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298: Is PRIVATE Debt the Real Danger?

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Buck: Welcome back to the show everyone. Today, my guest on Wealth Formula Podcast is Richard Vague. Now Richard is an interesting guy because he started out, you know, is a very effective entrepreneur venture capitalist. He’s the co-founder and chairman and CEO of an electrical company and natural gas company and a co-founder and CEO of two national consumer banks. Now what’s unique about Richard is now he serves as a Pennsylvania secretary of banking and so usually when we get those kinds of positions, you know, it seems like a lot of those people end up being academics and not necessarily having real world experience. So Richard, I’m so excited to have you on the show today.

Richard: It’s a real honor to be here. Thank you.

Buck: Now, Richard, you also wrote this book, The Case for a Debt Jubilee, which I assume is making the thesis of what we’re going to talk about today, but maybe we’ll talk about that a little bit later. For my audience. Let’s start with this question here, because I think the fundamental idea, that I think you’re talking about is this concern, being overseen that it’s not necessarily the national data sovereign debt that we should be concerned about, but more private debt that we should be looking at, maybe just because, you know, we have so many people who are not economists. Maybe you can kind of create for us a sort of infrastructure for thinking about that before we kind of dive in.

Richard: Absolutely. Yeah, we studied this pretty carefully and private debt, which is the debt of businesses and individuals, now totals, you know, some $35 trillion. So it’s quite a bit higher than government debt, which is in the $25 trillion range, growing rapidly, of course, but private debt is big and it had the bigger effect on economic outcomes and to put it in perspective right after world war II, let’s say around 1950 private debt. As a percent of GDP, which is a way to think about it through time was less than 50%. And today it’s about 160%. So private debt, the average amount of debt that the average household or business carries has tripled in that period. And that’s weighing down a lot of folks and it’s mortgage debt, obviously.

But, you know, more recently it’s been a huge growth in student loan debt, credit card debt buy now pay later debt, automobile lending, debt, you name it. And it’s one of the things that impedes economic growth.

Buck: So let’s back up when we talk about, you know, we often hear about the concern of, you know, national debt and tell me why you perhaps less concerned about national debt than, you know, traditionally, we hear from say from politics,

Richard: Well, it’s not that we’re not concerned about it. It’s, we’re less concerned about it. We’ve studied the debt of over 50 countries going back almost to world war two in most cases. And that’s really about 90 plus percent of world GDP in world debt. So we’ve studied very actively. Dead trends everywhere across the globe increases in government debt, rarely cause any issues.

If you think about it, empirically rapid increases in private debt, bring financial crisis. The crisis in the United States at the end of the 1980s was brought about. Junk bond debt and commercial real estate debt. Obviously our 07/08 problem came about by a trip, a doubling of a mortgage debt from 5 trillion to 10 trillion.

So we can find example after example after example, the private debt growth, bringing financial crisis. you know, when you’re in a large developed country, you really are hard pressed to find examples where growth in government debt creates much of an issue. And one of the reasons for that is.

Government debt and spending actually government can print money to pay back its own debt.. And so, you know, it doesn’t create the repayment crisis, that it obviously does in the private sector.

Buck: Now let me ask you this. One thing that I’ve heard in interviewing some economists lately is that savings rates have actually gone up. Is that true? And if it is, savings rates go up in household savings. Do we look at the debt as people who essentially are not paying down debt, but they just, their savings rates are going up. How, how does that work?

Richard: Well, I think we’ve had a one-time phenomenon here. That’s really, without precedent, you know, pretty much ever in history, we’ve had the government spend and this is a fiscal congressional act and we’ve seen it in the cares act.

And the more recent acts where we gave Americans across the country checks for $1,400 and $1,200. And we. Additional child support checks for additional child support that released on the order of $3 trillion in additional spending into the economy. So counting, you know, in one respect, the answer is of course our savings rate is up government, just bit, you know, 3 trillion, which is it’s dead.

But the private sectors asset, so savings rates are, are up. That’ll get depleted through time as fiscal programs disappear

Buck: Is that, you know, I’m sure there’s not where you’re leading, but it just makes me think. Is that an argument for the universal basic income?

Richard: Some folks, some folks say, yes, know that’s its own discussion, but then, you know, what it would suggest to you is there capacity for that?

And I think, you know, it’s judicious. I’m not a person who spends a lot of time advocating that kind of a program, but I don’t, you know, I don’t complain a lot when others do, I think their heart’s in the right place. And there might be an approach that works, but in terms of capacity, absolutely demonstrates that we have capacity.

Buck: You know, then what other kinds of debt relief policies do you think would be effective to alleviate private debt? I mean, short of, you know, the government handing out money and getting people to, you know, to pay.

Richard: Well, I think you have to be careful here. And this is where I think, you know, it, it behooves us to think carefully about this because some folks like presidential candidate and Senator Bernie Sanders and Senator Elizabeth Warren and others have advocated with the best intentions wiping out all student debt, which right now total is almost $1.8 trillion.

And yet others have said, you know, I think with plenty of justification that there’s an unfairness to that, because what about the folks that were responsible that did pay down their debt that did forego the new car and the vacations and pay down their debt. So, you know, I think we have to think about the fairness dimension of this.

And folks may remember that it was a. Kind of in the Obama years, that right around the big crisis that Obama proposed a certain kind of a debt relief relative to mortgage and a number of folks, objected that quite loudly in the formation of the tea party came out of that. And again, it was just this idea of we’re going to do blanket X for somebody that certainly will help others, but it will be unfair to many who were more responsible.

So. The book that, you’re kind enough to, to be visiting with me about today. I try to be thoughtful about that in the case of student debt. For example, I propose a program where if you make a certain number of payments, let’s say eight years worth of payments. And also you do a certain amount of community service.

Let’s call it a thousand hours or 800 hours that would qualify you for. You know, a buydown of some or all of your remaining Stu suit and debt. So I’m trying to kind of find a middle ground between just giving stuff away and nevertheless, trying to help folks that are willing to work for that.

Buck: Yeah. It seems like maybe tie in with some of this infrastructure stuff too or something like that, right?

Richard: Yeah. Well, you know, there’s a lot of room to be creative here and then, you know, I think, I think it’s just keeping in mind that yes, people do need an accelerated way to dispose of some of this burden, but we have to be fair about it

Buck: When you break those numbers down. Cause you know, obviously a hundred would have think you said 160 percentages for private debt, how much of it is coming from mortgages of, for example, you know, obviously in, in my world we have a tremendous amount of debt. You know, we tend to think of it as good debt, because it’s, you know, cashflow is covering the debt and mortgages and in a way, the government is doing us a favor by, you know, creating inflation, washing out our, the value of our debt.

What’s the breakdown on that? I mean, how much is this is like, you know, personal debt versus an increase in leverage. You know, investors because presumably when you talk about private debt, you’re including, you know, the 30, $40 million, you know, mortgage that we’ve got from Fannie and Freddie on, you know, on a $45 million property and that kind of thing.

Richard: Well, it breaks down like this. If there’s a, roughly 35 trillion, about half of it is business debt. And about half of it is individual or household debt. So let’s call that, you know, 16, 17 trillion that’s household debt. Well about 11 trillion of that is mortgage debt. So you can see, you know, the 800 pound gorilla.

Anytime you think about private sector, debt is it was mortgage debt and that’s household mortgage. On the commercial side, it’s about 6 trillion in what I would call commercial real estate that, and that encompasses everything from, you know, interim construction lending to permanent mortgages on commercial properties.

So any way you cut it, the big factor in private debt. And if you add the individual and commercial real estate debt together, that’s about half of all. Private sector debt. And you are correct in saying that most of that is, is very productive. However, we do get into these periods as we did in oh seven and oh eight, where evaluations become unrealistic because.

And accelerated, schedule a blending, you know, mortgage lending increased from 2002 to 2007 mortgage lending went from 5 trillion to 10 trillion. You know, a blind man should have and could have seen it. And yet the fed didn’t and, so there you can get in trouble in real estate lending. We’re not in such a period right now.

I will tell you, but it is an area you can get in trouble if you’re not mindful.

Buck: Got it. So I guess the, I guess the next question I is for me is like, we’re not in trouble right now, per se, in the mortgage side. What kind of triggers and time are we looking at, w what kind of warnings are you looking at to say going from we’ve got a problem to, you know, straight up economic calamity?

Well, it’s not, it’s not subtle and it’s not hard to detect, you know, I think what we do, and, and I go into this in the book. And I also have, you know, a web service that, that covers this. But if you look at any of these categories of debt and you divide it into GDP, you get it. That’s a way to look at it through time.

And if real estate debt, or any other category in ratio to GDP stays pretty constant. Or grow slowly. you don’t have a problem. we would estimate that if that category increases, let’s call it 30 or 40% to GDP in a four or five-year period. You got yourself a problem. And you just kind of, you can slice that into five-year one-year intervals and see that if it’s growing more than four or 5% a year for two or three years in a row, Fasten your seatbelt.

And that’s a pretty easy computation of may. And in all of our analysis of crisis, whether here in the United States, China, Japan, elsewhere, it’s never a subtle movement that you have to have a micro spoke to detect. These are big obvious problems.

Buck: Well, you know, if you look at the housing market right now, I mean, you, we have had a huge, a huge change.

Right? So what, why or why would you say that we’re not necessarily there, right.

Richard: Well, several reasons. One of them is that our mortgage debt to GDP has stayed pretty far. It’s ticked up a little bit here in the last year. but not enough to be alarming. Secondly, if you look at. The building and the sale of new homes or the sale of existing homes, which is very easy data to get from the St.

Louis fed or elsewhere. You’ll see that the levels that we are now, running, you know, kind of our run rate now is far, far below 2005, 2006, 2007. You know, I think what has happened here is that our inventory of homes for sale. Was at a, you know, on a rate basis on an all at an all time low, you know, the inventory of new unsold homes in oh six oh seven was let’s call it 2.7 million homes today.

It’s 1.3 million home. So they’re just even before the pandemic pandemic, there just kind of weren’t any had this phenomenon that we all are very aware of, where folks are buying second homes. If they live in the downtown, they’re buying homes in the suburbs. If they live in the suburbs, they’re buying homes in rural America.

We see that throughout Pennsylvania, little towns, you know, inventory they’ve carried for 50 years is also low at the moment, but they haven’t yet sold their existing. So you have this phenomenon of a lot of additional home sales that primarily induced by the circumstances of the pandemic on a very low inventory base.

But, but we do not have anything close to an oversupply of unsold inventory.

Buck: That’s sort of essentially what we’re kind of seeing in the market too, is there’s just a. You know, there’s just still such demand or housing. And in some of the major markets that we’re focused on, there’s so many jobs and continuous need for housing that, that, that has not outpaced our growth.

So let’s talk a little bit about one question I have that I’ve been asking a number of economists and you know, other types of financial experts who come on the show. And I’m curious at your thoughts on this, Richard, is that, you know, a lot of the things that we talk about and we’ve been talking about today, debt, and, you know, the potential for that debt to become so burdensome is, you know, it has a potential of creating eco economic calamity.

One thing that I’m curious about is we’ve seen sort of a next level intervention from the fed and from the government. Do you think. That fundamentally the rules of the game have changed in the sense that calamities, like the one you’re talking about, that there would be such overwhelming government and fed a stimuli.

That you can avoid those types of things going forward. I know it seems kind of ridiculous to suggest right this time it’s different. Right. But on the other hand, we’re just seeing really unparalleled interventions. And I’m curious what your take on that is and how it affects your projection.

Richard: Well, you know, the fed has certainly learned how to mitigate the effects leading to a crisis.

If you look at 1929, the fed did everything wrong and the treasury did everything wrong. And by the time you got to 1987, w we had learned a lot and we mitigated it somewhat in Japan who was having their crisis at essentially the same time. You know, the early nineties was able to mitigate it somewhat.

We did even more and not in 2008, you know, when we did a trillion dollar stimulus program, and now what we’ve done makes all that look very tame. In retrospect, you know, we’re done. You know, it’s essentially $3 trillion for that. So we have certainly learned how to mitigate it. However, the underlying issue in a financial crisis, and I’m talking, I’m not talking about the pandemic crisis, talking about Japan in the nineties, the U S and oh 7, 19 29.

The fundamental common denominator of those prices is overcapacity. Who many houses. Too many office buildings in the 18 hundreds, we had a whole bunch of these crisis. It was too many railroads. You know, it’s, it’s some big factor in the economy. The fed can soften the blow, but if you’re a builder that’s built, you know, a thousand, too many homes, you can soften the blow for me, but you can’t take care of my fundamental problem.

Only time. Can dissipate that inventory so we can cushion things a lot, but we, we still have a massive overcapacity problem leading to these things. And you don’t need to hire construction workers when you got a million, too many homes and you don’t need to hire them from several years. So, employment is impacted, the banks that made the bad luck.

I have to take the time to recapitalize to be real, a little repetitive here can soften things, but it can’t make things go away with a magic wand.

Buck: It’s funny. Cause you were talking about overbuilding. I had this image of, all of those vacant, all that vacant real estate and. How are we doing compared to the rest of the world this year?

Richard: Quite well. They’re our problem. We, we looked at the seven largest economies in the world with regularity and that’s, includes China’s the world’s second largest economy, obviously. And their. The current estimate is that there’s 90 million houses and apartments in excess of what they need empty houses and apartments.

China’s got a problem. And, you know, do we talk about government mitigation? China’s government knows how to mitigate problems. That doesn’t mean the problems aren’t there and they, aren’t going to have two things they’re going to have to wrestle through. We see this with ever Grande and evergreen gets the headlines.

There’s dozens of other big companies with similar problems. I think two things happen as a result of that. You know, I think, I think China probably managing. To keep a bailing wire around the whole thing. But what China can’t do is sustain a seven or 8% growth rate for the next decade. so, and they have, that’s what they’ve been doing.

Historically their growth rate probably comes down to low single digits. And since they’ve been half of global growth, That half kind of disappears and it’s not dissimilar to what happened after 98 in Japan, Japan had been growing, you know, 15, 20% forever. And their growth from 1998 to the present is essentially been zero, zero.

And they had just built so much excess into their economy. So I think China is in for a slower growth, and we’re going to feel that around the world and we won’t feel in the form of a crisis in the us there hasn’t been that much cross border lending and investment. but we will feel it, in a, in a marginal slowdown.

Buck: How does that from a day-to-day perspective, how, how does that kind of slow down? Effect, you know, individuals, I mean, what I’m curious on that, because it certainly makes sense. You know, if you have this economy, that’s a behemoth, going from 8% down to two, 3% growth that there’s a global slowdown. How are we going to feel that if that happens?

Richard: You know, I think we feel it at the margin.

And I think that means. Our growth was going to be 3%. Otherwise it’s probably two and a half percent or two and a quarter percent. I think it, I think, I think it’s not a crisis, but it’s it’s we have less pep in our step.

Buck: You talk a little bit about a US business deathmatch with China. Can you talk a little bit about what’s going on?

Richard: Well, and you know, China’s gotten pretty good, you know, they, you know, they have, they have, you know, I will say China has more than its share problems that it’s going to be dealing with. But one of the things China has done is it has targeted investment into areas that matter for the future. And I clued in that list, genetic engineering, artificial intelligence, super computing.

you know, any number of things that, you know, augmented reality and virtual reality electric vehicles, and the like, and whereas we kind of had the world ourselves for three or four decades in terms of being so far ahead of the world in technology, we have a bonafide competitor for the first time and it’s.

Play out and competition for market share and protocols in, you know, while way is one of our competitors on the telecommunication side, you know, they’re going to either have more market share globally are we are, and that’s going to play out sooner rather than later, you know, there’s, there’s some astonishing breakthroughs that have happened in genetic engineering, associated with.

Cancer research group at Penn that has found in fact, found the cure for certain kinds of cancer through genetic engineering, they go in and modify the DNA of the immune system to attack the body’s own tumors. It’s called car T and there are now more trials. On car T in China than there are in the United States, even though it was invented right here in little old Philly.

So, you know, that’s what we’re looking at. And so we, we have the first legitimate competitor in my mind that we’ve had and, you know, half a century or a second. And it’s, we’re going to have to up our game.
Buck: I mean, the other challenge is, they don’t really play by the rules. Right. And there’s so much theft and intellectual property theft and that kind of thing going on.

I mean, what do you, what do you see the future of that?

Richard: You’re absolutely right. But I’ll tell ya. There was a country back in 1800, not in the name of the United States of America. It was stealing that would, they were Gump government sanctioned, theft of industrial revolution secrets from Britain, right.

And left. Right. We weren’t going to look, let them sit there without taking some of that for ourselves. I don’t think it’s unexpected. I think there’s, theft between American countries. you know, there’s a certain amount you can do through the court system, but I think the answer is as much or more in accelerating our investment in future research, it let’s let’s speed up our discovery of new things.

So by the time they steal them, they’re absolutely. And that’s what we really ought to be doing.

Buck: So curious about what you think given what, what you’ve talked about today with private debt, given what you know about, the condition of the country coming out of? Well, I shouldn’t even say coming out of a COVID crisis because it seems like there’s, there’s something else going on and everybody I know seems to have it, But w what do you thinks hap what’s going to happen in the next five years?

As we, as things start to normalize, do you see an increase in dat and inevitable calamity, or do you see interventions potentially being able to help? Oh, I’m just asking you to look into a crystal ball.

Richard: Well, I think one of the things that’s happened, you know, we, people don’t talk about this very much, but I think there is one concern about rising government debt and that is that we’re going to have even lower inflation and even more inequality.

We’ve seen a dramatic increase in inequality just in the last two years from the 3 trillion that’s been spent, where did most of that end up in the pockets of the, of the haves rather than the have-nots. And that’s a very different concern than most people have had for the last 40 or 50 years.

Everybody always thought our government debt. High inflation. Well, the opposite is the case and we don’t have to look much further than Japan to know that’s true. You know, Japan’s government debt is 250% of GDP. Ours is 130%. Their money supply is 211% of GDP. Ours is 91 and they have zero inflation. They have, in fact, they have negative impacts.

So I see a world where it’s somewhat slower growth. I see a world that after we get through pandemic inflation is back to low inflation. And I see a world where inequality is increased. What that means is a lot of folks that, that do have money have more. No, I think your, you know, your, your clients, your clientele with, and you are making savvy decisions in real estate, we’ll probably do better and better, but societaly, I have concerns that we have increased polarization increase unrest, not, I don’t think that rises to the level that some folks do, but I do think that makes things very painful for us, kind of in the background.

Buck: Yeah. It’s something that a lot of people have brought up. Hopefully, we can come up with some kind of plan for that. Richard, the, a book is The Case for a Debt Jubilee. And also you have an illustrated business history of the United States, right? Where can we get there? Are those available on Amazon?

Richard: Absolutely

Buck: Fantastic. And then you also have a website. It’s a www.RichardVague.com. Tell us what kind of information we can get.

Richard: Well, it’s just the books that we published, including the two you just mentioned, and some data sources that really play into some of the discussions we’ve had today.

Buck: Fantastic. Richard, thank you so much for being on Wealth Formula podcast. I would love to have you on again in the near the future.

Richard: Well, you have a terrific show. Keep doing the great work and thank you for including me. Thank you.

Buck: We’ll be right back.