Aviva has brought together a collection of prominent thinkers to provoke renewed debate and fresh ideas about future prosperity and creating a culture of sustainable savings. The group, names the ‘Future Prosperity Panel‘, published their report ‘Big picture thinking – Towards sustainable savings’.
My article is called ‘Savings and the alchemy of credit’ and is published alongside valuable work from Alain De Botton, Simon Tay, Paweł Świeboda and Diane Coyle.
Read a summary of my essay on the Aviva site and watch a video interview with me here… >
I managed to find your essay “Savings and the alchemy of credit” after a few false starts! I think the ability of banks to create money out of thin air has problems over and above those you mention. Specifically I suspect this ability degrades the market’s mechanism for optimising the amount of borrowing and investment.
This optimisation will obtain where the marginal benefits of borrowing equal the marginal costs or disbenefits of the consumption forgone in order to make the investment possible. Of course you might answer that with the claim you seem to make in your second paragraph that sacrificing consumption is not needed in order to make investment possible. My answer to that is that it is plain physical impossibility to make an investment without sacrificing consumption: economics has nothing much to do with it. Labour employed in constructing motorways is labour that could be employed making consumption goods or services.
The decision by an entity to borrow and spend means a rise in demand. Assuming the economy is at capacity, that means demand has to be reined somewhere else, e.g. government has to spend less on health or education, or it has to raise taxes for example. And it strikes me as totally illogical that the health or education systems or taxpayers have to make a sacrifice in order to make investments possible.
It would be much better if borrowing came only from those who have consciously decided to save: that makes a connection between borrowers and savers and would hopefully bring the above optimisation. The New Economics Foundation (along with Positive Money and Prof R.A.Werner) actually advocate something along these lines in their joint submission to the Independent Banking Commission. That is, they advocate a system which involves maturity matching: e.g. a bank cannot lend £X for Y years unless it has depositors who have deposited £X for Y years.