John, Brooke sent this to the list and it is a must read! It is lengthy but worth the time.
nytimes.com
Just a sound bite here:
Economists refer to Japan's situation, in which a zero interest rate just isn't low enough to restart growth, as a ''liquidity trap.'' The point is that, other things being equal, ''liquid'' assets -- cash -- are better than bonds: you can't use a bond in a vending machine. The only reason people are willing to invest in bonds is that unlike cash, they offer interest. When the interest rate gets very low, this incentive disappears, and people just hoard cash instead. So if even a zero interest rate isn't low enough to get consumers and businesses to spend, there's nothing more you can do with interest-rate policy; you're trapped.
To find another case of a liquidity trap, you have to go back to the United States in the 1930's. In 1939 the interest rate on Treasury bills was effectively zero (strictly speaking, it was 0.02 percent), yet the economy was still stuck in a depression. But that was a long time ago. By the 1990's, hardly anybody even thought about the possibility of a liquidity trap, and those who did usually dismissed it as something that probably couldn't happen in real life.
But Japan's example showed, ominously, that it could. The liquidity trap is back.
Monty |
