Tuesday, February 22, 2011

What is a liquidity trap

Wiki says:
The liquidity trap, in Keynesian economics, is a situation where monetary policy is unable to stimulate an economy, either through lowering interest rates or increasing the money supply. 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.
Today we know differently because people working the issue today are a hellava lot smarter than Keynes. A liquidity trap is the quantization error when the production graph is reducing rank and long term asset adjustments is bound up, generally with bad government policy. Long term adjustmens are large, because long term transctions happen less frequently and carry larger cargos.  We see this when the Channel is readjusting channel components and Keynesians economists are hysterical, a sure sign.

We know we are making large adjustments because there is not enough room in the curve to spread the components without effecting the longer term links, (the higher Fibonacci numbers).  From a balance sheet perspective, this means that passing the balance sheet error up or down the lower portion of the graph no longer works, it becomes time to pass the balance sheet problem up the graph, generally to the Fed's largest customer, the long pole in the tent.

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