“It is utterly impossible . . . for the rich to save as much as they have been trying to save, and save anything that is worth saving.” Marriner Eccles, Congressional testimony 1933.
Debt creates fragility. The question is how to escape from the trap. To answer it, we need to analyse why today’s global economy has become so debt-dependent. That did not happen because of the idle whims of central bankers, as many suppose. It happened because of an excessive desire to save relative to investment opportunities. This has suppressed real interest rates and made demand far too reliant on debt.
Two recent papers illuminate both the forces driving this rise in leverage and its consequences. One, directly related to the views of Eccles, who chaired the US Federal Reserve from 1934 to 1948, is on “The Saving Glut of the Rich and the Rise in Household Debt”. The other, on “ Indebted Demand”, explains how debt overhangs weaken demand and lower interest rates, in a feedback loop. The authors of both include Princeton’s Atif Mian and Chicago’s Amir Sufi, well known for their fine past work on debt.