In spite of the title of the Michael Douglas movie, I think that money sleeps. I say that because Paul Krugman and my economist friend both say that we are in something called a “liquidity trap,” and so I looked up the definition:
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. [Wikipedia]
So, my question is: “Exactly where are those people hoarding that money?” Surely not in their mattresses. But, then, where?
If I put money into a bank account, the bank pays me a little bit of interest. So, in order to stay in business, they must invest or loan that money somewhere at a slightly higher return. But now whoever gets that money has the problem of hoarding it somewhere, etc. Alternatively, I could buy stock with that money, but then whoever received that money would have the same problem. Or, I could buy a Treasury bond with it, but then the government would spend that money.
So, it seemed to me that there’s no place to really park money that it doesn’t immediately get moved to another parking spot, just like the movie title said: Money Never Sleeps. But then I came across this in a document at the New York Federal Reserve:
Now consider a third scenario, in which reserve accounts at Federal Reserve Banks earn interest—as they have since the fall of 2008 [...] More particularly—and this is the key point of the present post—paying interest on reserves can immobilize reserves in a way not contemplated by the traditional pre-2008 money multiplier model.
So, the Fed has deliberately created a liquidity trap to keep the proceeds from Quantitative Easing from flowing back into the economy and causing inflation. By paying interest on money that banks deposit with the Fed, they have created a place where money can sleep. And that’s why our economy is currently not flowing like it should. Ain’t that interesting? The Fed has deliberately shut down the U.S. economy and refuses to do anything about it.