What I mean when I say that savings ‘want’ to be invested is pretty simple.

First of all, ‘savings’ in a macroeconomic context is not precisely the same word as within an individual context. In this context, it means the aggregated total left over when national expenditure is subtracted from national income.

It’s assumed that what is saved is the surplus after the desire to consume is sated. Taking into account the desire for a certain amount of accessible liquidity, under normal circumstances the rest will be attracted towards becoming the basis of productive investments. The creditors, in this scenario, gain greater benefit from the interest than they would from leaving their savings idle, and the debtors gain investment which facilitates a greater level of economic expansion.

This is what I mean by savings ‘wanting’ to chase investments. Under normal inflationary circumstances, idle savings gradually lose their value, creating a disincentive against hoarding liquidity. That’s good for the overall economy because it makes investment capital more readily available in the form of credit.

Right now we’re stuck in a liquidity trap. That means that there aren’t enough attractive investment opportunities available to put the excess of savings to work. Some (disciples of Hyman Minsky) say that this is because the expansion of private credit has reached its practical limit. Excess savings would normally facilitate an expansion of private credit, but right now the private sector is too highly leveraged to accept any increased burden of debt.

How public investment can solve this problem is simple. There are goods and services which the free market would never provide which, if the state provides them, will increase collective prosperity and well-being. They’re known as public goods, and include things like schools, roads, and bridges etc

In this scenario, the government drains excess liquidity by borrowing the money from the private sector and spending it on developing infrastructure. The new infrastructure will create new investment opportunities, either by lowering the cost of business (eg a new road) or by making new forms of commerce possible (eg installing ultra high internet connections).

Ideally, the expansion of the economy that results from this exceeds the amount of interest the government pays on the debt. In a liquidity trap, that’s not hard, because the interest investors will accept on bonds is currently very low.

You might argue that the government makes bad investments, and the private sector should be left to pick winners and losers. That’s valid, but remember, the free market won’t supply public goods because it’s difficult to monetise the profit from them. More importantly, the private sector has very little capacity to borrow right now, unlike the public sector.

This also has the benefit of counteracting deflationary forces. Deflation is bad because it reduces the collective propensity to spend. If you think your cash will be more valuable in future, you will put off purchases for as long as possible. Over time, this creates an erosion of the economy’s productive capacity.

So why don’t we do this? The answer is mostly political. Democratic governments have been elected worldwide on the basis of sternly lecturing their populations on the urgent need to reduce public spending to tackle excessive public debt. They did this because the conventional fear was inflation, but they created a far bigger problem going the other way.

The only way to solve the problem is to do what the opposite of what they have been constantly telling the general population is unavoidable for years. Not easy for a democratic government to admit that all the pain caused by spending reductions might have been the wrong thing to do. At least, not if they want to avoid losing the next election!