## Breaking the Debt Supercycle by Atif Mian

## Source details

**Canonical URL:** [Breaking the Debt Supercycle by Atif Mian](https://www.imf.org/en/publications/fandd/issues/2024/03/symposium-breaking-the-debt-supercycle-atif-mian)

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## Bibliographic details
- Authors: ATIF MIAN
- Published: March 4, 2024

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### Overview / Thesis
- 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.

### Drivers of the debt supercycle
- 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.

### Key statistics and trends
- 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."

### Financial intermediation and the investment shortfall
- 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.

### Macroeconomic dynamics and feedback loops
- 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).

### World economy vulnerabilities
- 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.

### Policy recommendations and structural reforms
- 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.*

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## Content in this bundle

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_Source: https://www.imf.org/en/publications/fandd/issues/2024/03/symposium-breaking-the-debt-supercycle-atif-mian_