The idea of creating and enhancing “demand” with new money is hardly new. It is by far the easiest way to simulate demand growth. You print money (or otherwise boost credit). The economy takes up the new purchasing power and confuses it with real demand. Sales go up. Prices rise. A boom follows.
But it is a fool’s boom. Jean-Baptiste Say explained why more than 100 years ago. “Say’s Law” tells us that real demand can only come from production, not from printing-press money or expanded credit.
It is not called “Say’s Good Idea” or “Say’s Suggestion.” It’s “Says Law” because it is like the law of gravity. You can pretend it doesn’t exist. You can ignore it (for a while). But like all natural laws, it eventually has the last word.
Debt cannot increase demand because it is just an arrangement between people. The saver transfers his savings to someone else. There is no increase in demand – just a shift from one person to another… or from one time to another. In order to increase real purchasing power, real output must increase. People have to produce more. And earn more.
Demand comes from real incomes. And productivity drives, more or less, incomes. And capital investment drives productivity. When you spend less than you make, you’ve created capital. But by discouraging saving, this funny money pinches off capital investment, innovation, and productivity. Instead, money is used simply to make more money – bypassing the whole sequence of saving, investing, and productivity growth and income growth that normally drives the economy forward.