Here’s Why Inequality Is Responsible For Soaring US Debt Levels

Here’s Why Inequality Is Responsible For Soaring US Debt Levels
Stéphane Renevier, CFA

3 months ago2 mins

Most people blame soaring US debt on fiscal recklessness, but economist Michael Pettis says it’s more about structural flaws – in particular, rising income inequality. And as long as nothing’s done to reverse it, the US debt will have to keep growing, or Americans will be forced to accept higher unemployment. Here are his thoughts.

Rich folks are saving more, and spending less. So income inequality forces up savings by effectively transferring income from regular spenders (that’s you and me) to big savers (the wealthy). If the increased savings were invested back into the economy, that wouldn’t necessarily be a bad thing. The issue is, that’s not fully happening (and that’s partly because businesses are constrained by weak demand rather than a lack of capital). So all else being equal, those higher savings – and reduced spending – are shrinking the total demand in the economy and leading businesses to cut production and lay off workers.

To tackle this conundrum, Uncle Sam has three potential cards to play. One: make borrowing more attractive to households to sustain consumption levels. Two: dip into America’s own piggy bank to borrow and rev up demand. Or, three: export the savings in the form of a trade surplus.

That third option is out of the question for the US: it’s the world’s go-to place to park excess savings, so it’s stuck being a net importer of those funds. That keeps the US dollar strong, which, in turn, hurts competitiveness and widens trade deficits. But the first two are express trains to higher national debt, and they explain why it’s been soaring. That makes sense: without soaring debt offsetting that lower demand from excess savings, the economy would be weaker and unemployment higher.

The bottom line is that rising US debt is not simply the result of an out-of-control spending binge: it's a structural issue tied to income inequality and trade dynamics. And until those things are tackled, the US is caught between a rock and a hard place, forced to choose between higher debt or more unemployment. Debt ceilings and spending cuts won’t solve the problem. The only way to break this cycle is to rethink the policies that have helped exacerbate inequality.



All the daily investing news and insights you need in one subscription.

Learn More

Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

/3 Your free quarterly content is about to expire. Uncover the biggest trends and opportunities. Subscribe now for 50%. Cancel anytime.

© Finimize Ltd. 2023. 10328011. 280 Bishopsgate, London, EC2M 4AG