Breaking the Debt Supercycle by Atif Mian

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Dependence on credit to boost demand has produced a massive global "debt supercycle" that imperils the world economy.
Breaking the debt supercycle requires correcting underlying structural imbalances so growth is more equitable and debt finances productive investment rather than predominantly consumption.

Rising inequality: the share of disposable income going to the very rich (top 1 percent) has been steadily rising since 1980.
Saving glut effects:
- The "saving glut of the rich": the very rich save a much higher fraction of disposable income, producing large private financial surpluses.
- The "global saving glut": certain countries (including China) earn a larger share of global income and save at high rates through institutions such as central banks and sovereign wealth funds.
Combined effect: financial surpluses from these forces have financed a persistent buildup of borrowing globally.

Total debt in the United States:
- "About 140 percent of GDP between 1960 and 1980"
- "Has since more than doubled—to 300 percent of GDP"
Real investment as a share of GDP: "has remained stagnant, or even fallen over the past four decades" (no numeric value provided in source beyond this description).
Long-term interest rates: "the 10-year US real interest rate has declined from about 7 percent in the early 1980s to zero or even negative values in recent years."

Role of financial sector: intermediates surpluses to borrowers; if channeled to productive investment, resulting debt would be sustainable.
Observed outcome: the debt supercycle has mostly financed unproductive consumption by households and governments rather than productive investment.
Implication: debt-financed consumption ("indebted demand") contributes to aggregate demand short term but requires future consumption cuts by borrowers to repay debt, reducing long-run aggregate demand.

Indebted demand pulls down aggregate demand in the long run.
Policy/market response: economies compensate by pushing interest rates down to ease borrowers' debt-service burdens and to support aggregate demand.
Consequence of falling long-term rates: asset valuations rise, which further worsens inequality.
Paradox: despite extremely low interest rates and abundant financial surpluses, real investment has not risen, indicating both demand-side problems (rising inequality, saving glut of the rich) and supply-side problems (restrictive investment response).

Economies dependent on a continuous flow of new debt for demand are highly susceptible to financial market disruptions that can trigger slowdowns (illustrated by household debt-driven 2008 crisis).
Since 2008, reliance has shifted toward government borrowing to sustain demand.
Political and market risk: governments in advanced economies often borrow at rates lower than growth, but dependence on continued market stability is politically risky; recent rate hikes demonstrate this reliance cannot be taken for granted.

Rebalance growth to be more equitable to reduce the scope for imbalances that generate persistent saving surpluses.
Tax policy:
- Consider taxing wealth beyond a certain threshold to promote more spending by the very wealthy and thus reduce the saving glut of the rich.
Supply-side reforms to expand investment opportunities so debt can fund productive investment rather than unproductive indebted demand:
- Remove restrictions on new construction.
- Promote competition.
- Boost public investment.
Caution on traditional macro tools:
- Fiscal and monetary tools address temporary cyclical problems but not structural imbalances.
- Looser monetary policy can temporarily boost demand by enabling more borrowing, but ultimately indebted demand will exert downward pressure again; such measures risk merely "kicking the proverbial can down the road" or further impeding eventual resolution.

Breaking the Debt Supercycle — ATIF MIAN, F&D Magazine, March 2024.

Breaking the Debt Supercycle
- Breaking the Debt Supercycle (Markdown version)
- Breaking the Debt Supercycle (PDF)