Kimball Corson — A Note on Liquidity Preference

Short summary of the liquidity trap.

Wandering the Oceans: SailBlogs
A Note on Liquidity Preference
Kimball Corson

Brad DeLong — Ordoliberalismus and Ordovolkismus

And rare these days is the competent economist Who has thought through the benefit-cost calculation and failed to conclude that the governments of the United States, Germany, and Britain have large enough multipliers, strong enough hysteresis coefficients for infrastructure investment programs, and sufficient fiscal space–favorable likely distributions of r-g–to make substantially more expansionary fiscal policies than they are currently following almost no-brainers. 

It is against the backdrop of this situation that we find aversion to fiscal expansion being driven not by pragmatic technocratic benefit-cost calculations but by raw ideology.…

Contrast this to China's, We will do what it takes to avoid missing our growth targets, increasing unemployment while rebalancing and maintain price and currency stability. This is why China is going to win the international economic competition, and kick Western butt. They get fiscal, and they know the between the currency issuer and currency users. They may not be in paradigm but at least they are in the right ball park.

The West? Hopeless with the current crop in charge.

"Liquidity trap" = "You are using the wrong tool."

WCEG — The Equitablog
Ordoliberalismus and Ordovolkismus
Brad DeLong

Jason Smith — Does market monetarism exist in reaction to fiscal stimulus?

Wherein Jason Smith figures out what Scott Sumner is up to.

Information Transfer Economics
Does market monetarism exist in reaction to fiscal stimulus?
Jason Smith

Roger Farmer — A Bridge Too Far?

Closing in. Roger Farmer weighs the options and their consequences.

Roger Farmer's Economic Window
A Bridge Too Far?
Roger Farmer | Distinguished Professor of Economics at UCLA

Jason Smith — Does a liquidity trap ever end?

Another way of looking at it.

Information Transfer Economics
Does a liquidity trap ever end?
Jason Smith

Also

Perfect storm or just-so story?

NGDP targeting is roughly the same as inflation targeting

Brad DeLong — Must-Read: Cullen Roche: Does a “Liquidity Trap” Ever End?: "Brad Delong has a very smart post over at Equitable Growth

Cullen on Krugman on getting the Keynesian "liquidity trap" wrong. For whatever reason, Brad has decide to put Post Keynesian analysis in play. Another step in the last mile.

Grasping Reality
Must-Read: Cullen Roche: Does a “Liquidity Trap” Ever End?: "Brad Delong has a very smart post over at Equitable Growth
Brad DeLong | Professor of Economics, UCAL Berkeley

Also

Must-Read: The hawk-eyed Mark Thoma picks up and develops a very important point: Mark Thoma: Krugman vs. DeLong: "...

Is the tide turning?

Rob Parenteau — The Large Fly in Krugman’s New Keynesian Soup

Since Krugman wrote the introduction to the latest edition of Keynes General Theory, which is where Keynes lays out the liquidity trap issue, this might be a source of embarrassment to a liberal, especially if he indeed has a conscience. But as Jan points out, in the world of Very Serious Macroeconomists, there are people walking around calling themselves New Keynesians, when really they are just Old Friedmaniac monetarists, with a little pre-Great Depression Irving Fisher, and maybe a dash of 19th century Wicksell too, thrown in on the side for good measure. And they get away with it. Somehow. Like Kudlow does. 

New Keynesians like Krugman, Bernanke, Blinder, Yellen, etc. believe they have found a hammer, namely Irving Fisher’s real interest rate hammer, and so the whole economic world looks like a nail to them. Got an unemployment problem? Lower real interest rates. Got an inflation problem? Raise real interest rates. Life is simple, and life is good. It’s all there in Krugman’s 1998 paper – seriously, skim that piece. 

In that world, we are encouraged to forget about fiscal policy – government debt to GDP ratios are too high already – just ask Reinhart and Rogoff – and so few developed markets nations have the policy “space” to use fiscal stimulus, ever again, apparently. Even if they have sovereign currencies. Instead, monetary policy is deemed hegemonic....

Naked Capitalism
The Large Fly in Krugman’s New Keynesian Soup
Rob Parenteau, MacroStrategy Edge

Paul McCulley and Zoltan Pozsar — Does Central Bank Independence Frustrate the Optimal Fiscal-Monetary Policy Mix in a Liquidity Trap?

"[T]he role of an independent central bank is different in inflationary and deflationary environments. In the face of inflation, which is often associated with excessive [government borrowing and] monetization of government debt, the virtue of an independence central bank is its ability to say "no" to the government. [In a liquidity trap], however, excessive [government borrowing] and money creation is unlikely to be the problem, and a more cooperative stance on the part of the central bank may be called for. Under the current circumstances [of a liquidity trap], greater cooperation for a time between the [monetary] and the fiscal authorities is in no way inconsistent with the independence of […] central bank[s], any more than cooperation between two independent nations in pursuit of a common objective [or, for that matter, cooperation between central banks and fiscal authorities to facilitate war finance] is consistent with the principle of national sovereignty."

— Governor Ben S. Bernanke

GIC Global Society of Fellows
Does Central Bank Independence Frustrate the Optimal Fiscal-Monetary Policy Mix in a Liquidity Trap?
Paul McCulley, Chair, GIC Global Society of Fellows and Zoltan Pozsar, Visiting Scholar, GIC Global Society of Fellows

Paper to be presented at the Inaugural Meeting of the Global Interdependence Center’s  Society of Fellows on March 26, 2012 at the Banque de France, Paris

(h/t Brad DeLong at Grasping Reality)

Joe Gagnon — There Is No Liquidity Trap: Understanding 21st Century Monetary Policy

Interesting post by Joe Gagnon about possibilities of monetary policy, i.e., policy conducted by the central bank, to exert fiscal influence by buying assets rather than only acting through interest rate and the yield curve.

What I find surprising is the willingness to allow a small group of unelected and unaccountable technocrats to operate what is essentially a command system in micromanaging the economy. Is this consistent with the version of market capitalism that the Peterson Institute is promoting, or is it sliding down the slippery slope?

Peterson Institute for International Economics
There Is No Liquidity Trap: Understanding 21st Century Monetary Policy
Joseph E. Gagnon | Senior Fellow

(h/t Mark Thoma at Economist's View)

Philip Pilkington — What is a Liquidity Trap?

Perhaps the worst thing that can happen to a term in any language is that it loses completely its meaning and becomes a sort of floating signifier that can attach itself to any old nonsense. Such is the case today with the term “liquidity trap”.

Fixing the Economists
What is a Liquidity Trap?
Philip Pilkington

JW Mason comments at FB

I don't care for Krugman's use of the term either, but he is closer to Keynes than this rather confused post.

Keynes gives a precise meaning for "liquidity trap": A situation in which changes in the relative quantities of more and less liquid assets do not change their relative price. This occurs when interest rates have fallen sufficiently that the pool of "bull speculators" is exhausted -- i.e., there are no longer market participants who believe that interest rates will be lower in the future. If all market participants expect a future rise in interest rates, and hence a capital loss on bond holdings, the premium required to hold bonds will prevent any further fall in rates. Thus, the essence of the Keynesian liquidity trap is a consensus among participants that future interest rates will not be lower than current rates.

(This argument cannot even be stated in the language of contemporary economic models, based on uniform "rational" expectations.)

Keynes' liquidity trap has nothing to do with the premium on safe assets, as captured by measures like the TED spread. It is a story about the importance of expectations, and specifically the importance of a *diversity* of expectations about future interest rates.

Randy Wray — Reconciling the Liquidity Trap With MMT: Can DeLong and Krugman Do the Full Monty With Deficit Owls?

In recent days both Brad DeLong and Paul Krugman have written good pieces arguing against the austerity marketed by deficit hyperventilators. We can thank Thomas Herndon’s muck-raking that pushed the topic front and center, showing that there is no empirical evidence in support of the austerian’s claim that big government debts slow growth. (See my previous blogs here and here)....

Note, both of them raise additional good arguments against the R&R results and against austerity more generally. I am focusing in on the one point about the liquidity trap for the purposes of this blog simply because it seems to be the sticking point that prevents them from fully embracing MMT. From the perspective of Krugman and DeLong, MMT is fine for the liquidity trap, but wrong for the normal situation—when deficits will matter....

Economonitor — Great Leap Forward
Reconciling the Liquidity Trap With MMT: Can DeLong and Krugman Do the Full Monty With Deficit Owls?
L. Randall Wray | Professor of Economics, UMKC

Lars P. Syll — Austerity is no liquidity trap solution

Mainstream neoclassical economists seem to think that there really isn’t any difference between solving a liquidity trap by lowering real wages via inflation or by lowering nominal wages.

But that is of course pure nonsense. Lowering real wages via inflation and lowering nominal wages aren’t equivalent measures.

As John Maynard Keynes wrote in General Theory (1936):

Lars P. Syll's Blog
Austerity is no liquidity trap solution
Lars P. Syll | Professor of Social Studies and Associate Professor of Economics, Malmo University

Lars Syll — Sweden hit by deflation

Sweden is according to new statistics from the Statistics Sweden now in a state of deflation. The inflation rate was -0.2 percent in February, down from 0.0 percent in January. The inflation rate according to CPIF was 0.9 percent in February 2013, and HICP has increased by 0.5 percent since February of 2012.
So yours truly thought he should give the Swedish finance minister - Anders Borg – a suggestion for reading …

Zoltan Pozsnar and Paul McCulley have written an absolutely splendid essay on what a liquidity trap means and why mainstream neoclassical economics has nothing to offer in way of solving the problems that it brings along – and why it is so important to get hold of the insights that Fisher, Keynes, Minsky and Krugman have given us on debt-deflation processes and liquidity traps:

Lars P. Syll's Blog
Sweden hit by deflation
Lars P. Syll | Professor of Economics, Malmo University

Steve Keen: Krugman Doesn’t Understand IS-LM (Part I)

Here we go again.

Naked Capitalism
Steve Keen: Krugman Doesn’t Understand IS-LM (Part I)

(Warning: long and wonkish)

Have More Options Than We Can Imagine. ... Won't Explore Them. [helluva calling card]

commentary by Roger Erickson

Does Central Bank Independence Frustrate the Optimal Fiscal-Monetary Policy Mix in a Liquidity Trap?

While it's a very useful discussion, these guys are either being diplomatically over-cautious, or can't see the options for the fees. Answer sure seems to be "all the time," not just in certain situations. Central bank "independence" or "dependence" are just euphemisms for public-institution coordination. Select whichever method works better - but at least do it quickly? And keep changing it, as often as situations require? What happened to American ingenuity?

The deeper issue is that everyone isn't setting their sights 10x higher, and then openly discussing leanest/fastest/best ways to get there. Every process is too important to be left to the presumed process owners! That's what evolution means, for Pete's sake!

Have More Options Than We Can Imagine. ... Won't Explore Them.
[That's a helluva calling card. Don't expect the future to hire us unless we change what we broadcast about ourselves, and what we practice.]

Even the minority arguing for recognition of a liquidity trap don't see the simultaneous Fraud Trap. And, many of the people seeing the Fraud Trap don't even grasp what a liquidity trap is.

In any given situation, there are always multiple, simultaneous traps facing a culture with many degrees of freedom! If we don't maintain a citizenry - or at least a minimum set of leaders - capable of efficiently AND QUICKLY discussing situations from that perspective ... we're doomed? We already know that success tracks the quality of distributed decision-making. Yet we won't openly acknowledge and set about optimizing that metric!  Not openly exploring unimaginable options and organization traps - with agility - is our greatest known trap? Let's name that, and call it by two names.  An Adaptive Rate Trap, and an OBT&E trap.

"Leaders" are the emergency fallback for an incompetent electorate? Gods help us!

Steve Randy Waldman — A confederacy of dorks

It is, to be sure, only a baby step towards world peace.
But it is a step! Market monetarists will lie with post-Keynesians, the parted waters will turn brackish, as we affirm, in unison: Paul Krugman and I are both inarticulate dorks. Further, it is agreed, that David Beckworth, Peter Dorman,Tim Duy, Scott Fullwiler, Izabella Kaminska, Josh Hendrickson, Merijn Knibbe, Ashwin Parameswaran, Cullen Roche, Nick Rowe, Scott Sumner, and Stephen Williamson are all dorks, albeit of a more articulate variety. I say the most articulate dorks of all are interfluidity‘s commenters.

To mark the great convergence, there will be feastings and huzzahs from all. Or at least from everyone but Paul Krugman and myself, since during feastings, it is the most inarticulate of the dorks who tend to find themselves on a spit. Wouldn’t you all prefer to eat plastic apples?

Interfluidity
A confederacy of dorks
Steve Randy Waldman

Bill Mitchell — The on-going crisis has nothing to do with a supposed liquidity trap

The problem is that while there are some leading economists who are arguing against harsh fiscal austerity at present at the basis of their reasoning is a thoroughly mainstream approach which has helped create the problem. I don’t think their version of ECO101 Macroeconomics provides the answers. There is some common ground with Modern Monetary Theory (MMT) but an even deeper incongruence.

Read it at Bill Mitchell — billy blog
The on-going crisis has nothing to do with a supposed liquidity trap

by Bill Mitchell

Randy Wray — Martin Wolf’s Liquidity Traps And Free Lunches Through Fiscal Expansion

Read it at Economonitor | Great Leap Forward
Martin Wolf’s Liquidity Traps And Free Lunches Through Fiscal Expansion
by L. Randall Wray

Warren Mosler on Martin Wolf on McCulley-Pozsar

Martin Wolf comments on a paper by Paul McCulley and Zoltan Pozsar, and Warren intersperses comments on Wolf. Warren distinguishes between fixed rate and floating rate regimes to make his points, as well as fiscal policy and exchange rate.

Read it at The Center of the Universe
Fiscal and monetary policy in a liquidity trap
by Warren Mosler

McBride on McCulley

I've been reading former PIMCO managing director Paul McCulley for years (great insights). The following piece discusses the current liquidity trap and the failure of austerity in Europe:"Fiscal austerity does not work in a liquidity trap and makes as much sense as putting an anorexic on a diet."

Read it at Calculated Risk
McCulley: Monetary and Fiscal policy must be "irresponsible" in a liquidity trap
by CalculatedRisk