Douglas Carswell's Blog

Can cheap credit ease our way back to prosperity?

For many years, Western governments threw cheap credit at consumers and the economy.  And from the early 1990s to 2008, it seemed to do the trick.

Consumers consumed.  Entrepreneurs built enterprises.  Assets prices - notable of houses - rose.  Folk felt rich.  Hippey!

Just as policy-makers once believed they could engineer Western prosperity by controlling how much governments spent, they came to believe they could make our  economy expand by controlling the amount of credit.  For a while, it looked like they were right.

But, alas, there was one fundamental flaw. You cannot conjure real credit out of thin air.  Trying to do so is a bit like trying to build a perpetual motion machine - to do so successfully would mean defying the laws of physics.   

One person's credit must ultimately be another person's savings, or in economist-speak "deferred consumption".  And unless a lot of folk are deferring their consumption, you cannot really have a lot of credit.  They weren't. 

The credit crunch proved this point.  

Many policy-makers, however, do not seem to have learnt this lesson.  They still see cheap credit as the answer. So they continue to fire salvo upon salvo of low interest rates and cheap credit in the hope of holding back stagnation - or worse.

Like their predecessors in the late 1970s who urged yet more Keynesian spending to stimulate the economy, Western policy-makers today urge for more monetary stimulus in the belief it will bring growth.

A generation ago, we eventually realised that it was the very remedies we were applying that was making the economic patient ill.  We only returned to prosperity only once we stopped having governments try to engineer growth, and got government out the way instead.

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