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News Liquidity Trap: Break on through to the other side

  1. Aug 9, 2011 #1


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    So with the national agenda focused like a laser on austerity measures, how do we get out of the liquidity trap that is killing our economy? Many people are hoarding cash instead of investing in the market because they are afraid to invest in a weak economy; however, the economy is weak because they do not invest. I'm afraid the most immediate problem in our economy is being swept aside with the focus on the debt debate. Nobody is offering suggestions on how to get out of this vicious cycle. Even if we do something for our debt, its not going to matter if our economy sinks.
  2. jcsd
  3. Aug 9, 2011 #2
    That cash hoarding has been going on since the 80s, and has been growing very fast since then:
    http://www.tradersnarrative.com/wp-content/uploads/2010/06/corporate%20cash%20hoard%20record%20Jun%202010.png" [Broken]

    So it's nothing new, just that now it's much probably even worse. We have to ask the questions: why don't corporations want to invest in the US? What was happening in the past that made corporations invest?

    - The expected return isn't good enough. And why is that? Expected returns are influenced by taxes, interest rates, and consumption expectations. The first 2 are definitively ok, but consumption expectations might not be enough to make investments, and the reason for that is income inequality. The base of the consumption comes from the middle class, so if that class is getting lower incomes, the economy might not be able to continue growing. The income inequality is on 1929 levels, how can a economy that depends on the middle class consumption continue to grow if the middle class is getting lower incomes?
    http://graphics8.nytimes.com/images/2007/03/29/business/0329-biz-subTAXweb.gif" [Broken]
    - Another factor that increases the risk factor are the monopolies that exist: competing with multinationals and big corporations isn't very encouraging. The Monthly Review has a very good article on it, which makes it very evident how monopolistic USA's economy is today: http://monthlyreview.org/2011/04/01/monopoly-and-competition-in-twenty-first-century-capitalism". It's a socialist site, but you don't have to be a socialist (I'm not) to see the facts.
    Last edited by a moderator: May 5, 2017
  4. Aug 9, 2011 #3
    I noticed you just posted in another thread that the US and other capitalist countries need to de-grow (your word) and the advances in technology are not likely to solve environmental problems. Do you also want socialist countries to "de-grow"?
    Last edited by a moderator: May 5, 2017
  5. Aug 9, 2011 #4
    If cash hoarding (saving) is a problem - then stimulus probably isn't a solution - correct? On the other hand, saving help the banks with cash reserves that lead to loans which lead to growth - but interest rates pushed to all time lows don't encourage saving in a bank.

    If you want people to make investments - you need tax policy certainty rather than record Government spending programs with only one possible outcome - massive tax increases.

    Another key factor is regulatory meddling - forced pro-union initiatives and environmental agendas rarely encourage investment. The President has told us many times the future is in "green" energy - accordingly, have you ever tried to pull a permit for a windmill?
  6. Aug 9, 2011 #5
    I don't get your question, what does a country being socialist have to do with a de-growth policy to reduce the environment impact? Yes I also want socialist countries to degrow if they're contributing to environment degradation and global warming in a meaningful way, and if that's the only option. Earth is above any country's interest...

    Maybe a degrowth wouldn't be necessary if we started using alternative clean energies (including nuclear), but anyhow a de-growth policy is never going to happen for many reasons, so there's no point in discussing it...
    Last edited: Aug 9, 2011
  7. Aug 9, 2011 #6
    I think it's important to know the political agenda (if one exists) or at a minimum the economics viewpoint of the person engaging in a topic such as "liquidity traps". I have a fiscal conservative viewpoint and don't typically prescribe to the Romer or Krugman conclusions.

    It sounds as if your environmental concerns outweigh your political beliefs?
  8. Aug 9, 2011 #7
    I think you assumed I was a socialist, but I'm not and I said that on the 1st post. I don't have political beliefs, I'm not left or right. You can see me supporting extreme-right proposals and extreme left proposals, as long as they make sense.
  9. Aug 9, 2011 #8


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    http://online.wsj.com/article/SB40001424053111903454504576490491996443926.html [Broken]
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  10. Aug 9, 2011 #9
    I don't think so. If cash hording is happening, less money is available for transactions. If less money is available, that exerts deflationary pressure. The way to combat deflation is to introduce new money into the economy. I think this has to do with why "quantitative easing" has happened.

    The money can be introduced by the government via a stimulus. This is advantageous because it can ensure the money is spent, and also it can direct the money in ways that can facilitate growth and have other benefits to society, such as R&D projects.

    Saving by a bank is opposed to lending. If the bank saves some money, it has not lent that money.
    Last edited: Aug 9, 2011
  11. Aug 9, 2011 #10
    If individuals are hoarding cash in savings accounts in banks - the banks have cash to lend - and cutting the payroll tax by about $10 per week (President Pbama's tax cut for all working people) will just add to those savings - not stimulate the economy. As for Quantitative Easing (2) was designed to print cash to buy Treasuries back from the banks - who MIGHT have purchased more Treasuries, or the might have loaned it to Europe (for all we know). If they print more money in QE-3 > what will they do - buy the Treasuries back that the bqnks bought after QE-2?
  12. Aug 9, 2011 #11
    Keynes strategies did not fix this economy for President Obama did it?
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  13. Aug 9, 2011 #12
    Have you taken a macro econ class? If you have, you surely learned about the liquidity trap. Its not controversial, its macro 101.

    To ignore what a nobel prize winner says on the basis of your personal biases is the height of arrogance.
  14. Aug 9, 2011 #13
    They can buy other assets as well.

    I wasn't advocating QE with the banks, I was advocating QE with the Treasury (the Federal Reserve buying U. S. Treasuries) and using the money for stimulus. I was suggesting this as an alternate way of increasing the money supply, as the solution to the cash hoarding problem (if it is a problem).

    Additionally, I was bringing up QE as evidence of deflationary pressure. This pressure had to be combated as the economic crisis lead to a reduction in leverage (increase in "cash hoarding").

    Do you agree that "cash hoarding" effectively decreases the money supply available for transactions?
    Do you agree that this creates deflationary pressure?
    Do you agree that deflation is combated by increasing the money supply?
    Considering your criticism of QE with banks, do you agree that a stimulus funded by the Fed. buying treasuries might be a better way to increase the money supply than buying treasuries from banks?
    Last edited: Aug 9, 2011
  15. Aug 9, 2011 #14
    Krugman himself has called his papers controversial.
    "In the spring of 1998 I made an effort to apply some modern, intertemporal macroeconomic thinking to the issue of the liquidity trap. The papers I have written since have been controversial, to say the least; and while they have helped stir debate within and outside Japan, have not at time of writing shifted actual policy. Moreover, too much of that debate has been confused, both about what the real issues are and about what I personally have been saying. "

    Actually, I think our leaders are the arrogant ones. We elected a President with absolutely zero management experience. The liberal economic policies they've engaged aren't working - IMO - yet they are full speed ahead. The President was talking about a need for additional spending to create construction jobs yesterday.

    Today, the Fed promised to lock interest rates for 2 more years at near zero (on the heels of a credit downgrade in lieu of a $20+Trillion national debt trajectory and of course potentially more than $100Trillion in unfunded liabilities) and there are discussions of printing more money for a 3rd round of Quantitative Easing (possibly buying the Treasuries that the banks bought with QE-2 funds?), coupled with a need to borrow at minimum $.43 on every $1.00 spent. At the same time regulatory control is increasing and tax policies have not encouraged domestic investment (other than for "green" technology - another liberal agenda). We are clearly in uncharted waters and the long term effects of these actions are very unpredictable. Can anyone guarantee what will happen when interest rates are allowed to rise? So no - I don't trust Romer or Krugman's opinion right now - I apologize if that offends you.
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  16. Aug 9, 2011 #15
    Edit: I guess by "they are full speed ahead," you meant liberals, not the policies.

    Do you have answers to my questions?
  17. Aug 9, 2011 #16
    His papers on the liquidity trap in Japan might be somewhat controversial, the concept of the liquidity trap was in my macro 101 textbook a decade ago.

    Other then a 1 time stimulus, what "full speed ahead" has there been? Keep in mind, the fed is independent, and not at all a "liberal" organization.

    The fed doesn't set the rates for bonds, treasuries, etc. The demand for cash is really high right now, hence the super low rates on treasuries and the fact that some banks have started to CHARGE for large cash deposits, instead of offering interest. Even if the fed tried to push rates up, odds are the market will knock them back down. Your use of the word "allow" suggests rates are trying to climb, when all market indicators suggest the exact opposite.
  18. Aug 9, 2011 #17


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    First off, I'm not sure you understand the concept of a liquidity trap, and you may do well to read up on the topic before jumping into a conversation. A liquidity trap is a disease that is very difficult to cure, and America has contracted a severe case of it. People have developed a hoarding mindset because the economy is bad. But the economy will remain bad as long as they have this mindset.

    If Keynes was alive today, he would probably offer unique strategies for our situation. We would be most fortunate to have someone like Keynes alive today who could advise the government on how to get out of our situation. Unfortunately, I'm not sure people today would listen to a genius like Keynes; instead, they would suckle on their ideologies.

    In addition, Obama's strategy has been more Reganomics than Keynesian. He's given way more tax cuts than government outlays even though government outlays are more stimulative for the economy.
  19. Aug 9, 2011 #18


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    My wife and I have IRA, 401K, Money Market accounts, etc, as well as standard savings and checking accounts. We have plenty of interest-paying investments, but we also have a lot of liquid assets. Since those liquid assets are earning practically nothing in interest (thanks to the Wall Street-stooges at the Fed), we have used the lowest-earning account to buy some new vehicles in the past couple of years. Can't earn interest? You can negotiate some pretty nice discounts when buying vehicles for cash, and you end up with clean deals (no phony discounts for this and that based on inflated MSRPs, dock fees, etc). We ended up selling off several older vehicles and consolidating into two very capable vehicles that serve all our needs - a Subaru Forester and a Honda Ridgeline.

    We are not hoarding cash - we intentionally balanced our investments to maintain substantial liquidity in case a nice tract of real estate or some other good investment came on the market at a fair price. Unimproved real estate is still high, here (value of the timber, mostly) so no bargains, and the lack of interest from the banks, and the desire to stay within FDIC limits made it quite attractive to buy some new vehicles. We don't drive much (I drive less than 5K miles/year) and those vehicles will last us a very long time. Two of the older vehicles were starting to toss up odd mechanical/electrical problems after 10 years or so, and it was time to start clean and let them go.

    We are not like the Japanese, who tended to buy home safes and stash lots and lots of cash at home. The Japanese are distrustful of banks, etc, and want to keep cash on hand. Thanks to the FDIC, we can use banks and earn whatever meager interest that the Fed will allow us. Of course, inflation eats up whatever interest we can earn, so it's best to leverage the cash in lean times when dealerships need to move inventory and you can beat them up.
  20. Aug 9, 2011 #19


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    The low interest rates is an effect of a liquidity trap. The fed is simply unable to stimulate the economy through changes in monetary policy because the interest rates are already at zero. So the fed is playing more of a psychological role than a stimulative role. We need government outlays for stimulus, but I don't see a prospect for them any time soon. If anything, we'll see a cut in outlays.
  21. Aug 9, 2011 #20


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    You are probably right about that. My wife and I decided that it was a good time to upgrade some vehicles, and if we can't earn any interest on our savings and money-market accounts, the best way to make that money work for us was to make cash purchases and beat the crap out of the dealerships to "earn" a return.
  22. Aug 9, 2011 #21
    I'm not certain the OP indicates you have a grasp of the current situation - your personal attack aside and since this is your thread - why don't you explain how President Obama's policies are solving the problems you've indicated?

    The real fear of investment is uncertainty over tax policy - massive spending and debt will eventually lead to massive taxation. Increased regulatory actions are also a problem - look at the issues with Boeing's new plant.

    Your claim that Obama has been "more Reganomics than Keynesian," is laughable and an ill-conceived left wing talking point (the whole Reagan comparison has developed after the Lincoln embrace didn't stick). Obama's strategy for tax policy revolve around redistributing taxes and reducing payroll deductions - to get the highest possible head count (95%) to boost a claim of cutting taxes - these policies are stimulus oriented and designed to appeal to uninformed voters. The real test is how many tax policies has Obama endorsed that will encourage business investment - other than ones for 'green" projects that fit his liberal agenda or his short term embrace of the Bush tax cuts that nobody expects will continue?

    As for the premise of this thread - isn't our liquidity trap self inflicted by manipulation of interest rates? Who doesn't expect higher prices for food and fuel to lead the way to high inflation (as many countries that rely on the Dollar are experiencing)? Didn't the banks stop lending at the start of the recession because they needed cash (based on regulatory guidelines) and were bailed out?

    There seems to be a lot of variables that you choose to ignore in order to put the problem into a box that fits your fancy? I give you credit - it's a rather super troll - isn't it? I apologize for my tone - but you pushed the wrong button.

    As for the variables you've ignored, how long can they artificially suppress interest rates - is 2 more years really possible, how many Dollars can they print before the currency is significantly devalued, how many Treasuries can they actually buy back, (again) how long before the price of food and (imported) energy increase significantly - the expectation is that inflation WILL occur, how long will the unemployment rate remain above 8% as the GDP growth remains below 2%, what happens if the Fed (and Social Security Trust Fund together) become the largest holder of Treasuries, what will happen to the stock market and new investment if tax rates are increased on capital gaines/corporations/high income earners, and what will happen if we are downgraded further in 6 months?

    BTW - I forgot to mention the $70Trillion or so in unregulated derivatives floating around in the world - do you think they place pressures on any of these variables?
    Last edited: Aug 10, 2011
  23. Aug 10, 2011 #22
    What new redistribution has occured? Yes, payroll taxes have been cut, but this is classic supply side stimulus (which Reagan was the most notable practitioner). Keynes would suggest the government employing the 10% of our population that currently isn't doing anything to rebuild some of our crumbling infrastructure.

    A bank can make a loan to a small business at 5% real return and instead buys treasuries with a -0.04% return. Please explain how uncertainty over tax policy can cause this.

    What are you talking about? How would raising the feds overnight rates move us out of a liquidity trap? What do you expect would happen? Making loans less profitable will somehow encourage lending? What are you basing this on?

    Most people don't expect higher inflation in the coming years. Look at Goldman Sachs economic outlook report, or really any economic report. Demand is weak, growth is in the gutter, etc.

    No, banks started FAILING and being unable to functions as banks due to a lack of liquidity. Thats why we bailed them out.

    Anyway, please answer the questions above, and one more- why do you think the fed is some liberal institution that works for the president?
  24. Aug 10, 2011 #23
    to find out who the fed works for, skip to 7:38

  25. Aug 10, 2011 #24
    I'm not sure you and I will ever agree PG - you are too focused on a very narrow aspect of the economy and I prefer to look at the big picture.

    First, I think you are confusing Reagans policies with supply side stimulus - there is a difference. Subsidizing road construction or development of a HUD project is a supply side stimulus - but lowering capital gains taxes to make it cheaper to invest new capital is supply side economics ala Reagan. Reagan's focus was on business investment incentives.

    Second, the investment potential I'm referring to is the $Trillions parked offshore - that is waiting for a clear and specific tax policy - given the need to raise taxes to pay for the massive deficits. If Reagan was President he would be focused on bringing those funds home to restart our manufacturing base.

    Third, the Fed just guaranteed interest rates will remain low - did you miss the speech? Printing money to buy Treasuries from the banks should enable the banks to lend to small businesses who are starving for capital. The banks are still not loaning money to the small business community.

    Fourth, energy prices have increased and will continue to increase given the President's domestic energy policies - we need to import less oil. The $4.00/gallon fuel is driving up the cost of everything that needs to be planted, harvested, or transported. The more money families spend on food and fuel - the less they will spend on everything else. Also, regardless of the President's wish list - electric vehicles cost too much to purchase and electric rates are also on the rise.

    Fifth, aside from twisting my words we agree on what happened with the bank bailout - the needed cash and some of them were not failing - just slightly below the reserve requirements. Also, don't forget a lot of the bailout funds made their way offshore.

    Six, I didn't say the Fed was a liberal organization. I do think the Fed has put downward pressure on interest rates for much too long - and now they're out of tricks.
  26. Aug 10, 2011 #25


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    I never said they would solve the problems I've indicated. In fact, I'm very much opposed to all these tax cuts being granted; instead, I would like to see spending on infrastructure and lots of it while the interest rates are so low. And I think congress and the president are crazy for not doing it.

    Governments can invent ways to collect taxes. So hoarding money does not make people immune to taxes. In addition, we have been deregulation the market for decades. One of the primary reasons of our financial crash was the spirit of deregulation. But I do agree that markets can be over-regulated but they can also be under-regulated, and great care must be taken when adding or removing regulations. Regulations that may appear ineffective may be doing a great job. And some regulations that appear to be very effective may be awful. Regulation is a very tricky business.

    Most of Obama's spending has been in the form of tax cuts, and let me make it very clear: I'm very much opposed to this policy. This policy only made sense when we had a production based economy.

    Manipulation of interest rates? The fed is virtually helpless to stimulate the economy through monetary policy.

    I'm more concerned about disinflation than inflation.

    I mean absolutely no offence to you.

    I think the expectation is that disinflation will occur. Goldman Sachs predicts that the fed will have to do QE3 to combat it as they project inflation to fall.

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