Basing the growth of your economy on people borrowing money, as opposed to relying on increased productivity, doesn’t seem like a very sensible idea. An Austrian ecomomist called Ludwig von Mises described the problem very nicely:
It may sometimes be expedient for a man to heat the stove with his furniture. But he should not delude himself by believing that he has discovered a wonderful new method of heating his premises.
Nevertheless this is exactly the economic model that pretty much everyone apparently believes in at the moment. It seems to be the unanimous view of both journalists and politicians that we need the banks to start lending again in order to get the economy moving. But some of the banks are in trouble because of their imprudent and greedy business practices and so now all the banks are being extra-cautious and won’t lend. So the favoured solution is for governments to give the banks yet more money in the hope that they will lend it out to people. To go back to Ludwig von Mises, this is still not a wonderful method of heating; it’s just the government buying more furniture. Nobody is prepared to say the truth, which is that lots of people are going to have to accept a prolonged lowering of their standard of living.
