Posted by: Dirk | October 24, 2008

Does high income inequality lead to (Great) depressions via stock market bubbles?

The above graph from the NY Times shows that US income inequality has probably risen to levels only known in the run-up of the Great Depression. During the 20s, a huge stock market buble built up in the US. Its burst then started a deflationary downward spiral, leading to mass unemployment. In the 90s, we have seen a huge stock market bubble again, but it’s burst was compensated by a rise of another bubble: the real estate bubble. Now that these bubbles have burst, and already aggregate demand is falling, one would wonder whether we go the way of the 20s: falling asset prices cause a decrease in wealth and a decrease in credit. This causes firms to reduce output, which will reduce demand: debt-deflation results. We are not there (yet?), but maybe it is worth pondering whether historically high income inequality leads to stock market bubbles.

UPDATE: .. or the other way around.

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Responses

  1. […] inequality and Great Depressions More than a year ago I had wondered what role income inequality played in the financial crisis. Mike Konczal has put up a very interesting blog post in which he blames […]

  2. […] sheet recessions and income inequality Almost two years ago, I asked: “Does high income inequality lead to (Great) depressions via stock market bubbles?”. […]

  3. […] in the ongoing financial crisis. I posted some short comments on this connection in October 2008 on this blog, and have rewritten The Fable of the Bees (Wikipedia) into a modern story. However, the paper was […]


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