The indebted demand problem

Savings can infinitely grow whereas debt is limited by borrowers' service capacity.

The indebted demand problem has been producing financial crises since 1980s.

As income distribution changes in favor of the top 1% of the population, the rest has to surge debt to store the top 1%'s savings.

The permanently surging private debt induces financial crises, rendering borrowers fragile.

1. Understanding Indebted Demand

Atif Mian's (2022) concept of indebted demand describes a fundamental economic imbalance where wealth concentration among high-saving individuals ("Jeffs") necessitates ever-increasing debt among borrowers ("Janes") to maintain aggregate demand. This dynamic creates three systemic issues. First, it leads to liquidity traps when interest rates approach zero, as described by Mian (2022). Second, it generates financial fragility when private debt exceeds sustainable levels, evidenced by the U.S. household debt reaching 98% of GDP before the 2008 crisis (Federal Reserve, 2023) and China's corporate debt hitting 160% of GDP (IMF, 2023). Third, it creates fiscal paralysis when public debt surpasses 90% of GDP, as seen in Italy's bond market crises and Japan's economic stagnation (BIS, 2022; Bank of Japan, 2023).

2. The Core Mechanism: How Elite Savings Create Debt Dependency

The fundamental driver of indebted demand lies in the extreme income concentration among the top 1%, whose marginal propensity to save approaches 90% compared to just 5-10% for the next 9% (Saez & Zucman, 2020). This creates an economic paradox: every dollar shifting to the top 1% generates $0.85-0.90 in new savings demand, while the same dollar going to the next 9% would produce only $0.25-0.40 in savings (IMF, 2021). Statistical evidence reveals this dynamic:

• United States: The top 1%'s share of national income doubled from 11% to 22% (1980-2020), while household debt/GDP tripled from 50% to 150% (WID, 2023)

• China: Top 1% income share rose from 6% to 14% (1995-2021), accompanied by household debt exploding from 5% to 62% of GDP (Piketty et al., 2023)

• Eurozone: Where top 1% shares stabilized (Germany at 12-13%), debt growth remained moderate compared to high-inequality UK (top 1% at 15%, debt/GDP 140%)

The next 9%'s consumption patterns differ fundamentally from the top 1%:

• For every $1 million in additional income:

  • Top 1% spends just $100,000 (Saez, 2021)

  • Next 9% spends $600,000 (CBO, 2022)

This explains why:

• U.S. states with higher next-9% concentration (e.g., Massachusetts) show 30% lower debt/income ratios than 1%-dominated states (Florida) (Fed Reserve, 2023)

• Scandinavian economies with broader upper-middle-class income shares maintain debt/GDP ratios 40% below Anglo-Saxon economies (OECD, 2022)

3. The Failure of Conventional Solutions

Existing policy approaches have proven inadequate against indebted demand. Fiscal stimulus through deficit spending faces constraints when debt service costs become unsustainable, as projected for the U.S. at $1 trillion annually by 2025 (CBO, 2023). Modern Monetary Theory's claim that deficits are inconsequential (Kelton, 2020) fails in practice when market confidence erodes, exemplified by Italy's bond yield spikes at 150% debt-to-GDP (BIS, 2022). Liability-based CBDC models like Barrdear and Kumhof's (2022) maintain the debt-dependency by requiring central banks to purchase government bonds when issuing digital currency, effectively replicating the limitations of conventional monetary policy without solving the core problem.

4. The Asset-Based CBDC Alternative

A transformative solution emerges by reimagining CBDCs as central bank assets rather than liabilities. This approach enables three critical innovations. First, it permits debt-free money creation through direct grants to households without requiring bond purchases. Second, it generates seigniorage profits for central banks, analogous to discovering new gold reserves. Third, it allows targeted stimulus through programmable features like expiration dates and tiered interest rates. Unlike conventional systems constrained by bond markets, asset-based CBDCs are limited only by inflation targets, creating true monetary sovereignty.

5. Implementation and Advantages

The transition to asset-based CBDCs requires careful design but offers substantial benefits. Technically, CBDC issuance would be recorded as "monetary gold - digital" on central bank balance sheets without creating matching liabilities. This structure breaks the savings-debt linkage at the heart of Mian's (2022) critique while maintaining price stability through quantity controls and velocity dampeners. Historical precedents like COVID stimulus payments ($3,200 per person) and the gold standard era demonstrate the viability of direct monetary interventions. The European Central Bank's (2023) experiments suggest CBDCs could replace 20% of private credit, indicating significant transformative potential.

6. Addressing Concerns and Moving Forward

Critics raise valid concerns about inflation risks and central bank independence, but these can be mitigated. Inflation control mechanisms include annual issuance caps (e.g., 5% of GDP) and programmable money features. Central bank independence can be preserved through clear legislative mandates and transparent issuance protocols. A phased implementation over 5-7 years, beginning with limited digital stimulus vouchers and gradually replacing quantitative easing, would allow smooth adoption. This approach resolves the core limitations of both conventional policy and half-measure CBDC designs while providing a sustainable path beyond debt-dependent demand.

Conclusion

The indebted demand problem, as identified by Mian (2022), stems from wealth concentration among high-saving individuals that forces borrowers to take on unsustainable debt to maintain economic demand. This creates liquidity traps, financial fragility (evidenced by U.S. household debt reaching 98% of GDP pre-2008), and fiscal paralysis (as seen in Italy and Japan).

Current solutions fail because:

1. Fiscal stimulus becomes constrained by high debt levels

2. Liability-based CBDCs (like Barrdear & Kumhof's 2022 model) maintain debt-dependency

3. MMT approaches lose effectiveness when markets lose confidence

The proposed solution is asset-based CBDCs that:

• Are recorded as central bank assets (like gold reserves)

• Enable debt-free money creation through direct household grants

• Generate seigniorage profits for central banks

• Allow targeted stimulus with programmable features

Implementation would:

• Break the savings-debt linkage

• Maintain price stability through issuance controls

• Follow successful precedents like COVID stimulus payments

This approach resolves the core limitations of debt-dependent systems while avoiding the inflation risks and political constraints of alternative solutions.

References

• Bank for International Settlements. (2022). Annual economic report 2022

• Bank of Japan. (2023). Financial system report.

• Barrdear, J., & Kumhof, M. (2022). The macroeconomics of central bank digital currencies. Journal of Economic Perspectives, 36(4), 201–226.

• Board of Governors of the Federal Reserve System. (2023). Household debt and credit report.

• Congressional Budget Office. (2023). The 2023 long-term budget outlook.

• European Central Bank. (2023). Digital euro report. International Monetary Fund. (2023). Global debt database. Kelton, S. (2020). The deficit myth: Modern monetary theory and the birth of the people’s economy. PublicAffairs.

• Mian, A. (2022). The indebted demand problem. Princeton University Press.

• Mian, A., & Sufi, A. (2014). House of debt: How they (and you) caused the Great Recession. University of Chicago Press.

• OECD (2022). Household debt and income distribution. https://stats.oecd.org