Fed staff needs to be sent back to college to learn economics 101.

[touchring]

In a free trade system, when you hit the liquidity trap, monetary policy doesn't work. You can print all you like and jobs won't be created.

[ThePythonicCow]

Re: Fed staff needs to be sent back to college to learn economics 101.

In a free trade system, when you hit the liquidity trap, monetary policy doesn't work. You can print all you like and jobs won't be created.

Well, I didn't know what a "liquidity trap" was, so went reading about it. It seems that it happens when people don't want to spend their extra money, nor want to invest it in productive enterprises. Rather they keep the cash, deposit it in a savings account, put it under the mattress or perhaps buy non-productive "safe" assets such as gold and Treasuries. Perhaps they can't find any productive asset worth investing in (all too risky or too low a return), or perhaps they building up a buffer for some anticipated financial distress.

Hmmm... that sounds familiar. Gold, Treasuries and difficulties in finding any worthwhile producing investment; that sounds like EJ's situation to me. Stashing great globs of non-producing (other than a little interest) assets in their reserve account at the Fed, probably anticipating having to clear great globs of bad debt hidden in their balance sheets; that sounds like the big banks to me.

Even the little guys are getting in on the act, cutting back on spending and clearing bad debt as fast as they can.

One apparent contrary indicator, the stock market, has risen since early 2009. But there is rampant speculation that most of this rise is due to high frequency trading, not strong investors. If the major holders tried to get their money out of the stock market at present prices, they couldn't. Prices would collapse instead. There's little real investment in creating or growing producing business.

Major corporations are sheltering in place as well, building up cash reserves.

Liquidity trap you say. Isn't that where we've been for the last year?

Most of what inflation (rising consumer prices) we see does not seem to be caused by an increase in the money supply, for any such increase has been sterilized and the velocity of transactions is down. Rather such price hikes or product qualitdy declines seem to be (1) supply shocks and (2) declining volume shocks. If your volume of business declines, you have to charge more per item or unit, to cover fixed expenses and avoid going bankrupt. A sluggish economy is a less efficient economy, which forces you to pay more for the things you need, and go without the rest.

Australia sent every citizen a check last year, if my recollection of some comment of Steve Keen is correct. That got some more money actually in circulation.

U.S. President FDR in the 1930's:

1. created public works projects for most every able bodied man (my Dad helped build the state highway that I herded cows across as a child),
2. established social security for the elderly, and
3. provided pensions for any government worker with 20 years experience (my grandfather retired at age 40, after 20 years delivering the U.S. Mail, and lived another 45 years on that pension.)

It seems that the only way to legitimately increase economic activity at this time is to give money, or paying jobs, to those who will spend it, that being mostly the poorest half of the nation.