Moneymoney

Mon Jul 8, 2019, 09:28 AM

Shelton, The Fed, & The Realization Of A Liquidity Trap

“A liquidity trap is a situation described in Keynesian economics in which injections of cash into the private banking system by a central bank fail to lower interest rates and hence fail to stimulate economic growth. A liquidity trap is caused when people hoard cash because they expect an adverse event such as deflation, insufficient aggregate demand, or war. Signature characteristics of a liquidity trap are short-term interest rates that are near zero and fluctuations in the monetary base that fail to translate into fluctuations in general price levels.”

There is absolutely no evidence that the Fed’s “zero interest rate policy” spurred a dramatic increased in lending over the last decade. Monetary velocity has been clear on this point.

The definition of a “liquidity trap” states that people begin hoarding cash in expectation of deflation, lack of aggregate demand or war. As the “tech bubble” eroded confidence in the financial system, followed by a bust in the credit/housing market, and wages have failed to keep up with the pace of living standards, monetary velocity has collapsed to the lowest levels on record.

... in the short term, it appeared such accommodative policies aided in economic stabilization, it was actually lower interest rates increasing the use of leverage. However, the dark side of the increase in leverage was the erosion of economic growth, and increased deflationary pressures, as dollars were diverted from productive investment into debt service.

https://realinvestmentadvice.com/shelton-the-fed-the-realization-of-a-liquidity-trap/

This is not a policy that trump started. It began a long time ago and is a reflection of the economic cycle of mature capitalist economies.

This isn't about politics. If you care to read it, you will have a better understanding of why some see a downturn in the near future. The probability of a correction increases as the cycle matures and the response by the central banks becomes less effective to boost economic activity.

The 2007-9 Great Recession has had a long lasting cycle of slow growth in the general economy, interest rates were exceptionally low to sustain the economy, yet the flow of funds went into stock market which favored investors over savers.

Valuations in the stock market are distorted compared to risk, one reason is that the return on investment depends more on low interest debt to purchase share buybacks, to sustain the upside of the market. Which is why the market wants the FED to cut rates.

Consumer demand is stagnating, which has nothing to do with trump. This is what happens when growth slows. Growth in wages, growth in productivity, growth in trade, growth in consumption, are all slowing around the globe. The US is in better shape, but that's not saying much.

Consumers are loaded with an overhang of debt across the generational spectrum. Corporations are like wise loaded with institutional debt. That's the other anchor weighing on the economy.

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Reply Shelton, The Fed, & The Realization Of A Liquidity Trap (Original post)
uncledad Jul 2019 OP
rampartb Jul 2019 #1
Grumpy Pickle Jul 2019 #2
rampartb Jul 2019 #4
Grumpy Pickle Jul 2019 #5
uncledad Jul 2019 #3

Response to uncledad (Original post)

Mon Jul 8, 2019, 09:43 AM

1. failure to punish the perpetrators of the 2008 crash

to pass any reasonable legislation or regulation to prevent another crash, or even any serious investigation into the causes of the 2008 crash might account for much of the citizens' distrust in these markets and institutions today.

for that I hold Obama, Geithner, and holder responsible along with the congressional committees responsible for banking and the economy.

the record market averages are not indicative of any underlying "market strength." i'm also very suspicious of unemployment figures that do not reflect the millions of middle aged americans who will never work again, and who know it.

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Response to rampartb (Reply #1)

Mon Jul 8, 2019, 10:22 AM

2. Geithner let the banks in the New York Fed Reserve get away with what ever they wanted.

He should have been indicted.

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Response to Grumpy Pickle (Reply #2)

Mon Jul 8, 2019, 10:38 AM

4. the shenanigans were bipartisan

Paulson and Bernanke (as well as greenspan) dropped their share of the ball as well/

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Response to rampartb (Reply #4)

Mon Jul 8, 2019, 11:08 AM

5. Agree........it was a rat's nest of deceit.

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Response to rampartb (Reply #1)

Mon Jul 8, 2019, 10:26 AM

3. I don't disagree with any of what you said.

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Moneymoney