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Fed: We Are In A Liquidity Trap Which Can Only Be Cured By Inflation
From The Daily Capitalist
Federal Reserve Bank of Chicago President Charles Evans said we are in what Keynesians call a "liquidity trap":
A liquidity trap may be defined as a situation in which conventional monetary policies have become impotent, because nominal interest rates are at or near zero - so that injecting monetary base into the economy has no effect, because base and bonds are viewed by the private sector as perfect substitutes.
In order to make monetary policy "effective" during a recession, they say you have to stimulate the economy by creating price inflation. They create price inflation by printing money (quantitative easing or QE). This will free up all those dollars that savers are "hoarding." What this will do, according to Krugman and Keynes, is cause people to spend because they will see that inflation is depreciating their dollars and there is no use continuing to maintain high savings. This new spending will break the "trap" and people will spend, businesses will borrow, and banks will lend. But it won't work unless people know that the Fed really means it when it comes to creating inflation. If they think the Fed will "chicken out," then folks will just hold on to savings during economic uncertainty and they won't spend. So, the Fed really needs to push the money pedal hard.
This is all quite zany, but most modern economists believe it. They think that by debasing the currency they are actually creating real economic growth that will be sustained once the money pumping stops. They ignore the fact that people are doing the rational thing by paying down debt and increasing savings to prepare for the lean times. They do that by not spending as much. Thus, these economists say, we are trapped in this spiral of low consumer spending and high savings which tanks the economy. They think people are stupid so they believe they must trick savers into spending by devaluing the currency. They are right: if they create enough inflation folks will certainly want to dump deflating dollars.
These "modern" economists ignore the need to deleverage and the need for malinvested capital tied up in unprofitable ventures to be liquidated and then reinvest capital in new profitable ventures. They ignore inflation's distortion of the economic function of the act of saving which gives false go signals to producers of higher order goods (goods that take a long time to make). They ignore the creation of a new boom-bust business cycle based on a papered over mirage of fake profits. They ignore the fact that once the inflation stops, the economy collapses again.
President Evans is a big QE guy and he has been writing a lot about it lately and he has a vote on the Fed's policy decisions (member of FOMC). Mr. Evans favors a "targeted inflation rate" which means they will print money until they achieve their desired inflation target of about 2%. Oh, and here is the latest idea which various Fed economists have invented: the "inflation deficit." What they mean is that they can create price inflation higher than 2% for a while because since we've had price inflation below the 2% target we can sort of average out to 2% inflation over time. Hey, you can never have enough inflation according to these guys.
Here's how they think it will work:
Click to enlarge
I hope you appreciate the 13% devaluation of the dollar by 2014.
Evans cites Keynesian economist Paul Krugman, among others, as a source for research that this will work (Krugman, Paul R., 1998, “It’s Baaack: Japan’s Slump and the Return of the Liquidity Trap,”Brookings Papers on Economic Activity, Vol. 29, No. 2, pp. 137–187.) You should know that Japan tried most of the things that Krugman had recommended during their decades long slump, without success. In other words these econometricians have created models of aggregate demand and production (you are reduced to an autonomic unit) by which they think they can pull a money lever and achieve a desired outcome. As if these models have worked well lately.
QE won't work to save the economy, but it will work to create inflation. Because of the lack of formation of real capital that savings creates and the failure to deleverage the economy, we will experience stagflation instead of the desired robust real economic growth.
This should give you a bit of a pause when you consider the quality of economic thinking coming out of the Fed. If you trust the Fed, you shouldn't. The only frame of reference these guys have is some form of Keynesian economics. It was the Fed that got us into this mess to begin with and this is like giving the keys back to the guys who drove the bus off the cliff.
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Man will not be free until the last economist is strangled with the entrails of the last central banker.
"Well, I ain't no movie star; but I can get behind anything..."
-Gordon Downie
+100!
Those who shill for inflation in depressionary times do so to starve us to death, not to help us. The obvious solution, so carefully obscured by the ruling oligarchs, is neither fiscal nor monetary but industrial policy.
When will the average Joe understand that behind all the fancy speak about reigniting the economy the real message the Fed is relaying to him is:
'Gimme your money, or we will take it via inflation!'
This is a monetaristic shakedown, make no mistake.
Solution: buy tangible, portable property that will retain its inherent value. I have a couple of suggestions... but then you already knew that.
Regards
"Chicago Fed President Evans said that we are in a Keynesian "liquidity trap" which means monetary policy isn't working. As a result the Fed hasn't been able to stimulate the economy because you stupid consumers refuse to spend and are saving money."
Haha!
Succinct.
Inflation is the only way to keep the banks and the government solvent, "to hell with the individual citizen" is what I hear the FED saying.
No COLA for those folks who paid into Social Security for 40-50 years? Of course not.
They will inflate, but right now the game is to bring more cash into equities and to bleed out more retirees and savers/responsible citizens who still have assets.
Inflation will lower the value of the debt long term and bring in yet more money from the middle class for government and central bankers.
caconhma,
Since you have first-hand experience in the collapse, any advice for newbies would be much appreciated!
Thanks
when the economy needs a pressure cleaner enema the voodoo economist quacks pound wet cement up our ass and beans, tar, and tasty freeze down our throats....
fuck charles evans....
As someone who came from a communist country with a central planning system, I can tell that these (FED) people were not called lunatics in my old country. They were called "Enemies of People" and "Foreign Agents". They also were called terrorists, and were executed together with their families.
Afters all, socialism has its own great virtues.
Unfortunately, America became a lawless country where productive business based on common sense and hard work cannot succeed. To my horror I am reliving once again a collapse of a great country and society violent disintegration...
While its Evans and Bernanke drinking the Keynesian Koolaid, WE'RE the ones that will be poisoned! I'm convinced that this is going to be the most ugly economic armageddon of our nation's history! When it happens, these guys should be sent to the guillotines!
FOMC: What's this "we" crap regarding a liquidity trap? I paid my bills and saved my money and didn't screw anybody.
Thanks bunches, douche bags.
again, "the operation was succesful but the patient died." now, onto the "other business of the day."
Translation: "We are in a liquidity trap than can only be solved by fucking you up the ass. Again."
That moron should read some serious work to know what is really happening. Try this:
http://www.debtdeflation.com/blogs/
They're trying to convince you and anyone who believes their bullshit that we have to get back to spending like mindless idiots in order to get the almighty economy back on track. In order to do that they're gonna try to convince you that your savings have to be destroyed via inflation because inflation is good and deflation is bad. Well go buy some fuckin' groceries, or fill your gas tank, or pay for your kids college education let alone buy the books, or go buy a pair of shoes. Deflation? - a fuckin' ruse to spend more money we don't have. Try and buy a CD at the bank with your hard earned savings. Yeah, good fucking luck, but hey Hank Paulson said the world was gonna end - he must have known for sure. We'll sleep well knowing that Stan O'Neal can keep his club membership at your expense suckers. I pray for the day we see some of these fuckers hangin' from a bank flag pole. They deserve nothing less.
Too bad they don't recognize that the lack of idiotic spending is less a personal-style-choice than it is a side-effect of their previous bubble-larceny.
Personally I think we not caught in a "liquidity trap" but rather a "stupidity trap".
#QE won't work to save the economy
anyone who think FED care about ecomony is an IDIOT.. only job of FED is monetize fed gov deficit.. thats it.. its gonna be $ 2T next fin year..
all those fency words liqudity, unempl, inflation targeting ARE PURE BULLSHIT...
if FED wont buy bonds US GOV WILL SHUT DOWN and %rates will skyrocket...
alx
“ “The banking system is absolutely awash in excess reserves being directly parked in treasuries as the regulators demand increased quality of the asset side of the balance sheet and borrowers at the margin are those that in more traditional times would not have at the margin been extended credit.” “
Excellent. The heart of the problem. CASH IS TIGHT and small business which hires 85% of the workers is tighter than a drum head for cash. The Dallas Fed just said this is not so. NONSENSE
They think removing debt by defaulting = saving. Nuf said, idiots.
Dude USD has dropped 10% since June - extrapolate that to 2012 and it will be close to zero!
Oh diddlie duh.
"We're in a liquidity trap that's not working?"
So sorry to disappoint, but the liquidity trap IS working. No amount of additional excess upon already excessive liquidity will get economic activity responding, as per MV=PT.
V is not responding to additional M at the margin, for the consumption activity necessary to boost T ain't there with several whole generations net worth somewhere between badly impaired to wiped out.
Any significant further increase in M without the consumption (and credit function ) response will only serve to increase P (Prices) which will in turn further deteriorate the wealth effect and dampen prospects for T (output) as real personal disposable income declines as prices increase faster than wages.
The banking system is absolutely awash in excess reserves being directly parked in treasuries as the regulators demand increased quality of the asset side of the balance sheet and borrowers at the margin are those that in more traditional times would not have at the margin been extended credit.
Further easing, particularly in the form of another QE (infinity or whatever) is only going to make the overall economic landscape worse, not better. That's why it's called a "trap". The only solution is to generate a positive wealth effect for the consumer upon which he can look as permanent. Lower taxes, less regulatory burden, etc. Else things would already be responding favorably to that which has already been done.
The necessary deeds must be implemented on the fiscal side as opposed to the monetary side of the ledger.
As was once famously said, "Change". 'Cause what's working ain't.
Don't give the drunk another bottle.
Come now. That would help the common folk. It's common knowledge that this is not the objective.
don't cite garbage.
The foundational "equation" of monetarism, MV=PT is FOUR dimensionless and unmeasurable "variables". IOW, it's total fucking garbage and should be laughed at by anyone with a basic math education.
We're not facing a monetary problem
Travis? does that mean all the liquidity on the sidelines has not helped either? and all the billions being passed out in denominations under $100b at a time all summer long have not helped? what do you mean money is not the problem? paper money is everywhere, people have big giant piles of it and we need more of it? at higher rates of repayment, while de-valuing the face value because of more printing... its perfect... it has always been the cause..
OPEC wants $100bbl... yesterday, or are testing the markets with the vote yesterday I mean...
My Best to You and Yours Travis as always, JW
'Chicago Fed President Evans said that we are in a Keynesian "liquidity trap"
We arent in a Keynesian anything, cause Keynes was a putz
Now now, Strannick, you know that Paul Krugman and Jon Nadler, stellar intellects both, are firm believers in Keynesian (statist) economics, so therefore it MUST be true!
Nadler...nevermind since I have nothing positive to say.
What drives me nuts is that everyone's waiting for quantitative easing part II. It's already here. The Fed's ongoing POMO purchases of Treasuries constitute QE II. Bernanke is just using old-fashioned misdirection.
The QE II ship has already left the port.
I don't think they know what they are doing anymore. I think they see what is coming but they can't get it to stop, so they do stupid things.
I think you are being to conservative. Really only 13% devaluation by 2014, hell if it's only 13% I'll dance a merry little jig! With these maniacs at the helm I'm expecting 25% minimum.
In other words these econometricians have created models of aggregate demand and production (you are reduced to an autonomic unit) by which they think they can pull a money lever and achieve a desired outcome.
Econophile, here off S. Main we call that happy crappy faith based governance. Econometricians, great word.
I live on a Main Street in some dying midwestern manufacturing city. I have busted my ass for forty years in manufacturing and I am about to lose all that I have saved for monetary experiments by tenured "intellectuals".
Some day when we are all stripped of our live's efforts we will realize that goomint is the hagfish of evil. What is so disappointing about the "Tea Party" movement is that the candidates coming out of that mess are incompetent to take down the overarching parasite of the fiat money system. Nothing will get better until post-collapse.
Mozillo paid out a small fraction of his fraudulent gains to get immunity. The rest will get their bailouts from some fiction of taxcows picking up the tab by way of TARPs and other acronymns. Let's just get this crap over with.
Tapeworm:
Lever up, convert to cash, buy gold, tell 'em "So sorry, lo ciento... Me no have dinero.".
Fukit!
"And I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around the banks will deprive the people of all property -- until their children wake-up homeless on the continent their fathers conquered... The democracy will cease to exist when you take away from those who are willing to work and give to those who would not." -- Thomas Jefferson wrote on May 28, 1816
btw., Thomas Jefferson never said or wrote that:
http://wiki.monticello.org/mediawiki/index.php/Private_Banks_%28Quotatio...
You should aim to do better than this, with a nick like that :-)
That claim is false, and thus the whole line of argument of this article (which is awfully light on facts to begin with) fails: at no time has Japan come even close to implementing a straightforward keynesian policy response to deflation (closing its GDP output gap) and has never come close to generating positive inflation again.
Their policy response was catastrophic: firstly, for a few years, in good japanese fashion, they were polite about the problem, they were in denial and bailed out the banks, trying to muddle through. Then they tried a weak stimulus - but it was both too late (deflation already got priced into long-term contracts) and it was way too small on a per GDP basis as well.
During that time all the usual helpful suspects of austrian economics were suggesting to them that hyperinflation was nigh and that they should tigthen, tighten, tighten, and save, save, save. The result was deep deflation, unemployment, and general human suffering - while the rest of the world prospered.
For example there was an increase of +40% in the suicide rate in Japan:
http://theincidentaleconomist.com/wordpress/wp-content/uploads/2010/10/S...
Deflation is definitely not a fun situation to be in. Your cash holdings might go up in value but most everyone in the country will be worse off - negatively affecting your standard of living as well.
Btw., Japan is currently trying a much more aggressive anti-deflationary policy. It's obviously very hard as they have an economy with 10 years of 'economic memory' of a deflation. The US has better chances - it hasn't entered deflation yet per se (but core CPI has come awfully close).
Thank you for the comment but you are quite wrong about this. See "The Japanese Disease," and "Will We Have A Lost Decade(s) Like Japan." Nothing wrong with deflation except when it lasts for 20 years as a result of failed Keynesian policies.
The US has better chances - it hasn't entered deflation yet per se (but core CPI has come awfully close).
Looks like the U.S. is a long way from deflation. You are confusing deflation of things we want (houses, computers, etc.) vs. inflation of things we absolutely need (food, energy, etc.). Gov't inflation statistics are a total sham and don't reflect life for the average person in the real world. I assume you focus on core CPI because you neither consume food or energy in your daily life.
http://www.safehaven.com/article/18394/an-inflationary-cocktail-in-the-m...
What level of debt to GDP above the current 200% should they target? Maybe I have the wrong question, so how much devaluation (debauchery, via Hendry) should the Japanese citizen expect to face under the "inflation is better for you" (money printing) scenario?
This theory assumes I am going to buy more goods/services because the price is going up next year/week. How about this. I am going to make what I have last longer because I can't believe how expensive that new car/washing machine/frig/etc. costs and its pretty damn inexpensive by comparison to repair it. In any event, I can't afford new because holy shit batman that banana sure got expensive.
You mean, should someone who has almost been beaten to death still struggle for his life? Yes, even if the odds are long.
Japan started out with 70% of debt to GDP in 1990 and in a decade of disinflation and a decade of deflation turned that into 200%:
http://www.economicshelp.org/blog/wp-content/uploads/2009/01/japan-debt.png
After more than a decade of explicit deflation it's very hard to change long-term expectations though, deflation got deeply embedded in the japanese economy. Here is Japan's inflation history:
http://www.tradingeconomics.com/Temp/Japan-Inflation-Rate-Chart-000002.p...
Deflation officially started in 1999 but you can see how it gradually got underway from 1990 onwards via disinflation, hitting deflation first in 1995 then getting embedded by 2000. It's a decade of struggle since then.
So you have indirectly proven my point: Japan's high current debt is the result of low growth and deflation, not the other way around.
Also note that the japanese QE attempt in 1999:
http://www.princeton.edu/~pkrugman/jbasepercent.PNG
Was not effective as it just stuck reserves into banks - but that money did not get out into the real economy.
Output gaps (the gap between optimal production capacity and actual production levels) are destructive until they exist, so it's critical to close them decisively - before deflation gets embedded in the economy.
Effective QE in a liquidity trap is hard as it cannot operate via the monetary base alone, it needs to counter deflation expectations. The Fed's current attempt might do the trick although it's both late and small at ~4% of GDP (which the current expectations of 0.5t project). Whether it will work is an open question.
The US has a gdp to debt ratio of 95% currently. The beating has begun, but we are still fighting.