Are we trapped by liquidity?

Uncategorized

| January 25, 2012

Frank Shostak has provided an excellent review of the Keynesian concept of liquidity trap and some of its key theoretical problems in his column today at mises.org.

For those who are unaware, Paul Krugman, the current ringleader of Keynesian (read: voodoo/shaman/theoretically challenged) economists, has been proclaiming that the United States is in a liquidity trap-meaning individuals are hoarding money with no intention of spending or investing it. This literally means the hoarding of cash-deposits in your bank account do not count since banks are financial intermediaries and, consequently, an indirect means of investing.

To overcome this liquidity trap, Krugman feels the Federal Reserve needs to crank up the printing presses even faster so that the value of the dollar will fall more quickly and prompt inviduals to get rid of dollars the second they get them so as to avoid the loss of value. Essentially, the Keynesian prescription is to turn the entire concept of monetary exchange into a giant game of “hot potato.” If you’re holding the potato too long, you’re going to lose.

While the Keynesian voodoo artists have cloaked their “hot potato” approach to economic policy in scientific jargon, it’s not difficult to imagine how such a rapidly depreciating currency complicates exchange in the real world. Businesses that contract for the delivery of goods or services six months to a year in advance, for instance, must guess at how fast Keynesians plan to play the “hot potato” music over that time period. If they guess too low or too high, then one party to the contract or the other is likely to lose his shirt. This complication is multiplied millions of times over, as contract upon contract throughout the global economy become subject to “hot potato” antics.

While this charade might sound completely ridiculous, it’s universally accepted by Keynesians as scholarly economic theory.

It’s a brave new world out there…

Geoffrey Lawrence

Geoffrey Lawrence is director of research at Nevada Policy. Lawrence has broad experience as a financial executive in the public and private sectors and as a think tank analyst. Lawrence has been Chief Financial Officer of several growth-stage and publicly traded manufacturing companies and managed all financial reporting, internal control, and external compliance efforts with regulatory agencies including the U.S. Securities and Exchange Commission. Lawrence has also served as the senior appointee to the Nevada State Controller’s Office, where he oversaw the state’s external financial reporting, covering nearly $10 billion in annual transactions. During each year of Lawrence’s tenure, the state received the Certificate of Achievement for Excellence in Financial Reporting Award from the Government Finance Officers’ Association. From 2008 to 2014, Lawrence was director of research and legislative affairs at Nevada Policy and helped the institute develop its platform of ideas to advance and defend a free society. Lawrence has also written for the Cato Institute and the Heritage Foundation, with particular expertise in state budgets and labor economics. He was delighted at the opportunity to return to Nevada Policy in 2022 while concurrently serving as research director at the Reason Foundation. Lawrence holds an M.A. in international economics from American University in Washington, D.C., an M.S. and a B.S. in accounting from Western Governors University, and a B.A. in international relations from the University of North Carolina at Pembroke. He lives in Las Vegas with his beautiful wife, Jenna, and their two kids, Carson Hayek and Sage Aynne.