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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.
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Comrade, why has the FED “shut down the economy”? Now that would be an interesting post.
I don’t claim to know. I do, however, notice that the European Central Bank is doing the same to the European economy. And, I note that there are a lot of conspiracies in the world, so I refuse to dismiss conspiracy theories out of hand.
It’s no longer right vs. left. Now it’s top vs. bottom
Be bold. Why would they jump for socialism for the 1% and war to remove vestiges of it for the 99%?
wig, you’re accepting the theory of the multiplier. In fact, your whole argument depends on it. But there’s no evidence for that theory. It’s a neo-liberal myth. Here’s the myth dispelled.
The Fed hasn’t shut down the economy by paying interest on reserves. Congress has shut it down by not providing for deficit spending at the appropriate levels since the crash.
And who’s paying Congress to do that?
Wall Street, led by Peter G. Peterson and the big banks. The Congress is largely bought. They’ll stay bought until we make it plain that their asses are on the line.
What I quoted is from the Fed’s web site and it says what the Fed is trying to do. Larger deficits would be an excellent alternative remedy but are very unliekly with either of our current presidential candidates in office or any congress that we are likely to elect.
IMHO, the Fed could do something but has chosen not to for whatever reason.
Right on!
You mean Wall Street fraudsters have outwitted the FED? And here I thought it was collusion.
Both are correct. With the FED it is collusion. Also with Treasury. And, a majority of Congress is bought. These fuckers play to win.
The Fed has done all it can do without violating its legal limits. It has no authority to conduct fiscal operations, and further QE won’t add to Net Financial Assets. There’s no causal mechanism by which QE can do that unless the Fed exchanges reserves for assets that are worth less than those reserves. Such trades would be illegal.
Randy explains again why the Fed can’t help.
I disagree. If the Fed stopped giving interest on reserves, the banks would have to loan that money out and/or invest it. That money would no longer be sleeping.
Why the Paris Hilton of course.
I continue to be lost in these discussions, even though lets has tried to knock it all into my head.
But while I was at New Economic Perspectives just now, I clicked onto Stephanie Kelton’s posts, and read one in which she linked to a wigwam my.fdl post in 2011. Now…I’m assuming you’re not she, but how cool.
And I swear I tried to grasp both. ;o)
Wow! IIRC, Stephanie is a professor of economics somewhere. I surprised and flattered that she linked to something I posted. Thanks for pointing it out, Wendy.
;o)