Top Highlights

• economy, if the economy has the capacity to produce the increase in demand.
• But one household can only borrow and spend if another household reduces its consumption in order to lend. Overall, the two must balance. If the first household fails to pay back their loan, the second one suffers. Again, the future gains and losses must balance. There’s no free lunch.
• Phelps’s argument, greatly simplified, points out that an economy that allocated all its output to investment would grow, but without producing any goods for consumption, whereas one that consumed all its output would quickly grind to a halt. An economy somewhere in between provides just enough capital per worker to maximize all future consumption....
• Regardless of the presence of these suboptimal pockets, economies, including the U.S. economy, suffer from large shortages of equity overall and the risk taking that equity underwrites. As a result, increases in investment and risk taking yield large returns, on average, through productivity gains and economic growth.
• If the Fed relieves constraints to the expansion of credit—when there is no pent-up demand for increased risk taking—credit will sit unused and the velocity of money will slow. This happens in recessions when investors and