Talk:Liquidity trap

interest rate below 0

Is there any in principle reason why interest rates could not drop below 0, at least for state owned banks? Mark Richards 23:22, 27 May 2004 (UTC)

Well, I think it is inherent in the concept of interest rates. They are "rent" on money, right - someone lends someone else money and receives 'interest' for that service. So negative interest rates would be just like someone throwing money at you to live in their appartment or someone giving you extra money for borrowing their money. However, someone who definitely knows what he's talking about seems to suggest that there is such a thing as negative interest rates. Check out Paul Krugman's article on the Liquidity Trap: [web.mit.edu/krugman/www/trioshrt.html] Cheers, User:Tmstapf

Well, intuitively yes, but in reality, lending below the rate of inflation is throwing money away (forget for the moment that we are talking about an example where inflation is also zero). You break even on lending if you lend at the rate of inflation, anything above that is profit, below it is loss. Governments frequently lend at rates below what they could get at market in order to increase the availability of capital in the market, to stimulate growth - they incur a loss against what they could in theory 'rent' the money for in return for political gain of stimulating the economy. I don't see why they could not, as inflation approaches zero, and if interest rates were also zero, lend at below that for the same reason. I agree that the scenario is unlikely. Mark Richards 05:51, 29 May 2004 (UTC)

Sure I agree that governments often lend/spend for the political gain rather than the profit (political gain is so to say government's profit). But still I cannot see a negative interest rate making sense. If I borrowed $5 from you today, promising to give it back to you in a year at -10% interest I would need to give you back only $4.50 at the end of the year. So in effect you would pay me to take your money. And even though governments are sometimes desperate to gather political support I don't think they would need to do this, because people are going to be happy to take their money already at 0% interest rate.

Your assumption is that the inflation rate is 0%. This is why it appears that the real interest rate can't be negative.

Let's bring inflation into it. Let's say you lend me $100 with a nominal interest rate of 10%. Now, let's say (for the sake of this discussion) that the real inflation rate is also 10%. In one year, then you would need $110 in value to equal the value that you have in the $100 today. Thus, the real interest rate of the loan that you gave me would be 0%. That is, you would have $110 in one year, but that $110 at the end of that year is worth the same as the $100 that you have now. You would not have a net gain.

Now, let's say that you charge me only 5% nominal interest, with an inflation rate of 10%. In 1 year, you will get back $105, which is worth less than the $100 that you have now (remember, you need at least $110 to match the value that you have now). You have, in effect, "paid" me the other $5 because I got the value out of that money immediately, before the interest rate affected it.

This is why it is possible to have a negative real interest rate. The nominal rate can't go below 0%, but if the inflation rate is higher than the nominal rate, then the real rate is negative. The key here is understanding the distinction between the nominal and real rate.--76.104.90.6 03:24, 8 October 2007 (UTC)

Wouldn't it just end up being a partital grant? There are many examples of govts giving grants, subsidies and tax breaks along with loans to encourage business to one thing or another. I guess this is the practical manifestation of negative interest rates. Mark Richards 15:50, 1 Jun 2004 (UTC)

There is a very good reason why interest levels cannot drop below zero. If the central bank decided to do so it would mean offering money that din't already exist. So it would need to increase M1. But such an increase would merely correspond to what Krugman already suggested. Hence it is useless to discuss interest levels below zero because that simply means increasing the amount of money. Also, if the interest is 0 demand will be explosive which means that the central bank would have to impose direct quantative restrictions on M1 rather than using the interest rate to clear the money market. This would effectively disrupt the money market and result in adverse effect on the goods market and in turn labor market. This is why central banks prefer to use the interest rate. One notable exception is if the central bank is following a fixed exchange rate rule. In such a case the central bank cannot set the interest by itself but needs, roughly speaking, to accept it as given. In this case the central bank does indeed regulate M1 directly but in this case interest levels below or at 0 would imply other problems beyond the scope of this article. MartinDK 13:37, 19 October 2006 (UTC)

That's not true. REAL interest rates can go below 0%. It is only the nominal interest rate that cannot go below 0%. The REAL rate is the nominal rate corrected for inflation. As stated above, if the inflation rate is higher than the nominal rate, then real interest is negative.--76.104.90.6 03:26, 8 October 2007 (UTC)

Batman picture

In case anyone objects to the picture based on the quality or how well it illustrates Friedman's views, the scene in question is on YouTube. This is where I got my screen shot due to limited technical capabilities, but if anyone can get a better shot (other moments I would have rather used were too pixelated to see) feel free to do so. Paliku (talk) 22:41, 29 July 2008 (UTC)

The picture is almost nonsensical. It's hard to tell what it depicts, and what it depicts is a scene from a 1989 fantasy movie that has nothing to do with economics or Friedman. Also, it does not "illustrate Friedman's views," unless one thinks that Friedman advocated free money raining down from Government sources (he did not). This is trolling, and bad trolling at that. Take your editorial elsewhere. 209.193.36.155 (talk) 00:36, 13 August 2008 (UTC)

Are you sure the sentence about trolling wasn't a self-reference? I can't help wondering if the anon who left the comment even read the section in question, let alone its description about bypassing the bank. But yes, the part about it being hard to see is why I posted here... Civil comments are welcome if you'd care to have an actual discussion. Paliku (talk) 04:22, 16 August 2008 (UTC)

Austrian Critique?

Is there a reason every article on economics has to have an "austrian" view covered? —Preceding unsigned comment added by 209.131.62.113 (talk) 00:41, 17 December 2008 (UTC)

I don't know if I can answer that, but it's been a matter of much discussion: here, here, here, and here besides in individual article talk pages. CRETOG8(t/c) 01:26, 17 December 2008 (UTC)

I think it's a good question. The Austrian school is a fringe view that seems to be given unequal weight in most places. Maracle (talk) 23:17, 12 February 2009 (UTC)

The validity of any discipline claiming to be a science is demonstrated by its ability to predict. Have the various "Austrian School" economists been correct in their predictions of what would happen if certain economic policies were enacted by the officers of civil government, or not? Recent events have given (and will continue to give) cause to state that they have.
The fact that most of these economists are profoundly hateful of Mencken's "Malevolent Jobholders" (Murray Rothbard's famous quote: "Hatred is my muse") says nothing more than that they are hostile - with good cause - toward the career politicians and bureaucrats who are served by such policies. (See also public choice theory.) The Austrians' consistent argument is merely that "public servants" make decisions that dispose of their polities' wealth for reasons at best tangential to - and too commonly diametrically opposed to - the real welfare of the people they're supposed to be "serving." For this very good reason, the Austrians argue that society in general and individual citizens in particular are better off when government action in the marketplace is sharply limited to the preservation of the classic negative rights of the individual (to life, to liberty, and to property), and are not undertaken to force politically "sweet" but economically nonviable outcomes on the population. —Preceding unsigned comment added by 71.125.131.24 (talk) 07:18, 21 March 2009 (UTC)

I don't think that there is a problem with having the "Austrian School" view on the issue. But there is the problem of what the "Austrian School" view is. This material seems to be "Rothbardian" Austrian School material. And the "Rothbardians" are but one of several groups within the Austrian School and are generally considered to be the most radical in their views. --Nogburt (talk) 01:31, 11 April 2009 (UTC)

I don't mind having austrian views present as long as we follow up by posting why they are known to be wrong. For example, the Austrian view is that Ronald Reagan or George Bush would have a higher growth rate than FDR. You can see how well that turned out here: https://dddb4a4a-a-62cb3a1a-s-sites.googlegroups.com/site/thecakeparty3/home/GDP-LogoForWeb.gif

Please excuse the interruption. I don't know how reliable your chart is but to imply that under Reagan or GW Bush the American economy operated on Austrian-school economic principles is a real knee slapper! What if it is the case that the stimuli of Democratic administrations pumps up the GDP in the near term and the inflation doesn't do its dirty work until the perps are out of office? What if both the good and evil that men do lives after them? I think Mr. Krugman, for one, would claim that GW Bush is responsible for our poor economic performance under Obama and by the same logic, Eisenhower would be responsible for JFKs success, all of which goes to demonstrate the lure of the post hoc fallacy and the absurdity of such meaningless macroeconomic "proofs." It's clear that the readily and repeatably observable principles of goal-directed human action provide a sounder scientific basis for predicting the results of proposed economic policies. As for being 'fringe', there's no percentage in proving to the government agencies that hire economists that they should shut down and go home, and speaking that kind of truth to power, no matter what the subject matter, is guaranteed to get you nudged out of the "mainstream" very quickly. Just thought I would clear that up. —Blanchette (talk) 07:53, 31 July 2012 (UTC)

But anyway, Reading this particular article makes me feel like the entire world has gone insane. Is there not an economist we can quote that will say that Liquidity trap is not just something that happens every once in a while for no known reason and is instead the inevitable, only possible result of shifting money that would have been aimed at consumption to be aimed at capital after you pass a certain point? Surely someone has made the obvious point that capital is fighting over return, which in turn comes from consumer dollars. If too large a fraction of the revenue dollars fall outside the radius of consumption, then required capital investment approaches zero (from a required production capacity standpoint) while dollars that are aimed at financing capital investment increase past all normal limits which is practically the definition of interest rates heading to zero. Apparently even the liberals are not able to communicate that clearly, and it is profoundly disturbing that even some people who understand the problem with supply-side economics still favor supply-side stimulus in a low interest rate situation.70.113.72.73 (talk) 09:28, 30 May 2012 (UTC)

Hello again. That's a very nice Austrian-style piece of reasoning in your second paragraph where you argue on observable principles (of goal directed action) that capital is fighting over return, and so forth. I can't say if you have left out any vital factors, like the real source of all those dollars aimed at capital investment, but you make an excellent point and finding a RS for that view would help the article. —Blanchette (talk) 07:53, 31 July 2012 (UTC)

The austrian comment looks like self publicity by the book's author — Preceding unsigned comment added by 141.228.106.149 (talk) 08:34, 1 December 2011 (UTC)

Section entitled "Macroeconomic dynamic" in need of an expert

The section "Macroeconomic dynamic" is gibberish for non-experts. What is "the money demand function Pr"? Is there one money demand function, which is called "Pr", or are there several money demand functions, among which this section is discussing the one that happens to be named "Pr"? What is the parameter/argument/independent variable of which it is a function? If the workers of the world unite and demand more money, does the money demand function increase? What does "the output Y" represent? GDP? Beer production per annum? And what do R, Ry and Py stand for? Finally, what is "the IS curve"? Enquiring non-experts demand to know.  --Lambiam 09:56, 17 December 2008 (UTC)

Third paragraph of intro

The first two paragraphs provide a pretty good summary of the meaning of liquidity trap. The third paragraph, a two sentences sentence, is just sort of hanging out there, and doesn't (to me) make a lot of sense. It reads:

The liquidity trap theory applies to monetary policy in non-inflationary depressions. The theory does not apply to fiscal policies that may be able to stimulate the economy.[citation needed]

First sentence may be true, but isn't terribly meaningful without additional explanation. Second sentence seems pointless. There are all sorts of things that the theory doesn't apply to.

I'd just delete both, but before I do, wanted to make sure that these don't have some special meaning for one of the regular editors. --66.28.243.126 (talk) 03:34, 9 March 2009 (UTC)

'The monetary authority must act covertly to give gift money to specific individuals or firms without appearing to give money away.'

Is this really an accurate representation of the predicament of a government stricken with democracy, or else is the above sentence written by a believer of conspiracy theories? —Preceding unsigned comment added by Shane.Halloran (talk • contribs) 19:56, 2 May 2009 (UTC)

The edit at http://en.wikipedia.org/w/index.php?title=Liquidity_trap&curid=683586&diff=296770653&oldid=296608056 of this page contains weasel words. —Preceding unsigned comment added by Shane.Halloran (talk • contribs) 18:32, 16 June 2009 (UTC)

did we really want to delete half the article?

http://en.wikipedia.org/w/index.php?title=Liquidity_trap&diff=prev&oldid=318347239 i'm not going to be bold and revert this one, though. Gzuckier (talk) 01:27, 28 October 2009 (UTC)

A civilian--an intelligent, well-read citizen with no training in economics--cannot enter into this article. There's a thorny barrier of jargon that prevents passage. No wonder the article rates a "C" for writing. Can someone please give an overview in plain language? 97.115.103.109 (talk) 06:19, 19 January 2010 (UTC)

Yes, the article does contain a ton of jargon and it also lacks references. But as a student of economics, I must attest for its significant increase in accuracy since that massive edit. Please, nobody revert the article back to its old state. As per 97.115.103.109, less jargon ridden text would be way better. --Dwarnr (talk) 23:16, 4 February 2010 (UTC)

Helicopter Drop

Why does "helicopter drop" redirect here when it's not even mentioned? Did that part of the article get deleted? — Preceding unsigned comment added by 216.183.171.30 (talk) 20:28, 12 July 2011 (UTC)

A big chunk of the article that lacked citations for Austrian criticisms was gutted out of the article in March of 2009. That part included the "helicopter drop" reference. While I'm sympathetic to the Austrian view, I think the edit was justified. Without sources, that section had to go. -- SpareSimian (talk) 16:24, 24 August 2011 (UTC)

Naming

Should be called 'Low interest or Zero rate trap'.  ??--70.240.151.123 (talk) 22:14, 10 August 2011 (UTC)

The 'Liquidity Trap' is a different concept from the 'Zero Lower Bound', which I believe is what the previous user may be referring to.

There seems to be no article yet on the concept of 'Zero Lower Bound'. I strongly suggest that we do not mix this concept into the present article until it achieves a higher quality.--Jergas9 (talk) 21:39, 7 December 2011 (UTC)

Introduction

The introductory paragraph has as its second and last sentence: "Liquidity traps typically occur when expectations of adverse events (e.g., deflation, insufficient aggregate demand, or civil or international war) make persons with liquid assets unwilling to invest."

What is the source for that statement? It doesn't make sense to me.

Now, I am not an economist, merely a retired engineer and an amateur actor. But figuratively walking a mile in the moccasins of a "person with liquid assets," I would not be deterred by mere expectation, considering the uncertainties inherent in any new investment. Absolutely the only thing that would make me "unwilling to invest" would be the absence of any opportunity for investment that might furnish a rate of return in excess of the cost of capital.

I would not object if the sentence said "Liquidity traps typically occur when the virtual absence of investment opportunities that offer a rate of return greater than the cost of capital makes persons with liquid assets unwilling to invest." I have no authority for that statement either, but it seems more plausible to me than the one in the article.

However, my only legitimate objection to that sentence is that there's no citation to support it. Marty39 (talk) 00:28, 11 August 2011 (UTC)

in our case Bernanke doesn't think he can raise due to people with mortgages stuck in those low rates. What happens if you raise them. They foreclose. It's a trap. — Preceding unsigned comment added by 70.240.151.123 (talk) 09:56, 11 August 2011 (UTC)

I concurr with Marty39 in that the two last sentences of the introduction are not entirely appropiate. Moreover, I believe that the very first sentence should be slightly modified as well.--Jergas9 (talk) 22:04, 7 December 2011 (UTC)

self-perpetuating?

In the case of a liquidity trap is there an expectation that the absence of investment caused by an expectation of adverse events can in fact cause (or perpetuate) the adverse event itself? For example, if banks stop lending money because they're worried about the possibility of a recession, then that in itself could cause a recession. Similarly, if they continue to not lend, again because of worries about the economy, then that can perpetuate the recession? I was under the impression that it was this aspect of things that made it a "trap" - if this is the case then I don't think that this is reflected in the article. --Kick the cat (talk) 13:32, 26 August 2011 (UTC)

The 'Liquidity Trap' is a relatively old concept. Most people would agree that its father is John Maynard Keynes. At that time, expectations were just beginning to be formalized in economics. So the 'Liquidity Trap' typically refers only to the (almost) infinite slope of the demand for money in the (amount of money, nominal interest rate) plane [money on the horizontal axis, interest rate on the vertical axis], and not (necessarily) to expectations.--Jergas9 (talk) 21:49, 7 December 2011 (UTC)

Copyright problem removed

Prior content in this article duplicated one or more previously published sources. The material was copied from: A dictionary of economics by John Black, Nigar Hashimzade, Gareth D. Myles, Oxford University Press p. 265. Infringing material has been rewritten or removed and must not be restored, unless it is duly released under a compatible license. (For more information, please see "using copyrighted works from others" if you are not the copyright holder of this material, or "donating copyrighted materials" if you are.) For legal reasons, we cannot accept copyrighted text or images borrowed from other web sites or published material; such additions will be deleted. Contributors may use copyrighted publications as a source of information, but not as a source of sentences or phrases. Accordingly, the material may be rewritten, but only if it does not infringe on the copyright of the original or plagiarize from that source. Please see our guideline on non-free text for how to properly implement limited quotations of copyrighted text. Wikipedia takes copyright violations very seriously, and persistent violators will be blocked from editing. While we appreciate contributions, we must require all contributors to understand and comply with these policies. Thank you. Voceditenore (talk) 13:54, 10 October 2011 (UTC)

Criticisms - Austrian viewpoint

In the Criticisms section, it currently states: "Austrian School economists generally argue that a lack of investment during periods of low interest rates are the result of malinvestment and time preference instead of liquidity preference."

Do they argue it's a result of low or high time preference? Or neither? I'm not too familiar with this, so I don't personally know the answer to clarify it in the article. Anyone care to expand on this? Thanks. Error9900 (talk) 18:52, 15 December 2011 (UTC)

Here's the idea--If there's a lot of malinvestment that hasn't just happened (there's been enough time for it to not pan out and for the bubble to burst), then the economy is probably in a slump, which will discourage people from investing. Also, with respect to the time preference thing, if people aren't doing a lot of investing, then that's also probably partially the result of people preferring consumption now to more consumption in the future at the cost of forgoing consumption now. Byelf2007 (talk) 18 March 2012

Interpretations section

I had previously removed the content that has now been added to the "Interpretations" section. I don't have have access to FT article, but I looked at the other sources used in this section, and I don't think they are relevant here. Only one of the sources (Sumner) directly mentions liquidity traps. Most of the sources are focused on quantitative easing, which is a potential policy response to liquidity traps, but that relationship isn't made clear here and generally isn't discussed in the referenced sources. The "Democracy Now" source is clearly misused because Stiglitz never mentions liquidity traps while the text suggests he explicitly discusses them.

I think this section is extremely confusing to readers looking for an explanation of liquidity traps. Readers might be led to believe that liquidity traps are synonymous with quantitative easing. Generally the section is a confusion of quantitative easing, liquidity, and currency wars without reference to anything directly related to liquidity traps or "Interpreting" them. I am removing it again and hoping it stays removed.--Bkwillwm (talk) 21:28, 18 March 2012 (UTC)

Dennis Robertson (1926)

"Liquidity trap" was first introduced by Dennis Robertson in 1926 (and not by Keynes, it's annoying !).

Richard Koo critique

Is it worth including Koo's critique here? He seem's to be having an increasing influence in the theory associated with this in the context of the current economic crisis. Bradqwood (talk) 20:01, 8 January 2013 (UTC)

Random asterisk with no associated note.

>In its original conception, a liquidity trap refers to the phenomenon when increased money supply fails to lower(*) interest rates.

Seriously, what the f#$@ is this even referring to? An asterisk would normally denote a note or NB, but nothing of the sort is provided! I'm removing it for now since it's redundant. -Matt (JVz) (talk) 00:26, 19 July 2013 (UTC)

Where's the part about the trap?

The Trap is that the BANKS are holding onto cash and not lending because of their own Liquidity Preference yet the Fed cannot raise rates due to inflation fears.

Simply put, loan rates are tied to the Fed rate. The banks have been hording cash because interest rates are so low they aren't willing to loan at the low rates. That's called their Liquidity Preference, they prefer cash to the nominal interest they might earn by loaning money. They are waiting until interest rates rise. All this cash ($4T from QE1/QE2/QE3) never made it to the economy, it is sitting in bank vaults. If the Fed were to raise rates, even a little, that money would start flowing, madly, out of the banks and into the economy. When all that cash hits the economy, it will cause inflation, not just a little inflation but possibly hyper-inflation. Most economists think a rise of 25 basis points (0.25%) would be enough to start the gushing. That's the trap. Even a small rise in rates could cause hyper-inflation.

The Central Bank has caused this problem and they can't get out. They normally pull excess money out of the economy by raising rates but in this case there is too much money yet they can't raise rates - they are trapped. The Fed understands all this but most Americans do not.

There is nothing in the article about the trap? — Preceding unsigned comment added by Joenitwit (talk • contribs) 14:59, 23 September 2015 (UTC)

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Removed incorrect claim about M1 spike in 2020

There was a claim in the section on 2020 which claimed that M1 increased from $4 trillion to $20 trillion as a result of monetary stimulus. While quantitative easing did occur, about $11.5 trillion of this increase was the result of a change to the definition of M1 in May 2020. Possibly this section could be reworked to incorporate evidence from M2 or a measure of M1 that corrects for the redefinition, but as it is, it's simply wrong and doesn't belong here. The actual increase in M1 was about 33%, not 400%. — Preceding unsigned comment added by BergerCode (talk • contribs) 02:30, 10 June 2023 (UTC)

End of the 'Historical Debate' section

There's this sentence: "Keynesian economists, like Brad DeLong and Simon Wren-Lewis, maintain that the economy continues to operate within the IS-LM model, albeit an 'updated' one, and the rules have 'simply changed.'"

One problem is that the two economists referenced come from a prior revision, and the material that was specific to those two is now gone.

The other problem here is that when you go to the cited articles, they're misquotes. I'm not expert enough to state what's intended here. Something about IS-LM not being applied consistently. But the overall effect, as it is now, is to try to discredit an argument that's not even presented. I'm going to take it out, even though I wish I knew more so I could save those two citations. Maybe somebody knows how to fix it properly. Kyle Cronan (talk) 21:33, 21 June 2023 (UTC)