by How inequality causes financial crises One way that inequality precipitates debt bubbles begins with “relative deprivation.” This concept concerns the discontent people feel when they compare their socio-economic status, measured by income, wealth, consumption, or other indicators of perceived economic welfare, with that of their richer counterparts. Economists have suggested several ways that this discontent may translate into indebtedness. One theory holds that people of a given income level may try to increase spending to match the higher consumption of those just above them. This in turn leads others just below the group in question to spend more, and so on, in what has been termed an “expenditure cascade.” Another theory focuses on the increased
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How inequality causes financial crises
One way that inequality precipitates debt bubbles begins with “relative deprivation.” This concept concerns the discontent people feel when they compare their socio-economic status, measured by income, wealth, consumption, or other indicators of perceived economic welfare, with that of their richer counterparts. Economists have suggested several ways that this discontent may translate into indebtedness. One theory holds that people of a given income level may try to increase spending to match the higher consumption of those just above them. This in turn leads others just below the group in question to spend more, and so on, in what has been termed an “expenditure cascade.” Another theory focuses on the increased supply of high-status goods and services that flow into the economy as the rich grow richer. Such increases might induce everyday people to demand and consume more of these status items. If the non-rich wish to maintain their usual consumption of other, non-status items, they might then end up spending more out of current income …
Compared with low-income households, high-income households spend a lower share of their income, and save a higher share. They also allocate a higher fraction of their savings toward riskier assets. This may be another way that higher inequality drives inflated valuations of risky assets like stocks.
Moreover, the manner in which the rich save can serve to finance the debt bubbles of the poor and middle class. Since the 1980’s in the U.S., the rise in savings by the top 1% of the income or wealth distribution has been substantial, and has been associated with dissaving, in other words borrowing, by the rest of the household sector as well as the government … The combination of demand for debt by the non-rich, and the excess of funds supplied by the rich, caused the ratio of household debt to disposable income to rise from 77 percent in 1983 to 177 percent in 2007 for the bottom 95% income group of U.S. households. In contrast, the top 5% group maintained a trendless ratio in the range of 50-100% during the entire period.