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Mah-Hui, Michael Lim
Khor, Hoe Ee
Year of Publication: 
Series/Report no.: 
Discussion Paper, Turkish Economic Association 2010/13
Despite robust growth, rising inequality is widespread in many countries. At the same time financial instability and crises are occurring with greater frequency and severity. These two phenomena are related to the contest for a greater share of economic output between labor and capital, with capital gaining a greater share over the past few decades. As a result, there is a tendency towards falling-consumption by the average household and rising savings by a rich minority that could cause stagnation in the economy. This contradiction between falling consumption and rising saving is resolved through the financial system by the recycling of funds from the rich minority to the average household in the form of credit. Financial engineering in the U.S. exacerbated this process that led to excessive lending and borrowing, and the creation of an unsustainable debt and asset bubble that eventually imploded. There is a similar tendency towards greater inequality, falling share of consumption, and rising share of savings and investment in China. However, in the context of a globalized world economy, the contradiction is resolved through a recycling of the excess savings from China to the U.S. adding to the debt and asset bubble in the U.S.
Document Type: 
Working Paper

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