The Hidden Roots of Our Debt Crisis
Seventeenth Paolo Baffi Lecture on Money and Finance: Atif Mian
On 24 November 2025, Atif Mian (Princeton University) delivered the Seventeenth Paolo Baffi Lecture. Professor Mian explored the structural causes of the global surge in debt and the persistent decline in interest rates recorded since the 1980s, arguing that rising income inequality and financial liberalization have been the key drivers of this phenomenon. As income has become increasingly concentrated, overall savings have risen dramatically because the wealthy save a much larger proportion of their income than the rest of the population. This has pushed equilibrium real interest rates downwards, inflating asset prices and increasing collateral values, thereby enabling lower- and middle-income households to borrow more in order to maintain their level of consumption. This has created a cycle of debt-driven demand ('indebted demand'), whereby an economy becomes increasingly reliant on borrowing to sustain aggregate demand.
The Great Recession of 2008 has prompted a shift in reliance from private to public debt, with policymakers running deficits to sustain demand while households have been under pressure to reduce their debt. However, such reliance on public borrowing is not without peril, as excessive fiscal deficits increase financing costs and pose risks to economic stability. Fiscal policy must therefore strike a delicate balance, as deficits must be large enough to prevent recession, but not so large that they threaten debt sustainability. Professor Mian highlighted the significance of risks in the current context of elevated debt-to-GDP ratios at a global level.
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