Bubbles and Inequality

There’s something that’s pretty . . . suggestive about the apparent historical link between huge runups in the share of income controlled by the very wealthiest people and the emergence of asset price bubbles and the subsequent crises:

But what would explain the link? Steve Randy Waldman speculates that it’s all about the difference between loose monetary policy creating consumer price inflation and loose monetary creating asset price inflation:


Whether an economy generates asset price inflation or consumer price inflation depends on the details of to whom cash flows. In particular, cash flows to the relatively wealthy lead to asset price inflation, while cash-flows to the relatively poor lead to consumer price inflation.

This is because richer people have a lower marginal propensity to consume. As Kevin Drum puts it:

So: as income inequality goes up, more money flows to the well-off, who use it to buy financial assets. Conversely, less money flows to the poor and middle class, who respond by increasing their debt level. Both of these mechanisms produce a higher demand for financial assets and therefore promote asset inflation.

This seems reasonably plausible to me.