Wednesday, October 8, 2008

A Liquidity Trap?

Is this what a liquidity trap looks like?

A liquidity trap gives one the feeling that the monetary authorities are pushing on a string. The amount of liquidity the Federal Reserve and other central banks around the world have provided for the financial markets has been huge. The Paulson Plan was supposed to create confidence that illiquid assets would now have some liquidity. The Fed Plan to purchase commercial paper was supposed to create confidence that illiquid assets would now have some liquidity.

Yet, the financial markets remain silent.

Seemingly, no one wants to commit because no one is sure about the solvency of other participants in the financial markets.

Bernanke spooked the financial markets again yesterday as he talked about a possible cut in interest targets…which he did follow through on. The speech was to the National Association for Business Economists at their 50th anniversary get-together in Washington, D. C.

The message the market heard, however, was how dire things were.

And, the market asked…what does Bernanke know that we don’t?

The absence of leadership seems to reach new heights daily. (See Mase: Economics and Finance for October 7, 2008.)

But, now we are apparently in a liquidity trap. Consumers are pulling back their spending…the latest figures out on consumer credit even show a decline. Businesses are consolidating and cutting spending and hiring plans. State and Local governments are going to the Federal Government to get cash to help them meet payrolls. And, then the Federal Government…

Get out your old copy of Keynes’ General Theory.

1 comment:

Adam Smith said...

Prepare for the New World Economic Order

Interest Rates [Credit] are the Cause and Consequence of the Explosion of Income/Wealth Disparities and, Hence, of the Inherent Instability of this Economy:

The Ominous Keynes' Liquidity Trap.
The Origin of Economic Chaos.

Everyone Need an Economy, Don't They?

There Is One Solution That Works:

A Credit Free, Free Market Economy:

The New World Economic Order.

The Only Goal of 1776 - Annuit Cœptis is to Implement It.

They Can Transfer Their Assets & Forget Their Liabilities.

Anyone Can Join But Still Needs to Ask for It.

The Purpose Is to Provide Both a New Deal and a New Game.

It is NOT to Fix This Economy Which is Already Beyond Repair.

The Intention Is to Create a New Economy
With the Assets of the Old One Without its Liabilities.

Why Not Insure Against the Worst Case Scenario?