Debt is central to our economic system and its potential ruin.

The economics profession has faced increasing pressure in recent years due to its treatment of debt. The Paradox of Debt enters this debate as the strait-laced, level-headed cousin of Modern Monetary Theory. Providing an overview of the monetary system and credit creation, the book critiques prevailing narratives on deficits, trade and inequality, but offers practical policy considerations within a framework the author calls Debt Economics.

Debt Economics is predicated on a few key principles: total debt matters more to an economy than government debt; debt should be considered in the context of a country’s balance sheet and income statement; and increasing debt-to-GDP increases inequality, best resolved by debt relief.

Authored by Richard Vague, a practitioner with experience of running banks and businesses, the content is data-driven with only smatterings of theory to guide the reader along where necessary. Vague opens with a description of GDP, money creation and its sectoral components, before making an early distinction between two types of debt: Type 1, used to fund consumption, and Type 2, used to buy existing assets. The former drives GDP growth, the latter inflates asset prices. Together, they lead to a general rise in debt-to-GDP over time.

Much of Vague’s initial analysis is couched in US economic data. Later chapters then apply his accounting-based analysis to several major economies; the results are convincing. He identifies different “growth strategies” across these countries based on the primary source of debt. Government debt, for example, was the key debt source for the US, France, UK, Japan, and probably India (the data are patchy). Debt created by the government creates wealth for households. Germany, by contrast, has grown by attracting funds from the Rest of the World – international debt rather than domestic. China stands on its own. Debt there is mostly from the non-financial business sector, an outcome only possible due to the state’s ability to control and support these firms. Playing Vague’s game of “Whose Debt is it Anyway?” raises an important challenge to the media fixation on bringing down government debt: should private debt make up the difference, or should household wealth fall?

Despite briefly acknowledging the role of supply-side expansion, the book pays surprisingly little regard to productivity in creating real growth. Vague addresses productivity early in the book but argues that productivity gains are only possible through debt. While the effect of debt in increasing productivity is an interesting area for further exploration, it oversimplifies the drivers of growth and, ultimately, living standards. Throughout the book, Vague focuses on nominal (or financial, as he says) GDP and takes a simplistic approach to inflation, money velocity, and bond markets, leaving important questions unanswered. These factors deserve deep analysis before the book’s policy considerations can be fully endorsed.

In a recent speech on growth, the Bank of England Governor, Andrew Bailey, failed to mention debt or credit once. That omission is hard to ignore. Economists need to look at debt more closely. They need to develop their understanding of accounting. The Paradox of Debt offers an approachable entry point, but it does not provide all the answers, nor does it claim to do so. If you suspect that the debt tail has begun to wag the economic dog, then The Paradox of Debt helps unpick those mechanics and offers provocative solutions worth considering.