became convinced and it was as espoused by, you know, superstar economists, Milton Friedman and others. And it was certainly used by Paul Volker that the reason that inflation was high and it peaked at 13 and a half percent, but it, the reason it was high was because of high money supply growth go examine that period carefully. The thing that was really going on in that period was the acceleration of petroleum prices. The early prices in, you know, I think it was September of 1973, went from $3 to $10 a barrel in the Yom Kippur war. And then just a few years later in 1978, 1979, it went from $10 to $39 a barrel <laugh> and that’s what brought inflation.
And you can observe that correlation almost month by month. Inflation does not really go up in any profound way until oil prices go up. And then what happened? Well, Carter first in a timid way, and then Ronald Reagan and his typically bold way deregulated domestic oil prices, which Richard Nixon had capped in 1971 cap did at $3 barrel was fairly uncontroversial move at that time, cuz oil had been, you know, $3 barrel or lower for, you know, 20 years. What happened when Reagan deregulated oil and it was just domestically production exploded. Everybody was drilling for oil ever. I was living in Texas at the time I guarantee you. It was a [inaudible]. And as soon as, you know, production doubled and quadrupled and so forth, what happened well, obviously prices collapsed. And so, you know, the prices headed down 1982, the price had gone down from $39 barrel to 28. And by the time you got to 1986, it was down to 10 or $11 barrel. And in fact, just followed that curve just, you know, almost year by year and, and in, and the truth is money. Supply growth was still high in 1986 and inflation was only 2%. So it’s really hard. I think once you get into the actual data to build a compelling case for that linkage.
So for the eighties, it almost sounds like the deregulation improved production, which improved or increased supply, which drove prices down, which allowed consumers after the fact to buy more, purchase more and take advantage of that increased supply. Okay. I get that. I understand that. Now, how would you explain the inflation that we saw in the sixties and seventies then?
Okay, so inflation in 1972 is 3%. Okay. So, you know, the very mild, there’ve only been eight episodes of what I would call high end in the entire us history from 1800 to the present only eight. Okay. Four of those were linked to war, which you would expect, right. You know production is decimated in war and the only two recent ones were a brief period of what I would consider mild inflation. It only got up to 5.7% cent in 1969, 70 then was back down to reasonable levels in 72. And then it came back up in 73 with the Yam Kippur war. So what happened in the sixties was we were trying to defend the gold standard, right? The gold in the United States in the thirties, when we, you know, delinked from gold, gold, just flowed into the United States. And we ended up with 20,000 metric, tons of gold in the United States circle, let’s say the mid 1930s.
Then we put Bretton Woods into place in the 1940s. And the gold supply was maintained by that Bretton Woods Agreement at that $35. But as early as the mid 1950s, the dollar was starting to weaken against this artificial $35 level. Right. So folks started showing up at the fed, exchanging their dollars for gold for 35 bucks an hour and selling ’em on the rest of the world’s markets for 40 56. You know, I think in India for a period of time, gold was selling like for like 70, $80 by ounce and you know who wouldn’t. So the United States from 1960 to 1970, the supply of gold at the Fed goes from 20,000 metric tons to 10,000 metric tons. Wow. That’s a lot. And then, you know, we actually raised rates to try to defend the strength of the dollar in 1961, 62, 63. You, you go look at, in the records, they were all already worried about the departure of gold and trying to defend it. Inflation didn’t raise its little ahead until 1966. And then just, like I said, only got up to about 5.7 and then came right back down when Nixon took us off the gold standard in 71. So to me there were other factors at play certainly, but the main thing was us trying to defend an artificial price for the dollar and kind of getting caught.
So kind of a curiosity and personal question, I’m just curious, do you fall more in the Keynesian School of Economics or the Austrian School of Economics? I’m just wondering if you have political or economic alignment to any of those schools of thought?
You know, I’m not closely aligned with either one you know, I certainly have respect for a lot of folks in both camps. I do think there’s room for deficit spending. You know, we’ve, I’ve obviously seen that, but I think there’s a limitation on growing government debt and it’s, this’ll be a surprise, I think, to most folks, but if you are an empiricist and you go look at it. Yep. The thing that correlates with higher government debt is two things. One of them is lower interest rates, which is actually adverse for the economy at a certain point, you know, creates asset bubbles. It hurts pensioners and the like, so, you know, it’s not all of better roses to have declining interest rates. The second thing that rising government debt does surprisingly is increase and exacerbate inequality, right?
Yeah. I mean, that’s the middle class, does it not?
Absolutely. So I don’t have this belief that you can increase government debt in an unlimited fashion as some folks do, but I think a certain amount of it, particularly if that it stays pretty much in line as a percent of GDP is appropriate.
Okay. So if you were to look at, I mean, correct me if I’m wrong, this almost sounds like creditism where we need to drive the economy based on consumers, not on producers, which is moves away from the Austrian school’s thinking. And if that’s true, is there a way to explain inflation as we’ve seen it or the lack thereof through the lens of capitalism versus creditism because these seem to be opposing forces the way you’re describing it.
So, <Affirmative>, if you take all developed economies, you know, Western Europe and the United States, as I said earlier, you don’t really have a lot of inflation and you certainly don’t have the high double digit or triple digit inflation you do in less developed country. Okay. You know, I think, I think the, the highest inflation in the us ever had was towards the end of the civil war where it jumped in one year 30, 34%, I think was the capital. Aside from that, it’s rare to have inflation more than, you know, kinda 10, 12% ever. And it’s limited to just a very few years, and that’s really across the developed economies, but you do have it in, you know, Mexico and Argentina and Zimbabwe. And, and I think there’s an important difference that I can’t find folks anywhere that have really focused on. And that is, there’s a difference between issuing debt, which has a maturity and has an interest rate.
And thus has kind of a built in accountability mechanism if you will, and actually printing money. Now everybody uses the term printing money, but we are, what we’re doing is not printing money. You know, printing money is like what they did to finance the American revolution. They printed pieces of paper. And those <laugh> pieces of paper were, you know, doing payable by the flimsy government. There was that was what we did in the Confederate. The Confederacy did in the civil war. Sure. Other, the other thing that’s notable is, and this is hard to reconstruct. We spent a lot of time on this and it’s and this is, is true of Zimbabwe and is true of Weimar Germany. The amount of currency currency that was printed was like 50 or 75 or a hundred percent of GDP for years to get to that point.
And to me that’s genuinely an inflationary. It’s not debt. In fact, even in the American revolution, the first bank ever chartered in the United States, America, which is called the Bank of North America chartered in 1781, you know, almost concurrent with the Yorktown battle was to shift from printing money to supplying the supplies for the American revolution through bank debt. So again, this difference between printing pieces of paper in issuing debt. We see in the past, we won’t really do that today. So, but third world countries often, and do they, I will just print money and pay folks with it. So I see the very high inflation and the hyperinflation being linked to that phenomena printing paper in amount that is not five or 10% of GDP, but 50 or a 100% of GDP, which would mean in our case in a single year, if we were gonna to try to drop parallel to Yar that our GDP is 21 trillion. So that would mean we’re printing 10, 15, 20 trillion in currency a year for a couple years. I guarantee you that’s gonna create inflation, but that’s not within a hundred miles of what we’re actually doing, which is a printing debt of a couple of trillion a year.
Well, okay. So that’s a perfect segue to what I was thinking about what is going on today. How do you explain what has happened over the last, let’s say 18 months or so, where we’ve increased, you know, the feds balance sheet from about 4 trillion to about 8 trillion. I mean, we’ve effectively created 40. I see in different numbers, 25 to 40% more currency in the US economy from the beginning of time for the us dollar, we are seeing inflation virtually everywhere, especially in healthcare insurance education, but we are seeing it in food and energy. And I mean, you name it. So to me, this is almost like a chicken and egg thing, but how do you explain the last 18 months?
So let’s get back to what I was saying earlier that there’ve been eight episodes of inflation in the United States. And we’ve talked about the, the last two, but we haven’t talked about the first six, four of those six were the war of 18, 12, the civil war, world war I and world war II. And just like clockwork. When you have massive war, what you’ve done is you’ve removed a tremendous amount of the productive capacity within that economy. So Europe and world war, I, you know, all the farms of Europe are turned into battlefield. The United States ends up exporting 20, 30% more wheat and corn from our own farms just to keep the folks from Europe from starving. So there’s a decimation of the supplies in each of those wars. And, and by the way, there’s actually a boost in demand too. If you actually look at the data, the war spending kicks demand up a little bit.
It more importantly, it damages supply production, you know, by 20, 30, 40, 50%. And in each of those periods, you have three plus or minus years of high inflation. And then it ended almost instantly, you know, the soldiers return from the army to factories and farms. Supply chains are untangled in world war II, you know factories that are building tanks are converted back to building cars as the supply chain is resuscitated and restored disappears, not in a matter of years, but in a matter of months, I view our current situation as being most closely comparable to those what I call supply depletion periods of inflation.
So if I was to paraphrase what you just said and in turn it my way, it sounds like the massive inflation that we’ve seen over the last 12 to 18 months or so has been driven, not because of the trillions of dollars that have been printed or created by the fed and put on the balance sheet. But it’s because of disruption in production, which reduced supply, meanwhile, demand for that supply of goods and services didn’t change. If anything, it maybe has increased because we were getting stimulus checks, PPP loans, credit is still cheap. So we’re still depositing monies and creating currency from bank loans that are just creating dollars out of, you know, thin air putting it into existence. So the demand side was the same or increasing supply side was diminishing. And that imbalance, which is just economics 101 has pushed prices, or what we call price inflation. Is that a fair assessment in summary?
Exactly, exactly. And by the way, you’ll know, we, 2020 was actually a period of very low inflation. So if you do a two year look at inflation, you know, the number yesterday was 12 or 7%, right? If you did a two year. So if you compared December of 21 to December of 19, over that two year period, inflation was only up 8.2%, which means 4.1% a year. So, you know, our, our inflation is, is high it’s hurting people, but compared to war based inflation in prior periods, which typically was 10 or 15%, we’re still a little below that.
So everything we’ve talked about makes sense. It’s clear, but it’s not something that you hear very often or even talk about. Why are the talking heads in the mainstream media and maybe even politicians not talking about what we just talked about here in terms of what is creating inflation. And everybody’s so hyper focused on, you know, the quote unquote printing of money and the trillions of dollars being put on the balance sheet.
You know, it’s just an, an interesting thing. And, and I came up in the seventies or eighties, myself, and one of my very first job was running a Fed funds desk in 1979, when fed funds got up to 20%, you know, it was just, it was, it was just mind blowing. That experience is seared into the consciousness of the folks that are the leading the generation of leading economists out there. And so, you know, you know, I think that has really colored everything since that period. And, you know, I marvel people that don’t know anything else, you know, the man on the street, right. Who doesn’t know anything else about economics knows for sure that money supply growth or government debt growth caused inflation. So it’s one of those beliefs, it just became pervasive. And I think if you’re an I empiricist and you go back and you really study things, it’s not nearly as convincing a thing.
So are you saying this is just a lack of education and some level of ignorance? Is that all it is?
You know, I hate to put it in that kind of a term, but I think, yeah. I mean, I think I’ve seen lots and lots of inflation studies. I’ve been pondering this for several years that that’ll do this massive research paper on inflation and the entire spectrum of what they’re studying is the United States in the 1970s. Here’s 47 other countries with a lot of data that you could look at, but no, it’s what you’d call it you too narrow of a scope of analysis. [Inaudible] perhaps.
Yeah. Well, I mean, I don’t say ignorance in a negative light. I mean this podcast and this show and everything we do, you know, in my companies is all about educating people on financial literacy and financial education. And so when I talk about ignorance, I refer to, to ignorance as being expensive. I mean, people think ignorance is bliss, but the reality is ignorance is expensive because you need to educate yourself, especially financially. And what you don’t know is actually costing you opportunity time and whatnot. You know, I’d love everybody to pick up a copy of your book. I think it’s a great read. So, you know, a few questions here as we wind things down your is about consumer debt forgiveness. For the most part, I would assume. Yep. And you make a compelling case. So kind of a two part question, like what is The Case for a Debt Jubilee? Because that’s essentially what you’re talking about. Well, let’s start there before I ask you part two.
Well, something that I stumbled across maybe 10 years ago now is the fact that debt total debt, which is public and private as a percent of GDP and GDP is a proxy for income. So the debt to income ratio of every country in the world, basically, certainly every large country always goes up. And that was an astonishing to me. I can remember when we first pulled the data together, which we did back in those days, there wasn’t an OEC database and some other things we had to make a big effort to pull this together. And when I saw the fact that for all the major economic regions of the world, the ratio of total debt to GDP always grew except for periods of intense calamity. So that ratio actually improved during the great depression, that contraction, by the way, caused a lot of misery, but, you know, go, we can go back as far we want in the case of the United States, we can reconstruct that pretty well all the way back to the early 18 hundreds, but I, we can push it back pretty far in a lot of economies, it always goes up well, if you were talking about an individual and their debt to income ratio always went up, or if you’re talking about a company and their debt to income ratio always went up, we would know without having doing a lot of analysis, that there was trouble ahead, right?
Right, bankruptcy.
Well, all the nation’s aggregate debt is, is the sum of all the household and corporate debt in that country. And so what I’m my conclude is that overindebtedness is built into economies and that leads you to the question, what should we do about it? And, you know, the book goes into great detail about this. You’ve gotta deleverage, but the conventional mechanisms of leveraging inflation growth actually don’t work. We can’t find examples to him. And one of my chapters goes into great detail about this. So, you know, kind of the flippant remark that a politician or economist might make that says, oh, we’ll just outgrow it. You can’t outgrow debt because it takes debt to grow. And so, you know, by process of elimination, all you’re left with is some kind of debt amnesty, some process for expedient dealing with debt that can’t be paid.
Bankruptcy laws are a form of debt amnesty. It it’s a difficult form, but you have, you know, student debt’s gone from 500 million to trillion eight in just a few years is one example. So our book [inaudible] you know, a way for young adults to accelerate the relief from student debt through community service, you know, that’s, that’s, I, I’m not making the same recommendation that Bernie Sanders made that would just wave a magic wand, get rid of it because there’s an element of fairness unfairness to that. But nor am I saying no to the idea, because we need forms of structural debt release almost as a safety valve within our economy. And so we’ve tried in the book to put forward areas of ways of approaching debt relief that have an element of fairness to them. So when you’re
So when you’re talking about the us government and world governments, you’re not talking about a form of restructuring of their debt. You’re actually talking about true forgiveness.
Yeah. In the private sector, I’m talking about true forgiveness. It’s a, okay. It’s a harder nut in government debt, but in the private sector. Yeah. I’m, I’m talking about principle reduction or principle elimination through some mechanism that’s ultimately deemed fair.
Interesting. Okay. All right. Okay. So just wrapping this part of the conversation up, just a question on deregulation. Do you think deregulation is part of the solution going forward?
Well, we’ve examined all the financial crises in American history in great detail. Yeah. And we had crises in 1792, 1797, 1819, 1837, 1857, 1873, 1884, 1893, 1907, 1914, 1929, 1987. So, you know, I, I say all that to make a point every single one of these, and this is one of my earlier books called A Brief History of Doom. And every one of these, they were precipitated by runaway private sector lending, you know, in the mid 18 hundreds, it was massive over lending in the railroad business. You know, you’d have 25 different companies that had lines into Chicago. Well, you know, that’s too many, right? You don’t need that much capacity. So the bonds that were used to finance that go into default and you have yourself a, a debt crisis in the United States. So I do think there’s one thing that you could do to prevent crises. And that is, and, and I make one other point every time there’s rapid debt growth, excessive debt growth as there was from 2002 to 2007.
In the mortgage market it’s because credit policies have been relaxed and usually significantly relaxed. So they’re making mortgage loans to folk that have no jobs, no assets, no. In, you know, the fame ninja loans. That’s true as far back in time, as you can love folks, just relaxed covenants got rid of requirements, lowered ratio, requirements, and so forth, which means we’re making loans that aren’t creditworthy and banks are gonna have losses potentially fail. So the, you know, the one area that we advocate is at some level folks need to monitor the aggregate private sector lending, and it gets excessive. And that threshold is very high. By the way, you can have a lot of growth without triggering the, the alarm bells. I, I think, I think that there’s some, some action that needs to be taken to prevent the crisis.
You mentioned the word crises at least a dozen times, maybe too. And it just seems, there’s an anchor there. Every time we have inflation, do you have indicator or some sort of algorithm that you follow or look at that helps to predict economic crises and the impact it might have?
For what I call banking crises, the answer is yes. You know, we, we have a rough rule of thumb. You know, if you have growth in private debt to GDP of over 20% for four, five years, that’s the warning signal. And that, that equates to about 4% growth in one year. And that’s in GDP adjusted debt.
When you say GDP adjusted, sorry to interrupt by adjusted. Do you mean your removing the government spending out of the GDP?
It’s just private sector debt divided by GDP. Okay. So that GDP increased 10% and private lending increase 10%. That’s zero increase in private debt to GDP. So if you have a, you have a level of debt incur, that’s occurring that where the growth is higher than that, you state need to start looking more deeply into the issues.
Got it. Interesting. Okay. Last question. This shows about education, you know, that’s something we’re really big on, and I’m a big believer in, and what role do you think education plays in finances and wealth creation? Kind of a teed up question, but I’m gonna ask you anyway.
Well, I I’m, I’m a huge believer in lifelong learning and you know, that’s, I think why your show is so terrific, right? And why your show is so valuable to folks, thank you. You know, folks need to learn and they need to relearn cuz you know, most of, most of what I learned when I was 20 and 30 has since become obsolete. So you gotta, gotta stay current. So, you know, I think you guys do a superb job in that, but remaining on top of things is essential. Good stuff.
Good stuff, great! Well, before we give out your contact information, any final thoughts for our audience before we wrap up today.
Just deep appreciation for the opportunity.
Awesome! Richard, it’s been an honor having you on share with our listeners where they can find more inform about you, your work and especially your books. And I, again, I’ve said it twice now I’m gonna highly recommend people pick up a copy of The Case for a Debt Jubilee as well as The Illustrated History of the United States, which should arrive from Amazon tomorrow. And I’m excited to get my hands on it. So please share all your particulars and contact information.
Well, it’s, it’s very easy. My name is Richard Vague and my last name is spelled V as in Victor, A G U E. So it’s richardvague.com.
Beautiful! Well, we’ll put all that in the show notes on the website, in the transcript and in our newsletter. So everybody gets their hands on it. Richard, it’s been an honor having you on thank you for all your information and good work. Keep up the fight. And I hope to have you on again later this year.
You very, very much.
Thank you.
Well, I hope you enjoyed today’s episode. If you haven’t listened to the last episode I did with Jeff Deist titled Inflation and the Economy, be sure to listen to that. It’s an interesting compliment to this episode and it shows or poses some slightly opposing views on the topic of debt and inflation. I think the two go well together and it gives you a lot of food for thought. So be sure to take that one in as well, remember to subscribe if you haven’t done so already takes just two seconds and that way you are notified every week of new episodes and share this with your friends. I mean, why not? If you have like-minded individuals that you like to talk about various topics from investing to economics markets, tax strategy and whatnot. This is a great show for them. So do them a favor and share the show with them. That is it for today. Thank you for listening. See you all on our next episode.
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