PRESIDENT GEORGE W. BUSH Message Board

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Politics : PRESIDENT GEORGE W. BUSH

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To: gerard mangiardi who wrote (437596)	8/3/2003 1:05:38 PM
From: GROUND ZERO™	Read Replies (1) of 769670

The classic Keynesian liquidity trap is a fallacy... according to this fallacy, when people come to believe that interest rates will rise and thus bond prices will fall, liquidity preference (the demand for cash balances) becomes so intense that the rate of interest cannot fall low enough to stimulate investment... therefore, trying to stimulate the economy with low interest rates is like "pushing on a string." The only problem with this so-called analysis is that it is utterly and dangerously wrong... The first thing about the Keynesian liquidity trap that should strike anyone conversant with Keynesian thinking is that it completely reverses the Keynesian explanation of what determines the interest rate... Keynes argued that it was determined by liquidity preference and the supply of money... But the liquidity trap clearly assumes that the demand to hold money is determined by the rate of interest, meaning that this demand should vary inversely with changes in the rate of interest... if this is so, then what then determines the rate of interest? The Keynesian explanation of interest should actually see interest rates peak during a depression and bottom out during a boom, therefore interest rates should be very high and certainly not at their present low levels... the truth is that the monetary explanation for interest is one of the oldest fallacies in economics... GZ

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