519-646-2222The Debt Spiral: How Increasing Debt Fuels Inequality, Inflation, and Economic Instability – Economists are always wrong!
The modern economic model has long encouraged consumer spending as a driver of growth. However, this model increasingly relies on the expansion of personal debt—an unsustainable strategy with long-term consequences for wealth distribution, inflation, and government fiscal health. The global financial trends observed since the 2020–2021 lockdowns have illuminated the systemic risks of this approach, marking what many experts call the greatest transfer of wealth in human history.
The Hidden Cost of Debt: Transferring Wealth to Lenders
When individuals accumulate debt, they effectively commit a portion of their future income to interest payments, transferring wealth to those who issue and hold the debt—primarily financial institutions and affluent investors. As economist Michael Hudson notes, “Debts that can’t be paid won’t be paid—but the attempt to pay them impoverishes the economy” (Hudson, 2015). This debt-servicing burden diminishes disposable income and limits economic mobility, especially for middle- and lower-income households.
Low Interest Rates: A Double-Edged Sword
While lowering interest rates is traditionally used as a stimulus tool, it also creates incentives for excessive borrowing. The post-2008 and post-COVID monetary environments featured historically low interest rates, leading to record levels of consumer, corporate, and sovereign debt. According to the Bank for International Settlements (2022), global debt reached over $300 trillion by the end of 2021—surging by over $40 trillion since the start of the pandemic.
This artificially cheap credit fuels asset bubbles and consumption-driven inflation. As consumers borrow more, their spending capacity increases, artificially stimulating demand and driving up prices across sectors.
Inflation and the Rising Cost of Government
As inflation rises, so too does the cost of operating government services. Salaries, infrastructure projects, healthcare, and debt servicing all become more expensive. Governments, facing inflated costs and already high debt burdens, are then forced to increase tax revenues—either through direct taxation or indirect means such as reduced subsidies or higher service fees. This further erodes disposable income and exacerbates the public’s financial stress.
The International Monetary Fund (IMF, 2023) highlighted that “inflationary pressures have led many governments to raise taxes or scale back public support programs, disproportionately affecting low-income populations.”
The Post-Lockdown Wealth Shift
The lockdowns of 2020–2021 catalyzed what some have described as the largest wealth shift in history. Central banks and governments around the world implemented stimulus programs, most of which ultimately inflated asset prices rather than wages. Billionaires saw their wealth grow by trillions, while millions of lower-income workers faced job losses, housing insecurity, and rising living costs (Oxfam, 2022).
An analysis by the Institute for Policy Studies found that the wealth of U.S. billionaires grew by over $1.7 trillion between March 2020 and October 2021, even as more than 20 million Americans lost their jobs during the same period.
Conclusion: A Vicious Cycle
The cycle is clear: Low interest rates encourage borrowing; increased debt fuels spending; spending drives inflation; inflation raises the cost of government; and governments raise taxes—further reducing consumer income and reinforcing dependence on debt. Without structural reforms in fiscal policy, taxation, and financial regulation, this debt-fueled model risks deepening inequality and undermining long-term economic stability.
References:
- Hudson, M. (2015). Killing the Host: How Financial Parasites and Debt Destroy the Global Economy. ISLET.
- Bank for International Settlements. (2022). BIS Quarterly Review.
- International Monetary Fund. (2023). World Economic Outlook.
- Oxfam. (2022). Inequality Kills: The unparalleled action needed to combat unprecedented inequality in the wake of COVID-19.
- Institute for Policy Studies. (2021). Billionaire Bonanza Report.