Least I think it’s new?!?
There has been an argument in recent years between those who adhere to the so called “loanable funds” theory and those who adhere to the endogenous money theory.
The first lot claim that banks intermediate between borrowers and lenders and that one person cannot borrow till another has saved up and loaned money to a bank. In contrast, the endogenous money lot claim that saving is not needed because a bank can simply create money out of then air and lend it out. That is, commercial banks when they see creditworthy potential borrowers can simply open accounts for them and credit them with money (perhaps after having taken collateral off the borrowers, or perhaps not).
Well now, if an economy is at capacity (aka full employment), then the extra aggregate demand (AD) that stems from creating and spending that new money is just not permissible: else excess inflation ensues, unless savings are increased (which has a deflationary effect). If savings DON’T increase and if market forces don’t raise interst rates and choke off additional borrowing, then the central bank will raise interest rates so as to bring AD back to its “acceptable inflation” level (NAIRU, if you like acronyms).
On the other hand, if the economy is NOT AT capacity, then there is no need for new lending to be constrained by how much is saved.
So the loanable funds lot are right where the economy is at capacity, and the endogenous money lot are right where the economy is NOT AT capacity. So the new law (untill such time as I decide it’s nonsense and withdraw it…:-)) runs as follows.
“Where, or to the extent that an economy is at capacity, lending is constrained by saving. But where or to the extent that an economy is NOT AT capacity, lending is NOT constrained by saving.”
(Incidentally, the latter law occurred to me while taking part in a discussion on this blog about the loanable funds v endogenous money argument. That’s the beauty of blogging: it forces you to THINK!)
P.S. (24th April 2015). Re my above suspicion that the above "law" is not original, it actually looks like Keynes said something similar: i.e. that when it comes to the effect of additional loans on interest rates, there is a difference between where the economy is at capacity and where it is not.