You are viewing an obsolete version of the DU website which is no longer supported by the Administrators. Visit The New DU.
Democratic Underground Latest Greatest Lobby Journals Search Options Help Login

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

Printer-friendly format Printer-friendly format
Printer-friendly format Email this thread to a friend
Printer-friendly format Bookmark this thread
This topic is archived.
Home » Discuss » Latest Breaking News Donate to DU
Demeter Donating Member (1000+ posts) Send PM | Profile | Ignore Tue Mar-18-08 10:00 AM
Response to Original message
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.
Printer Friendly | Permalink |  | Top

Home » Discuss » Latest Breaking News Donate to DU

Powered by DCForum+ Version 1.1 Copyright 1997-2002
Software has been extensively modified by the DU administrators

Important Notices: By participating on this discussion board, visitors agree to abide by the rules outlined on our Rules page. Messages posted on the Democratic Underground Discussion Forums are the opinions of the individuals who post them, and do not necessarily represent the opinions of Democratic Underground, LLC.

Home  |  Discussion Forums  |  Journals |  Store  |  Donate

About DU  |  Contact Us  |  Privacy Policy

Got a message for Democratic Underground? Click here to send us a message.

© 2001 - 2011 Democratic Underground, LLC