John Maynard Keynes had one idea he referred to as the “liquidity trap”. The condition is characterized by an economy in which interest rates are so low that consumers, business and investors don't care if money is in cash or in interest-paying investments.
BNY Mellon was reacting to a run to the bank by companies fleeing even U.S. Treasury bills for the safety of the bank. When they announced big corporations had to pay a fee rather than to pay them interest when depositing money on their account.
As long as consumers and businesses hold cash instead of spending or investing it because they expect the economy to be weak, the economy will be weak.
It makes the Federal Reserve's usual monetary policy impotent. Cutting interest rates below zero is (almost) impossible. Printing money to buy bonds creates sterile bank reserves but not much additional lending or spending.
In order to get out of a liquidity trap according to classical Keynesianism is that the government borrows and spend it on real infrastructure and create real jobs. This is what should have been done in the first place rather that bailing out insolvent (very important I’ll come back to that later) banks and most certainly in Obama’s follow up attempt. Frankly there wasn’t very much bang for the buck from the Obama fiscal stimuli at all.
Now and as actually deficit cuts talks has become all of a sudden the main topic in Washington, maybe adding another round of stimuli that would further add on the deficit may not be what the treasuries holders would like to hear?
Yet another way actually proposed by the Swedish mega theorist Lars O. Svensson is to devalue the currency.
Lastly creating the idea that inflation is a problem and that the objective with fiscal policy in fact is to create inflation would be another way to get out of the liquidity trap as people then surely would not like to horde cash but rather put it in to circulation.
This is what Harvard Economist Kenneth Rogoff says: "The only practical way to shorten the coming period of painful deleveraging and slow growth would be a sustained burst of moderate inflation, say, 4% to 6% for several years." Incomes rise with inflation, debts wouldn't, and they'd be easier to pay off.
http://www.project-syndicate.org/commentary/rogoff83/English
Then what if the cause isn’t a liquidity problem? What if the real underlying problem is a solvency problem? Throwing good money trying to save insolvent banks isn’t then going to solve anything.
Most likely well get nowhere until the $600 worth of derivatives has been neutralized, disarmed and cleared out.
Then and my view is that there will be no progress as long as the financial sector in any way, shape or form is the beneficiary of any stimuli. Now that in fact would be a real deflationary process clearing all of that debt clean. But that could then be managed in a situation like this by allowing the treasury generate new interest free loans aimed 100% at new infrastructure, get people in real jobs, so that they can pay tax as well as consume.
This way the deficit gradually will be paid off and all issues in the economy related to insolvency managed.
Are the banks solvent? Part of a talk by David Malone, author of The Debt Generation
http://www.youtube.com/watch?v=PD0YCSNdo8w&feature=related
The Banks Big Lie
http://www.youtube.com/watch?v=Jy9yluyizGo&NR=1
CSPAN Rep Paul Kanjorski Reviews the Bailout Situation
http://www.youtube.com/watch?v=pD8viQ_DhS4
The BIS review is a good way to grasp the dimensions long term monetary expansion has brought upon us. A net risk of $14 TRILLION compares with the annual GDP of the USA. Nobody, absolutely nobody can afford this tab in the case of an unorderly unwinding of this market that is roughly 12 times the size of the global economy
http://seekingalpha.com/article/99674-coming-soon-the-600-trillion-derivatives-emergency-meeting
Now that’s why the leaders in Davos came up with the number $100 trillion of injection, or perpetual QE, needed to the financial system. Now that’s then if you intend so save all what’s in fact rotten but isn’t it better to just clear it out once and for all?
This is a really great and perfect time for the SDR!
http://intheendwerealldebt.blogspot.com/2011/08/this-is-really-great-and-perfect-time.html
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