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News Liquidity Trap: Break on through to the other side

  1. Aug 9, 2011 #1

    SixNein

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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

    SixNein

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    http://online.wsj.com/article/SB40001424053111903454504576490491996443926.html [Broken]
     
    Last edited by a moderator: May 5, 2017
  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.
    http://web.mit.edu/krugman/www/trioshrt.html
    "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.
     
    Last edited by a moderator: Apr 26, 2017
  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

    SixNein

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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

    turbo

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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

    SixNein

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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

    turbo

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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.
     
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