Growth through credit expansion – a recipe for disaster

Politicians and business leaders love cheap credit: low interest rates create a temporary boom. But when driven by credit creation not real saving, the outcome is necessarily a bust.

Across political and commercial life, there is broad agreement that low interest rates are desirable. Politicians prefer them because they tend to promote employment growth, rising asset values and favourable economic statistics. Business leaders, facing competitive pressures and capital requirements, naturally favour lower borrowing costs. Central bankers and financial institutions, operating within these constraints, often treat credit expansion as a neutral or even beneficial tool of policy.

Happiness all round, you’d think: no wonder Reform wants the Bank of England to have a new mandate to drive economic growth…

Alas, there is a fundamental problem. When economic growth is driven not by real saving – that is, producing plus deferring consumption – but by the expansion of bank credit, the resulting boom sows the seeds of its own collapse, with all that entails. It is an argument I have made since my maiden speech in the House of Commons in 2010.

Artificially cheap credit is popular but it is a major problem. And you don’t need to take my word for it: here’s former top central banker William White giving his views: