Keynesian Economics Is Right

[lawcat]

I agree that the stimulus approach is the right one. But I do not agree with the bull and bear economy reference.

 

 

It is essential to separate economy from finance in analysis. The current difficulty is not essentially economic but financial--it is a crisis of liquidity. Cash is at issue. The finance markets over committed money to the housing sector. There is overabundance of loans and inventories compared to housing needs. We've over traded.

 

Housing market is a stable market in ratio to the need for housing. But we've over committed funds into future by about 5 years. So when the housing market stabilizes based on population we'll be out of it. In the meantime the cash infusion is welcomed to keep the economy rolling.

 

I don't see this as a bull/bear issue as much as unwise monetary policy. Although monetary policy and economy are linked.

[charles brough]

I agree that the stimulus approach is the right one. But I do not agree with the bull and bear economy reference.

 

 

It is essential to separate economy from finance in analysis. The current difficulty is not essentially economic but financial--it is a crisis of liquidity. The cash is at issue. The finance markets over committed money to a housing sector. There is overabundance of loans and inventories compared to housing needs. We've over traded.

 

Housing market is a stable market in ratio to need for housing. But we've over committed funds into future by about 5 years. So when the market stabilizes based on population we'll be out of it. In the meantime the cash infusion is welcomed to keep the economy rolling.

 

I don't see this as a bull/bear issue as much as unwise monetary policy. Although monetary policy and economy are linked.

 

Yes, if we don't keep spending in the meantime, the contracting of housing debt will drive down the general price level. That is deflation when the economy contracts as do tax receipts, hence less money to spend servicing debt and hence the inreasing rather than drawing down of debt. Deflation is self-perpetuating to the extent inflation and booms are.

[geko]

...unwise monetary policy.

 

Exactly. But is this not a consequence of the Keynes/Douglas approach as opposed to the Austrian and Classic? Whatever you decide the principle remains that money goes vertical, so constantly increasing the supply at an accelerated rate just means you have a higher column with forever increasing distance between the bottom and top with the notes getting denser the higher you climb. Couple this with the ongoing thinning of notes means if you haven't got a healthy volume you haven't got much.

 

Taxing the rich is not the answer. How far we going to go? Until their incentive breaks and they take their business and tax revenue off shore? Do we want to place the future on the off chance of the wealthy having egalitarian principles?

 

Don't get me wrong, i don't think for one minute that we can snap our fingers and for it to be done and dusted over night. Some essays i've read suggest it could take upwards of 40 years to realign in a way that won't cause harm. You erect the pillars though don't you, in a methodological manner over a period of time to allow easing.

[charles brough]

Exactly. But is this not a consequence of the Keynes/Douglas approach as opposed to the Austrian and Classic? Whatever you decide the principle remains that money goes vertical, so constantly increasing the supply at an accelerated rate just means you have a higher column with forever increasing distance between the bottom and top with the notes getting denser the higher you climb. Couple this with the ongoing thinning of notes means if you haven't got a healthy volume you haven't got much.

 

Taxing the rich is not the answer. How far we going to go? Until their incentive breaks and they take their business and tax revenue off shore? Do we want to place the future on the off chance of the wealthy having egalitarian principles?

 

Don't get me wrong, i don't think for one minute that we can snap our fingers and for it to be done and dusted over night. Some essays i've read suggest it could take upwards of 40 years to realign in a way that won't cause harm. You erect the pillars though don't you, in a methodological manner over a period of time to allow easing.

 

I am having trouble with your post. What do you mean by "money goiing verticle," "increasing distance between the bottom and the top (income brackets?)," "thinning of notes," "notes getting denser," and it might take forty years to realign (to what?)?"

 

Certainly, just increasing taxes won't solve our problem, but we did fine with the tax level before the Libertarian-led Party lowered taxes. Also, the corporate tax rate needs the closing of loopholes which could even then justify lowering corporate taxes. It will take several more years of recovery and price level rise to keep mortgage rates from falling with ever more defaults coming because of high unemployment. People lose their job and get behind on their payments. We need stimilus to mitigate that or the mortgage mess will grow instead of dimminish. An ideal stimilus would be feeding funds into infrastructure work involving the unemployed with a phasing out of long term unemployment insurance. With that, people would be able to pay their mortgages more and we would recover from the slump. Then, we could phase out the stimulus and cut back on government expenses, raise interest rates and get back to normal. Instead of up to 40 years it would take less than 4.

[CraigD]

I think Geko has stated the political conservative side of one of the main disagreements of the current controversy over the US budget:

Taxing the rich is not the answer. How far we going to go? Until their incentive breaks and they take their business and tax revenue off shore?

We might term this argument “the Atlas Shrugged hypothesis”, after the 1957 novel in which Ayn Rand has the rich withdraw from society, resulting in its near immediate collapse.

 

Though Rand’s literary allegory is arguably eloquent, and focused more on government usurpation of private control of intellectual properties (eg: “Rearden metal”) than tax rates, I don’t believe this argument is supported by historical data.

 

The idea that the rich would punish the US if they were taxed more is not only contradicted by rich people such as Warren Buffet, but by history. For most of the history of US income taxes (which were not Constitutionally permitted until the 16th Amendment made them so in 1913), from 1917 to 1981, the tax rate on high incomes was much greater (with the exception of 1924 to 1931, between 63% and 94%) than it has been since 1987 (28% to 39.6%). During this period, the rich did not have their “incentive broken”, or take their business and tax revenue out of the US. Rather, this period saw a great expansion of US business, industry, and government.

 

(source: http://www.taxfoundation.org/publications/show/151.html)

 

Do we want to place the future on the off chance of the wealthy having egalitarian principles?

No.

 

I believe such benevolence is precisely what the “trickle-down economics” theory justifying the dramatic 1981-1987 reduction in high income tax rates assumes: that if allowed to keep more of their income, the rich will use it to benefit the middle class and the poor. Although some rich people, such as “Giving Pledge” signers (see this post) are doing so, primarily by funding charities, I believe that for the most part, the actual behavior of the rich made richer by this policy have not supported the expectations of this approach.

[lawcat]

There is a good reason the gov't has been reluctant to raise taxes on anyone now for years in spite of the need to raise revenue for budget deficit and general debt reasons, or to cut spending, for which a lot people are calling for because they are so focused foolishly on AA+ rating.

 

If you understand that we have liquidity, cash, problem in financial markets you will quickly realize that raising taxes takes cash out of the market, also decreasing spending withholds money out of the market, thus perpetuating the liquidity problem.

 

The liquidity problem affects economy in that we can not borrow, there is not enough cash around. People can not invest in economy by purchasing with credit cards. businesses can not expand by raising debt for building and hiring, illiquidity stifles growth. Our economy is predicated on borrowing, expanding, growing. We've killed ourselves with unwise monetary policy in the housing market, and it was not the Euro or the Chinese or the War debt.

 

Increased taxes and shrunk spending withdraws cash from economy and directly negatively impacts liquidity in the markets. Now, a discussion about how spending and taxing is allocated most wisely is another story.

[geko]

Lawcat, i find myself in thought at your post, it's arguing for the benefits of liquidity, yes?

 

 

I am having trouble with your post.

 

It's a cartoon style representation of my understanding of the effects of a continually expanding money supply. There are others of course but that one seemed pertinent as a successor to a post above.

 

Craig, i don't know Rand but if you say she's already used the idea then i guess she did, although i didn't mean to imply that the rich would do it to punish a country, but rather because progressively relying on them to help us out of the situations we're creating they end up saying enough is enough.

 

As for the rest of the ideas I find myself left wanting when presented with such arguments, especially the historical ones when used for an insight into the future. I'm uneasy with the approach to be honest, although it is food for thought. For example, take the idea that during high levels of taxation there were high levels of growth in both sectors, suggesting that maybe level of taxation doesn't matter for our progress, and maybe even higher levels are actually beneficial. I'm asking myself questions such as how many loopholes have been closed since 1917? How many things were deductible in this period? Wasn't the AMT introduced to offset this deficit? What was the upper income limit, and what was the percentage intake across the various bands? I think we should remember that bonds were introduced around this period also. Shouldn't we really look at government intake from taxes as a percentage of GDP to understand the actual flow of money across this time? If so, whose graph or table to use? Wiki's? The Treasury's? Hauser's? Economic journals? They all fluctuate, often wildly. I don't know how to approach this material in aim of giving reasonable assent to any one position.

 

US history is really not my strong point so i don't know, i concede the point.

 

Tell me Craig, do you think our current political structure and policies are guiding us into a future to which we should aspire?

Edited August 24, 2011 by CraigD
Titled and linked quote for clarity

[lawcat]

Lawcat, i find myself in thought at your post, it's arguing for the benefits of liquidity, yes?

 

 

 

 

 

You are very perceptive!

[geko]

You are very perceptive!

 

Sorry, the second sentence in the third paragraph seemed to imply the opposite. But i'm now confused. Why take it out if you just want it put back in? Isn't this a wasteful way to go about things? It seems to imply that it wasn't already being utilised to fund the most highly valued areas?

[Rade]

"Now project the mentality of a savage, who can grasp nothing but the concretes of the immediate moment, and who finds himself transported into the midst of a modern, industrial civilization. If he is an intelligent savage, he will acquire a smattering of knowledge, but there are two concepts he will not be able to grasp: “credit” and “market.”

 

He observes that people get food, clothes, and all sorts of objects simply by presenting pieces of paper called checks—and he observes that skyscrapers and gigantic factories spring out of the ground at the command of very rich men, whose bookkeepers keep switching magic figures from the ledgers of one to those of another and another and another. This seems to be done faster than he can follow, so he concludes that speed is the secret of the magic power of paper—and that everyone will work and produce and prosper, so long as those checks are passed from hand to hand fast enough. If that savage breaks into print with his discovery, he will find that he has been anticipated by John Maynard Keynes." [Written by Ayn Rand]

[lawcat]

Sorry, the second sentence in the third paragraph seemed to imply the opposite. But i'm now confused. Why take it out if you just want it put back in? Isn't this a wasteful way to go about things? It seems to imply that it wasn't already being utilised to fund the most highly valued areas?

 

You are very correct as well. I missed an il in front of liquidity. Sorry for the confusion.

[Essay]

*

Lawcat, "Liquidity?" Where did that come from? Do you have any source or citation about limited liquidity, or anything about how lack of liquidity is at the root of our problems? All I hear about is the trillions of dollars sitting around in the back pockets of businesses and banks (each) just waiting for "certainty" (or at least "demand") to emerge.

 

~ :huh:

===

 

Property rights ... tell us who, what, where and why in a humane, respectable, unambiguous, voluntary and non-invasive way.

This is only true in a world where time and space do not intervene; but over long time spans and large distances, simple property rights (whose?) do not satisfy well.

===

 

"...and still the statist position holds." -geko

"Statist?" As opposed to what?

===

 

"So if a hampered market doesn't work, which it doesn't, and socialism/communism doesn't work, which it doesn't, what are we left with? There's only one other option available (that we know of)." -geko

 

So in your mind, there are only three options? You say neither the "hampered market" nor "socialism/communism" work, so we are "left with... one other option available."

 

Would the "unhampered market" be the third "option available?"

....And as civilization and global problems become exponentially more complex, cutting government (to unhamper the market) is seen as a solution?

 

Are there any examples from history (except feudalism) when this was working?

--I'd like to ask again.

 

"As for governments being the reason for posterity, well, i don't agree do i?" -geko

But governments were invented to insure our legacy, specifically to ensure our posterity! :)

===

 

 

"To my knowledge there is not a single, genuine argument against the Austrian school (do you have one? If you do please share it), but yet there are numerous genuine arguments against the others. In fact, the debunking of the others is ongoing...." -geko

 

The Austrian School? hmmmmmm....

[it's been over 30 years since I took econ. classes, but I don't recall....]

 

http://mises.org/etexts/austrian.asp

His History and Critique of Interest Theories, appearing in 1884, is a sweeping account of fallacies in the history of thought and a firm defense of the idea that the interest rate is not an artificial construct but an inherent part of the market.

 

Like his predecessors in the tradition, Menger was a classical liberal and methodological individualist, viewing economics as the science of individual choice.

 

It reflects the universal fact of "time preference," the tendency of people to prefer satisfaction of wants sooner rather than later.

 

Mises presented the broad outline of the Austrian theory of the business cycle.

 

He also founded the Austrian Institute for Business Cycle Research, and put his student Hayek in charge of it.

Oh, Hayek!

 

I'm no expert in econ. theories, but try to see things from an ecologist/systems analysis perspective. One of our fundamental problems in sustaining a system is that our values center around short-term and contradictory desires.

 

Cycles, and short-term and contradictory desires ("sooner rather than later, individual choice") may be the basis for understanding our history....

 

But cycles, and short-term and contradictory desires, are not a good basis for establishing a robust and resilient system that can sustain us as we enter a future of increasingly limited resources.

...especially 40 more years of this cyclical crap.

 

Why is this assumption (that a natural or stable foundation for an economic system is "cyclical") considered a valid basis for an ideology?

Is that based on history or "a sweeping account of fallacies in the history of thought?"

===

 

"Individual choice" satisfied "sooner rather than later" describes a spoiled brat. Combined with property rights and contracts (and a strong legal enforcement sector), you get the libertarian ideal of a modern, efficient, feudal, stateless society. IMHO, this is an overly simplistic vision of how a durable society should conduct transactions over time.

 

 

http://mises.org/etexts/austrian.asp

......by applying economic science within a framework of a natural-rights theory of property. What resulted was a full-fledged defense of a capitalistic and stateless social order, based on property and freedom of association and contract.

 

Now the Austrian School enters a new millennium as the intellectual standard bearer for the free society.

 

...inspired countless students to turn their attention to the cause of liberty.

 

The founding of the Ludwig von Mises Institute in 1982....

 

1982! [my BSc is from 1982] Hey! Is this another one of those conservative think tanks, which popped up back in the 1980's to reinforce the Reagan Ride?

 

"Liberty" "natural rights" and "the free society" sound like rhetorical appeals for emotional support of this ("full-fledged defense of a capitalistic and stateless social order") unscientifically developed paradigm.

===

 

This paramount focus on the individual (short-term focus and contradictory desires) does not bode well for the endurance of civilization's current benefits; nor does it encourage the emergence of broader and deeper benefits from civilization, for our species and for others, as the future evolves.

 

~ ;)

[lawcat]

*

Lawcat, "Liquidity?" Where did that come from? Do you have any source or citation about limited liquidity, or anything about how lack of liquidity is at the root of our problems? All I hear about is the trillions of dollars sitting around in the back pockets of businesses and banks (each) just waiting for "certainty" (or at least "demand") to emerge.

 

~ :huh:

===

 

 

http://www.elliottwave.com/freeupdates/archives/2011/07/13/The-2008--Liquidity-Crisis--Sequel-Bigger-and-About-to-Devour-Europe.aspx

 

http://www.consumeraffairs.com/news04/2011/08/us-banks-growing-more-profitable.html

 

There are plenty of articles, there are congressional reports from 2008. I lost links to most since I studied the crisis three years ago.

[geko]

Essay,

 

So in your mind, there are only three options?

 

Yes. Free, hampered and statist. Give me another and i'll change my mind if i think you're right.

 

 

Are there any examples from history when this was working?

--I'd like to ask again.

 

I dodged the question the first time around because i didn't want to get involved in an historical argument and also because i tried to imply in the next paragraph that i don't agree with the idea that our current is system is working. If you think the system is 'working' and i think the system is 'not working' we have to move on don't we and into more specific areas. The point of this whole…. diatribe from me i guess many would call it is i want to understand why statists believe in the benefits of the state. It's obvious you think it's working and that i don't. I think you're crazy, just like you think i'm crazy, so i'm putting my opinions out to be argued against believe it or not.

 

But anyway, to answer your question, I don't agree with basing arguments on history. They're not valid i don't think. How do we even approach it? Get some guy to catalogue lots of stuff from history and then he sticks it in a book, yes? Then we have to get another person to go back over the same material who shares the same viewpoint to make sure they got everything? How many times should we do this until we have a complete account of the reviewed information? When do we consider it complete? But we're not done yet since all of these people are biased and prejudiced because they're human so will find viewpoints and information in support of previously held assumptions, so we have to get another set of people to go back through it again. How many sets of people do we need to use to ensure that all angles of the information regarding the issue have been accounted for from the numerous human biases that we've decided to consider? If it's even further back in history we need to also get someone to read it and catalogue it all again in a more condensed form. Since this new scholar is also human and prejudiced we need to get lots more people to go through the material to make sure we have again accounted for all relevant material, maybe even going back to the source to take account of forever changing viewpoints and understanding. Now we have another set of books written by another set of biased individuals, does the process start all over again? Show me the totally objective guy that we can trust. When do we get to ze facts? Can we ever trust facts from history since the end guy will always be biased? Is this reasonable? …in steps the enthusiast thinking that they, of all people, know how to separate the wood from the trees.

 

Yes maybe after all this we have a totally objective account, which personally i doubt, bet let's assume we do. So what we have is an example of something happening at time X in situation Y. How is this correlated to time X+1 in situation Yn so closely that we can reasonable take it as some kind of statistic of what will happen in the present situation? Surely this is unreasonable? Should we not look to methodology and argument to find out the path we should take rather than relying on history as though it's some kind of predictor of the future?

 

 

But governments were invented to insure our legacy, specifically to ensure our posterity!

 

They aren't needed in my eyes, they're a hindrance. I'll address the point below.

 

The Austrian School?

 

Granted, i don't actually like using the idea of schools to split the economic 'camps' if you will but people seem to know what you mean when you say it so it's often convenient. I'm actually not fond of the persona of the Austrian school although that's neither here nor there i guess, but there's a number of things in their literature that are worth listening to in my opinion.

 

 

…our values center around short-term and contradictory desires….

…

…short-term and contradictory desires, are not a good basis for establishing a robust and resilient system that can sustain us as we enter a future of increasingly limited resources.

...

…the libertarian ideal of a modern, efficient, feudal, stateless society. IMHO, this is an overly simplistic vision of how a durable society should conduct transactions over time.

…

This paramount focus on the individual (short-term focus and contradictory desires) does not bode well for the endurance of civilization's current benefits; nor does it encourage the emergence of broader and deeper benefits from civilization, for our species and for others, as the future evolves.

 

I don't understand how people relate libertarianism with feudal because feudal relates to nobility with their vassals doesn't it? I don't see the association but it's a moot point so whatever.

 

It's wrong to state that our values center around short term desires as if it's a quantified length of time that's unacceptable. Unless by short term you mean our lifetime and our children's? And then their children's? And on it goes, no? I'm unclear why this is not good enough.

 

But anyway, I think we should have a quick look at some figures. I'll use this http://www.usgovernmentspending.com/spend.php?span=usgs302&year=2011&view=1&expand=70605000102030408090E0F0G0H0&expandC=&units=b&fy=fy12&local=s&state=US&pie=fed#usgs30240 , but you can argue the source or use your own if you wish.

 

That's a ~trillion on defense. Three quarters of which is military. Is this a high valued redirection of resources? How many country's does the US have military occupation in these days? Over a hundred http://www.defenselink.mil/news/Jun2003/basestructure2003.pdf. Is this a good thing? Better than open trade relations? Is it also a good thing when you consider the other areas of expenditure? Take the public health service, 800 billion. How is the US public health service? Is it struggling and failing like the UK one? How's Walmart and Mcdonald's doing? Are they also struggling to make a profit with serving their customers of their wants on a time scale that satisfies their needs? Pensions? 800 billion here too and what's the result? Are the old age still in poverty and struggling? Inflation is beneficial we hear. Only a 130 billion spent on education… you gotta laugh, no? Are you sure they have our future and best interests at heart? What rank is the US at educating their young? 14th overall with 17th for science and 25th for maths http://www.oecd.org/dataoecd/54/12/46643496.pdf. This is a good result considering the total intake of ~4 trillion? Something conducive to long term goals to which we are aspiring? Tens of billions also spent on general government that we'll reclassify as admin, which basically means tens of billions spent in putting this farce into operation in the first place. The list goes on it seems.

 

As Massey said with regard to identity and places, "..what is special about place is not some romance of a pre-given collective identity or of the eternity of the hills. Rather, what is special about place is precisely that throwntogetherness, the unavoidable challenge of negotiating the here and now…. There can be no assumption of pre-given coherence, or of community or collective identity. Rather, the throwntogetherness of place demands negotiation. In sharp contrast to the view of place as settled and pre-given, with a coherence only to be disturbed by 'external' forces, places as presented here in a sense necessitate invention; they pose a challenge". http://www.amazon.co.uk/Space-Professor-Doreen-B-Massey/dp/1412903629/ref=sr_1_1?ie=UTF8&qid=1314187407&sr=8-1

 

And what better way to rise to the challenge of meeting forever evolving, changing and dynamic value scales and environments but by negotiation in voluntary exchange of resources between all individuals in pursuit of increasing the well being and happiness of all those involved? Including their families and friends, which includes their young. As you say, making a better place requires attending to the complex and dynamic mixing of people, things and activities. Top down, central planning is not concerned with improving relationships and connections within and without, and therefore, in my opinion, it is not something to look towards for guidance. In fact, it's dangerous to do so due to its disconnected nature. Even if it was somehow super human in its policy making with regard to time X situation Y it's still not good enough because human direction, and especially our social life, is incoherent; government, especially big government, can't adjust fast enough. Subjective speculation of quantified social capital aside (something that governments have been jumping all over for years, seemingly oblivious to the negative correlations and therefore to the unreasonable nature of the argument), people will be found in places, performing acts and in pursuit of that which they value and has utility, so creating barriers to this by way of restrictions handed down from on high as if "they know better" is a wild imaginative theory based on ideas of 'agents taking care of us' (in my opinion).

 

"Individual choice" satisfied "sooner rather than later" describes a spoiled brat.

 

Are we all spoiled brats in your view? If so, what's the answer? A centrally planned board of directors (that must be spoiled brats themselves), to direct us?

 

...especially 40 more years of this cyclical crap.

 

I'm assuming you mean the booms and busts? Businesses are the ones to blame for this? I wonder though, who continually stimulates the economy with extra funds and artificial interest rates providing the indicators necessary to speculate on various markets?

 

"Liberty" "natural rights" and "the free society" sound like rhetorical appeals for emotional support of this ("full-fledged defense of a capitalistic and stateless social order") unscientifically developed paradigm.

 

Well, we could turn the idea around couldn't we. Big brother, daddy figure type desires. I recently read why we believe in god(s) and found myself swapping the state for religion and gods in various situations. Propensities, attachment, invisible agents, morality, ritual, education can all be related to belief in the state as well as god in various situations. Then we refer to La Boétie and find ourselves almost taken by the idea that statists are fools praying to deities but i don't go there as the argument from foolishness is stupid i think. And as you say it just sounds rhetorical, which i'm prone for i know ;)

[lawcat]

and the country is bankrupt.

 

America is not bankrupt and can not be bankrupt.

 

Defaulting will come by way of . . . stimulus . . . the purpose of defaulting by way of stimulation is to write off the debt through inflation . . . the value of the dollar goes through the floor

 

huh!? How does worthless paper get you out of debt?

 

no deficit spending are all good things

 

Are you Chinese, cause as far as I know they are the only culture who believes this?

 

 

As Massey said . . . the unavoidable challenge of negotiating the here and now…. There can be no assumption of pre-given coherence

. . .

 

And what better way to rise to the challenge of meeting forever evolving, changing and dynamic value scales and environments but by negotiation . . . .

 

I read that, as it relates to governance although the quote is about places, good governance is about negotiating decision based on facts rather than ideological pre-set rules of how it should be. So you should heed that advice.

[Essay]

Essay posted: Lawcat, "Liquidity?" Where did that come from? Do you have any source about limited liquidity, or anything about how lack of liquidity is at the root of our problems? All I hear about is the trillions of dollars sitting around in the back pockets of businesses and banks (each) just waiting for "certainty" (or at least "demand") to emerge.

 

There are plenty of articles, there are congressional reports from 2008. I lost links to most since I studied the crisis three years ago.

 

http://www.elliottwave.com/freeupdates/archives/2011/07/13/The-2008--Liquidity-Crisis--Sequel-Bigger-and-About-to-Devour-Europe.aspx

 

http://www.consumeraffairs.com/news04/2011/08/us-banks-growing-more-profitable.html

Yes, but today....

Again, I'm out-o-my comfort zone here; but I watch the news and the developments.

 

Liquidity: About.com says "Liquidity is the amount of capital available for investment."

 

http://www.reuters.com/article/2011/06/07/usa-fed-fisher-idUSN0711573020110607

 

Tue Jun 7, 2011 9:20am EDT

UPDATE 1-Fed's Fisher: Lots of liquidity in U.S. economy

 

(Reuters) - Dallas Federal Reserve President Richard Fisher said on Tuesday there was ample liquidity in the U.S. financial system and no need for the U.S. central bank to continue its extremely easy monetary policy.

...

"What would more liquidity do? It's not being used. It's sitting on the sidelines. The gas tanks are full," he said.

===

 

 

http://cebviews.com/2011/08/08/us-economy-escaping-the-liquidity-trap/

Aug. 8, 2011

 

US Economy: Escaping the Liquidity Trap

Despite the recent flurry of news caused by Friday’s downgrade, America’s long-term outlook remains the same: the US economy is stuck in a 'liquidity trap' where companies and households hoard cash and liquid assets; this means slow growth for years yet:

===

 

http://canonproperties.com/why-the-housing-market-is-caught-in-a-liquidity-trap

May 9, 2011 by canonbusinessproperties

 

Why the housing market is caught in a liquidity trap

 

FORTUNE – In textbook economics, lower interest rates typically spur higher investments Money is cheap. So the assumption is that people, banks and companies will spend more, therefore helping the economy grow.

 

But that doesn’t always work. Sometimes cutting the rate of interest, even to zero, won’t necessarily pull an economy out of a recession. British economist John Maynard Keynes called this the liquidity trap — when virtually everyone becomes so risk averse that banks would rather sit on their cash than offer credit. And even if banks start lending more, people wouldn’t want the credit anyway.

 

...underscores how weaknesses from the demand side (as opposed to the supply side) is perhaps the bigger problem.

===

 

 

Now I know that back when the crisis hit, lending dried up; but that was based on expectations, not liquidity.

 

Look at the history:

http://www.globalresearch.ca/index.php?context=va&aid=5592

Global Research, Asian Times Online

May 9, 2007

 

Economic growth in the US slowed to 1.3% in the first quarter (Q1) of 2007, the worst performance in four years of an overextended debt bubble. Yet the Dow Jones Industrial Average (DJIA) rose to an all-time intra-day high of 13,284.53 to close at 13,264.62 last Friday, rising more than 1,000 points or 9% in the same period.

 

The DJIA is now 82% higher than its low of 7,286.27 on October 9, 2002, during which US gross domestic product (GDP) grew only 38%.

...

Now in 2007, a looming debt-driven financial crisis threatens to put an end to the decade-long liquidity boom that has been generated by the circular flow of trade deficits back into capital-account surpluses through the conduit of US dollar hegemony.

 

In all these cases, a point was reached where the scale tipped to reverse the irrational rise in asset prices beyond market fundamentals. Market analysts call such reversals "paradigm shifts".

===

 

http://www.globaleconomiccrisis.com/blog/archives/31

Fed Rate Cut Threatens U.S. Economy With Liquidity Trap

December 17th, 2008

 

One of the most acute dangers to an already fragile economy is the phenomenon referred to by economists as a “liquidity trap.” ....

In actuality, a liquidity trap prevents liquidity from circulating, no matter what other extreme monetary measures are enacted by the central bank. This phenomenon plagued the Japanese economy during its recent “lost decade.”

...

 

A liquidity trap involves radical rate reductions by a nation’s central bank that translates into virtual zero interest being charged. The result, in a recessionary economy, is that the economic downturn becomes even more traumatic, since a zero rate discourages investment by stakeholders retaining capital. A zero interest rate provides no incentive for long-term investing with its concomitant risk-taking. Those with capital tend to hoard it while an effective zero interest rate is maintained, defeating the stated purpose of such monetary policy, which is to inject liquidity into the economy.

===

 

http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=103x100295

"The US Economy Is In Bush Liquidity Trap"

 

There is lots of liquidity, but just not much justification (have you seen the future?) to let it to flow.

 

~ :)

[lawcat]

Essay, we are sitting here at the end of 2011. We hit the liquidity crisis in mid 2007, acted with stimulus in late 2008 and early 2009 and onwards. If we meet here at this website to talk about liquidity crisis in 2015 there will probably be nothing to talk about. Things change for better due to stimulus, over time.

 

We are not out of it yet. We are still in liquidity crisis. Financial market is not limited to banks, a few banks. Speaking of banks, they took a drastic hit to their reserves over the last three years and they are just now starting to replenish. There are financial institutions struggling still. Even though segments are getting out of it, on the whole we are still in liquidity crisis.

 

AS I said before, you can not take a general rule that zero rate can be dangerous, and generalize that to US economy on the rule alone without analyzing the facts. Gotta look at the facts, can not be an ideologue.