Wednesday, January 7, 2009

The fiction of a liquidity trap

Christopher Lingle has excellent article in Mint particularly it is important to note the following: 

  • In the current climate of global economic uncertainty, central bankers are creating vast amounts of paper money from thin air to pump into the global economy. 
  • central bankers are perpetrating and perpetuating the problems they claim to be seeking to avoid. 
  • In the current setting, interest rates in the US and Japan should be much higher than their present low levels at near zero. 
  • In other words, investment depends more upon spending rather than upon increased savings. 
  • As a modern proponent of the liquidity trap, Paul Krugman is as confused and confusing as Keynes. Krugman suggests that an economy caught in a liquidity trap will slide into deflation. But he then states that deflation can push an economy into a liquidity trap. Like Keynes, he seems to like to have it both ways”.

Whereas T.N. Srinivasan who is Samuel C. Park Jr. Professor of Economics at Yale University says “Unless the private sector sees the current slowdown as an essentially temporary phenomenon and believes that the economy will be bouncing back to 8.5 per cent or more [growth rates], simply reducing the interest rates will not help,” he said.

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