People aren't thinking about these recovery bonds

The latest suggestion is that there’s a huge great big pile of saved money just sitting around doing nothing. So, why not issue bonds and the government can get on with spending that money on useful stuff:

Starmer’s plan for British Recovery Bonds to encourage those savings to be invested securely in local communities, jobs and businesses looks like a far better substitute.

Households have indeed saved £125 billion so why not?

The mistake is to think that this £125 billion is currently doing nothing. Some portion of household savings will be under the mattress and that is indeed doing nothing. But then we don’t record as savings what is under the mattress, we don’t in fact know how much is there. Our records are of what is in banks. And banks do not just shovel money into the vault and leave it there. That’s just not how banking works.

Instead that money is lent out.

Yes, we can all shout that banks just create money when they lend and they don’t actually lend out deposits. But by 4.30 every afternoon they must finance their lending. If this were not so then no bank could ever go bust as a result of a bank run and we know they can therefore it must be true that a bank must finance a loan. Deposits finance lending even if the financing comes after the lending.

Thus that £125 billion in bank accounts is already being used.

The proposal is therefore not to mobilise the savings because they are already mobilised. It is, rather, to change the manner in which they are mobilised.

Some will say that government spending the money on lovely local things will be better than fructification in the pockets of the populace. We don’t think so and we do have - given the usual examples of how carefully government does spend money - reality on our side.

The idea that such savings are currently not being deployed depends upon the idea that there are those vaults of unused money. It ain’t so - Scrooge McDuck is a cartoon, a jest, not a guide to public policy.

Recovery bonds will change what those savings finance but that’s all. And the argument to be won is that the new deployment will be better than the old - a difficult task we insist. The idea that those mountains of cash are currently doing nothing is just Disney economics and that might be the way to run the Magic Kingdom but it’s of as much relevance to real life as a duck in a sailor suit.