A liquidity trap is a situation described in Keynesian economics in which injections of cash into the private banking system by a central bank fail to lower interest rates...
This explication is being made by a pseudo academic which vaguely agrees with Keynes, and which is standard misunderstanding among demand management types.
In a liquidity trap the "cash", as it were, is already in the system, but it's locked up due to exogenous factors not related to money, monetary policy, and finance.
It's important to understand that there's only the private banking system, and that it has no purpose being mentioned in this context.
Since the trap has nothing to do with money, nor monetary policy, interest rates have nothing to do with it. Liquidity traps are independent of the level of interest rates. In the late '70s a trap existed with rates at 18%. During the early '30s there was no liquidity trap because there was no cash in the system. Keynes surmised that the artificial creation of cash would increase economic activity and thereby increase the conversion of work into cash.
...fail to lower interest rates hence fail to stimulate economic growth.
Lowering interest rates doesn't stimulate economic growth. For the last 5 years the interest rate structure has hovered just above zero. QED. Mark Levin claims FED is "holding down" rates. That would only be possible if Temporary was open. Temporary has been closed for 5 years. QED.
A liquidity trap is caused when people hoard cash because they expect an adverse event such as deflation, insufficient aggregate demand, or war.
Deflation is adverse? Since when do falling prices make you sad? On rare and brief occasions, e.g. Oct '08, when they do fall it makes me very happy because I feel freed from the threat of not being able to buy necessities.
When has anyone anticipated adverse events and when do we act on our anticipation? There's few Americans who didn't know in 2007 that the RE market was headed for a crash, but they wouldn't admit it for fear of inducing it since they all thought they could get out in time, or that the drop wouldn't hurt them.
There's no causal connection between a trap in place and the hoarding of cash, insufficient aggregate demand, or war, rather these phenomena are caused by developments upstream and may or may not related.
Signature characteristics of a liquidity trap are short-term interest rates that are near zero...
Interestingly, traps are more probable at high structural rates than low.
...and fluctuations in the monetary base that fail to translate into fluctuations in general price levels.
Non sequitur. There's no necessary causal connection between base persistent direction and prices. In the late '80s FED decided to take advantage of conditions to run an experiment that tested Friedman's constant base growth theory by withholding reserve additions. The base ran persistently at rates around 18%. There was no price effect. If FED wasn't adding them, where was the money, the reserves, coming from? It was coming from reduced taxes commerce running at an effective 18%. 18 - 18 = 0, no inflation.
Above, I've given the finest possible explanation of how right economics works unrelated to explicating liquidity trap. Someone like Thomas Sewell would appreciate how clever, tight, and accurate the expose is via the use of indirection. Unfortunately, the entire world is loaded with overpaid, ignorant fools, who wouldn't understand the above, but know only what doesn't work, and they are going to prove it by crashing the world's economies way after the liquidity trap had been in effect. |
