Morning Must-Read: Adair Turner on Rising Inequality as Possible (Probable?) Driver of Much of Our Demand-Management Difficulties

Adair Turner: Is rapid credit growth really necessary to boost GDP growth?:

The fundamental question therefore remains: Is there something about modern economies that makes adequate demand growth impossible without damaging credit growth? Rising inequality is one driver of this apparent “need for credit.” Wealthier people have a higher marginal propensity to save than poorer people. As the rich get richer, consumption growth may decline, unless the financial system uses their savings to lend to the relatively poor. But much of this debt may prove unsustainable. As Raghuram Rajan pointed out in his book Fault Lines, the US subprime-mortgage boom and bust owed much to pitiably slow growth in lower-income Americans’ real earnings over the last three decades…. A more stable growth model requires less of the “wrong type of debt” – that is, debt that finances purchases of existing assets, supports consumption without addressing the drivers of inequality, or results from unsustainable global imbalances. Without targeted policies aimed at limiting such debt, the world economy risks secular stagnation or further cycles of instability and crisis.