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The wealthy sitting on their savings may be helping finance the debts of poorer Americans and therefore play a role in rising inequality, according to the Chicago Booth Review. 

Researchers Amir Sufi, Ludwig Straub, and Atif Mian looked at the growing savings of America’s wealthiest residents, and found it isn’t going into what they call “productive” investments, like building roads or new research. Instead, the stockpile is going toward financing debt from everyone not in the top 1%.

Prior to the financial crisis in 2008, such savings financed “almost a third of the rise in household debt owed by the bottom 90%.” After the housing crash, they began to take on a greater role in subsidizing government debt (although the continued debt from lower-earning Americans is still financed from those savings).

How does that work, exactly? Rebecca Stropoli at Chicago Booth Review uses the hypothetical of a corporation issuing equity to a wealthy shareholder, but the proceeds don’t go on research or equipment but into a deposit at a bank, which in turn uses it to fund a mortgage for a less-affluent household. The wealthy are financing bank lending to average Americans, in other words.

When the poorer take on more debt — especially when they’re incentivized by low interest rates — that’s less money they have to spend on other things.

During the pandemic, wealthy savings climbed, along with their fortunes

On the whole, the personal saving rate — the amount that Americans have left over from their income after paying off bills — has climbed during the pandemic, although it shot down in April 2021. But, as Time’s Alex Gailey reports, an increased savings rate may not show the whole story. Poorer Americans, Time reports, continued to spend at levels just a little below pre-pandemic rates, while their wealthier …read more

Source:: Business Insider

      

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