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Reply #56: How close are we to a liquidity trap? Paul Krugman [View All]

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Demeter Donating Member (1000+ posts) Send PM | Profile | Ignore Tue Mar-18-08 10:00 AM
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56. How close are we to a liquidity trap? Paul Krugman /

Heres one way to think about the liquidity trap a situation in which conventional monetary policy loses all traction. When short-term interest rates are close to zero, open-market operations in which the central bank prints money and buys government debt dont do anything, because youre just swapping one more or less zero-interest rate asset for another. Alternatively, you can say that theres no incentive to lend out any increase in the monetary base, because the interest rate you get isnt enough to make it worth bothering.

Normally it doesnt matter which short-term interest rate you choose the Fed funds rate, which Uncle Ben sets, is usually very close to the interest rates on US government debt. But right now were in a situation in which Treasury bills yield considerably less than the Fed funds rate; to at least some extent this may reflect banks nervousness about lending to each other, even in the overnight market. And to the extent thats true, Treasuries not Fed funds are the interest rates to look at.

As of 10:38 this morning, the one-month Treasury rate was 0.57; the three-month rate was 0.825.
Are we there yet? Pretty close.
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  - It's the traps...  Prag   Mar-18-08 01:44 PM   #116 
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  - ~15:00 EDT: "Stocks clmb(sic) after smaller-than-expected cut"  Prag   Mar-18-08 02:05 PM   #121 
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     - You know, it's not beyond the possible that discounted funds were used  ozymandius   Mar-18-08 04:00 PM   #126 
     - There have been lots of Lehman rumors  DemReadingDU   Mar-18-08 04:07 PM   #127 
     - DIABETIC PATIENT WHO CAN NO LONGER REGULATE GLUCOSE  ashevillepolitics   Mar-18-08 10:00 PM   #145 
  - I do not feel sorry for those who got burned shorting Lehman.  Zynx   Mar-18-08 02:50 PM   #123 
  - The Wall Street Reacharound.  RUMMYisFROSTED   Mar-18-08 03:51 PM   #125 
  - End of the day: we all knew this would happen. It happens every single, cotton-pickin' time  ozymandius   Mar-18-08 04:08 PM   #128 
  - Right on cue: (guess what?)  ozymandius   Mar-18-08 04:10 PM   #129 
  - Fear driving people right back into stocks.  girl gone mad   Mar-18-08 04:14 PM   #130 
  - lots of good links here today  feminazi   Mar-18-08 04:36 PM   #131 
  - Please consider this:  ozymandius   Mar-18-08 05:53 PM   #132 
     - Get 'em while they're hot!  Karenina   Mar-18-08 08:20 PM   #136 
     - Ozy, if this was a "done deal" how can Bear Stearns still be  UpInArms   Mar-18-08 08:28 PM   #137 
     - pump and dump, mebbe  wordpix   Mar-18-08 09:10 PM   #141 
     - There is considerable speculation as to legal obstacles that might get thrown up.  Zynx   Mar-18-08 09:34 PM   #143 
  - Cokehead Kudlow actually kicked ass today.  Bushwick Bill   Mar-18-08 07:03 PM   #134 
     - Perhaps the dollar is due for a turn around?  ozone_man   Mar-18-08 08:31 PM   #139 
        - word is there will be an intermeeting rate cut -  UpInArms   Mar-18-08 09:02 PM   #140 
           - The rates may go down to 0.875%  ozone_man   Mar-18-08 09:14 PM   #142 

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