some longwaves stuff on liquidity trappers
written by mike alexander
My data shows commerical paper rates of 0.75% in 1935 and 1936. Inflation in those years was about 2% implying negative real short-term interest rates. Yet unemployment stubbornly remained above 10% for the rest of the decade. My understanding is that a liquidity trap is present when low interest rates don't "work" to stimulate the economy.
IMHO, a liquidity trap is simply economese for "incredibly bearish technicals". Since economists have always maintained that TA doesn't work how can they then say that a major component in causing depressions are "really UGLY charts". A seemingly endless series of major support breakdowns can degrade business confidence, or so it seems to me.
Consider, all a successful businessman need do to live quite comfortably is run his business well, he doesn't have to grow it. A businessman's preference towards business growth as opposed to business maintenance will depend immensely on the market for business growth (i.e. the stock market). When stock prices are rising, he will be interested in growth and his behavior will be heavily influenced by the price of money. When they are falling he will be less interested in growth and will require lower prices of money as an inducement to invest in growth. When stock prices are cratering, he may conclude that growth has no profit potential, at least not right now. For example, executive stock options could lose their appeal in favor of cash bonuses, and management could then eschew risky investment schemes.
Mike Alexander, author of
Stock Cycles: Why stocks won't beat money markets over the next 20 years.
net-link.net
----- Original Message -----
Paul Krugman's notion that Japan has been in a Keynesian
liquidity trap has been widely trumpeted about by him, at least until
after the 1998 Asia meltdown. ("The Return of Depression
Economics")
The usual way of putting the liquidity trap has been that it is like
pushing on a string, and that low or non-existent rates do not
create demand. Slight increases in the demand for money can and
do push rates up, and people (markets) do not believe that rates
can stay down at very low levels for very long. Thus rates tend to
rise in such a way as to counter the effects of the stimulus.
The Keynesian/Krugman solution is to create or administer
inflation so as to counter the tendency to save at the higher rates
rather than to spend or invest. The prevailing mythology, as I
showed before in quotes from Antal Fekete, was/is that it was
World War II that "saved" the economy of the 1930's by massive
inflationary spending.
As Fekete showed it was massive deficit spending throughout the
1930's which swelled the government bond market and prolonged
the "flight to safety" which bled deposits out of banks. With a much
smaller bond market the bond prices would have roared up quite
quickly and rates would soon have dropped to levels conducive to
new investment in business. As it was it took far longer, 1941 or
1942, well after the start of WW II. It wasn't a loss of confidence
per se which caused the run on banks; it was the loss of deposits
running into government bonds at high real yields which eroded the
lending base and reserve base. |
