Wednesday, October 08, 2008

The international financial crisis - return of the liquidity trap?

All those years ago when I did macro-economics for the first time, one thing that we learnt about was the Keynsian concept of the liquidity trap. This came about where no matter how much you lowered the interest rate or expanded the money supply (=liquidity), there was no impact on economic activity.

This came about because, among other things, plans to save were greater than plans to invest. In these circumstances, economic activity would contract no matter the expansion in liquidity. The only solution was fiscal policy, an expansion in real spend.

I think that this where we are now.

Postscript

I had no idea when I penned this simple post this morning just how right I appear to be. Listening to the news tonight - it is now 10.50 -the continuing financial meltdown is flowing straight across into the real economy. In Australia, consumer confidence is down 11 per cent.

In all this, there are rich pickings for some such as the Commonwealth Bank's acquisition of BankWest.

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.
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.

http://www.17-76.net/

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?