When savings claims exceed new real investment: How the top 1% stores wealth in the liabilities of the 99%

The stock of financial savings can be backed by liabilities that far exceed the economy's capacity for productive real investment.

This is possible because savings are created not only against investment-linked liabilities but also against consumption-linked liabilities.

Introduction

In macroeconomic terms, a financial saving and a financial liability are two sides of the same coin, an accounting identity that cannot be broken. One cannot exist without the other. This fundamental principle, while mechanically straightforward, has profound and often destabilizing socio-economic consequences. Critically, in a modern financial system, savings in the form of bank deposits are created through the extension of new debt. When a bank grants a loan, it does not lend out pre-existing deposits; it simultaneously creates a new asset (the loan) and a new liability (a deposit in the borrower's account), thereby creating new savings ex nihilo. Conversely, when a loan is repaid, the deposit is destroyed, and savings are extinguished. This essay argues that extreme income inequality has distorted this fundamental money-creation process. It has enabled a system where the vast financial savings of the top 1% are not just backed by real economic investment, but increasingly by the consumption-linked liabilities of the bottom 99%, facilitated by ever-lengthening debt instruments like mortgages and student loans. This mechanism allows the financial claims of the affluent to be stored in the consumption of others, creating a system of inherent financial fragility and social inequity.

The Foundational Principle: The Simultaneous Creation of Savings and Liabilities

The act of saving is fundamentally an act of deferred consumption. In a bank-based monetary system, the very record of this deferral—the deposit—is created at the moment a new liability is issued.

• The Mechanism of Savings Creation: When a commercial bank approves a mortgage, it does not transfer a pre-existing pool of savings to the borrower. Instead, it creates a new deposit balance for the borrower, which constitutes new savings in the economy. This is a double-entry bookkeeping reality: the bank’s assets increase (the loan contract) and its liabilities increase (the customer’s deposit). In case of a mortgage issuance, newly created deposit is spent in house purchase which is a real investment.

• The composition of an economy's newly created liabilities—what they ultimately finance—determines the quality and sustainability of its financial savings. A society can only consume what it produces. When new savings are created to finance consumption, it represents a financial claim on future production without a corresponding increase in the capacity for that future production. This is the core of the instability.

The U.S. Case Study: From Post-War Equilibrium to the Liability-Fueled Present

The post-World War II period in the United States represented a relative equilibrium. Strong wage growth and robust public investment meant that newly created credit was more likely to finance business investment, funding the expansion of industrial capacity (Piketty & Saez, 2003). The liability structure of the economy was more closely tied to productive investment.

This dynamic shifted dramatically from the 1980s onwards. The income share of the top 1% of earners began a steep ascent, creating a massive concentration of financial wealth at the top (Piketty & Saez, 2003). Concurrently, real wage growth for the median worker stagnated. The result was a demand-side problem: the bottom 90% could only maintain or increase their consumption levels by becoming borrowers. The financial system responded by creating the necessary liabilities—new mortgages, auto loans, and student loans—to facilitate this spending. The new savings (deposits) were thus created through the act of lending to the bottom 90% for consumption purposes, channeling these newly minted financial assets into the hands of the wealthy who received the payments for houses, education, and goods.

Statistical Evidence of the Shift:

• Income Share: The top 1%'s share of pre-tax national income rose from 10.7% in 1980 to 22.8% in 2021 (World Inequality Lab, 2022).

• Stagnant Wages: From 1979 to 2019, net productivity grew 59.7%, while the hourly pay of typical workers grew only 15.8% (Economic Policy Institute, 2021).

• Rising Debt: U.S. household debt rose from around 65% of disposable income in 1980 to a peak of nearly 135% in 2007 (Federal Reserve Bank of St. Louis, 2023), a direct indicator of the liabilities created to sustain demand.

The Mechanics of Concentration: Mortgages and Student Loans as Conduits

The financial system evolved to intermediate this flow, with two liability instruments becoming paramount.

1. Mortgages: Creating Savings Backed by Housing Debt When a bank issues a 30-year mortgage, it creates new deposit savings. The house serves as collateral, securing this newly created financial asset for the duration of the loan. As mortgage terms have lengthened, the duration of this savings lock-in has increased, making housing a more stable and long-term vehicle for the holder of the savings (the ultimate investor in Mortgage-Backed Securities) than for the legal homeowner. Homeowners could maintain their consumption by decreasing the amount of their monthly mortgage installments through the term extension until 30 years. The system is engineered to create long-duration assets that satisfy the saving desires of the wealthy.

2. Student Loans: Creating Savings Backed by Consumption Student loans represent an even starker example. A significant portion of these loans finances living expenses—pure consumption. When a bank issues a student loan, it creates new deposits. These deposits are transferred to universities and landlords, ultimately accumulating as financial assets for the saving class. The student's future income is pledged to service this debt, meaning the savings of the wealthy are, in essence, stored in the past consumption of students.

• Statistical Evidence: As of Q2 2023, total U.S. student loan debt stood at over $1.77 trillion (Federal Reserve Bank of St. Louis, 2023), representing a massive stock of savings created through consumption-linked liabilities.

The Paradoxical Outcome: When Savings Claims Exceed New Real Investment

This system leads to a seemingly paradoxical outcome: the stock of financial savings can be backed by liabilities when savings claims exceed new real investment. This is possible because savings are created not only against investment-linked liabilities but also against consumption-linked liabilities.

The national income accounting identity National Saving = Investment still holds, but it is maintained through specific sectoral balances. In a context of high income concentration, the private saving of the top 1% is immense. For the identity to hold:

1. The government must run a large deficit (dissaving), absorbing excess desired private saving by issuing public debt.

2. The household sector must be a massive net issuer of liabilities—mortgages, student loans—to absorb savings by funding consumption.

In the U.S., both occur. This allows the financial savings of the elite to be stored in the consumption of the many. It is a profound "level of economic craziness" enabled by unfair income distribution. The wealthy are not just saving in factories; they are saving in the apartments, groceries, and tuition of the less affluent, with the banking system creating the necessary deposits to facilitate this.

Conclusion: An Inherently Unstable and Inequitable Model

The current architecture, real investments financially become the top 1%'s savings through financial instruments. As real investments do not satisfy the strong saving desire, the savings of the few are stored in the consumption-liabilities of the many, is inherently unstable. It creates a fragile financial system, as witnessed in the 2008 crisis, which was triggered by the collapse of the mortgage liability chain. It also creates a profound social inequity, where the pursuit of education and housing transforms into a mechanism for transferring future income from the young and middle-class to the asset-holding elite.

Solving this requires addressing the root cause: extreme income inequality. Policies aimed at rebuilding the link between productivity and wage growth, such as strengthening labor bargaining power, and rethinking the financing of public goods like education, are not merely matters of fairness. They are essential prerequisites for dismantling a financial system that has turned the simple, virtuous act of saving into an engine of systemic risk and economic distortion. The liability-savings paradox shows that an economy cannot be financially stable when it is fundamentally unjust.

References

Economic Policy Institute. (2021). The Productivity–Pay Gap. Retrieved from https://www.epi.org/productivity-pay-gap/

Federal Reserve Bank of St. Louis (FRED). (2023). Household Debt to GDP for United States [HDTGPDUSQ163N]. Retrieved from https://fred.stlouisfed.org/series/HDTGPDUSQ163N

Federal Reserve Bank of St. Louis (FRED). (2023). Student Loans Owned and Securitized [SLOAS]. Retrieved from https://fred.stlouisfed.org/series/SLOAS

Piketty, T., & Saez, E. (2003). Income inequality in the United States, 1913–1998. The Quarterly Journal of Economics, 118(1), 1–41. https://doi.org/10.1162/00335530360535135

World Inequality Lab. (2022). World Inequality Report 2022. Retrieved from https://wir2022.wid.world/360535135