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Government vs. Private Sector Debt: Why It Matters

The cries and shouts against rising government debt are all too familiar by now. Newspapers scream that the sky is falling because of the U.S. debt limit. But we’re losing sight of what’s essential — private sector debt.

Private sector debt and government debt both need to be studied in the context of a country’s financial health. Solely focusing on one and not incorporating the other paints an incomplete picture. Here’s why.

A Balancing Act

When assessing economic growth, the scales must have some equilibrium or balance. It’s a matter of a balance sheet macro accounting, or simply put, total assets = liabilities + net worth. But, of course, there’s nothing simple about balancing a country’s trillion-dollar budget, or trying to process a liability entry of $31.4 trillion in bonds, such as the Treasury has.

Sometimes just breaking down the economy into five macrosectors can help make it a little bit more digestible. Domestically, these sectors are households, non-financial businesses (NFBs), financial companies, and the local and federal government. The fifth sector is the rest of the world (ROW), which is the net of all transactions with foreign households and other entities.

What is private debt? Private debt is the sum of loans and debt securities, which are on the liability side of the private sector. This is money owed to other entities, with an interest rate and maturity date. The largest piece of private debt is mortgage debt. Other types include student loans, credit card debt, auto loans, corporate bonds, and commercial real estate debt.

Putting Pad to Paper

The accounting involved can seem overwhelming. An important concept, that’s also a foundational element of capitalism, to understand is “dual-entry” accounting. On its basic level, when an entry is made for a liability, a corresponding entry should be made for an asset. This is a principle that governs how records are kept for businesses, individuals, and payment systems worldwide.

The result is what is called a net zero budget. But only if ROW transactions are included, because trade deficits must be considered within the calculation. If the net income of the ROW is positive, that means the ROW is making money at the expense of the U.S. and vice versa. Right or wrong, one entity’s loss is another entity’s gain.

A clear example is the year 2020. The U.S. saw its most significant deficit in history, due to the pandemic. However, a direct result of the government’s deficit was an equally large surplus in other sectors, most of which went to households (think of the stimulus payments). One sectors surplus is another sector's deficit—all of the sectors added together, including ROW, sum to zero.

Other countries spent less on the COVID response. Overall, in 2020, the world's collective gross domestic product (GDP) fell by 3.4 percent. On the bright side, the world and the U.S. quickly recovered in 2021, with the global GDP reaching $92.3 trillion, with U.S. GDP being $23.3 trillion.

Tipping the Scales

Considering the year 2020 again, but in terms of not just income, but in terms of wealth. The government saw a $3.2 trillion net income loss, and households only gained $2.5 trillion in net income, which is not the whole picture. If we look at the balance sheet of households, there was a dramatic $14.5 trillion increase in total wealth from 2019 to 2020. On top of the stimulus payments, assets prices skyrocketed- the stock market and real estate values both saw all time highs.

It should be noted that the net worth of ROW also contributes to individual wealth. This is because it encompasses foreign-owned U.S. assets and loans from U.S. entities by foreigners.

The Complete Debt Profile Picture

When analyzing macro economics, private sector debt should be a leading variable. After all, it’s no coincidence that unrestrained, ill-advised, runaway private lending preceded the banking crises of 1929, the late 1980s, and 2008. That’s not to say there aren’t some very valid concerns surrounding government debt. Yes, inflation could occur if there are no constraints on deficit spending. The key is to take a well-rounded approach that doesn’t dismiss the critical role private debt plays. Additionally, the existing paradox must be understood and analyzed to enable prosperity. For better or worse, the reality is that debt growth can bring household wealth and simultaneously increase household wealth inequality.


This blog is adapted from The Paradox of Debt: A New Path to Prosperity Without Crisis by Richard Vague.

For more insights on the vital role of debt—both government and private—in our economy as well as policy provocations that attempt to tame the dark side of debt while allowing it to continue to create wealth, be sure to pre-order your copy today!

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