Wednesday, September 17, 2008

Are we in a liquidity trap?

Currently it is claimed that lending is drying up because lenders are fearful of the credit worthiness of borrowers.  That is self-evidently true. I assume lending is also limited because people are holding onto money balances to purchase assets which look like getting cheaper across the board.  I notice that in the UK there are proposals to stop short-selling of bank shares to stop large investors driving down bank equity prices further - this is occurring in the face of doubts about the future of Britain's largest mortgage lender Hbos.  The same proposals were passed into law during the Great Depression. Expectations about persistent future asset price deflation are, in part, driving a reduction in lending.  Moreover, as people try to build up their real money balances this drives further deflation and economic contraction.

My macroeconomics is rusty but are we not in a type of liquidity trap?

2 comments:

Francis Xavier Holden said...

I had to laugh last night on one of those current affairs shows at 6.30 there was a bit about the crisis and shares not being good etc and a recomendation to buy real estate. By a real estate agent. Love 'em.

There will be a bit of negative equity around in houses and "investment" units in the next year.

Part of the reason the average punter is shy on bank loans is the large credit card debt people are carrying, some of it is backed by mortgage/real estate but most is backed by the weekly income.

Adam Smith said...

Prepare for the New World Economic Order

Interest Rates [Credit] are the Cause and Consequence of the Explosion of Income/Wealth Disparities and, Hence, of the Inherent Instability of this Economy:

The Ominous Keynes' Liquidity Trap.
Origin of Economic Chaos.

Everyone Need an Economy, Don't They?

There Is One Solution That Works:

A Credit Free, Free Market Economy:

The New World Economic Order.


The Only Goal of 1776 - Annuit Cœptis is to Implement It.

They Can Transfer Their Assets & Forget Their Liabilities.

Anyone Can Join But Still Needs to Ask for It.

http://www.17-76.net/

The Purpose Is to Provide Both a New Deal and a New Game.

It is NOT to Fix This Economy Which is Already Beyond Repair.

The Intention Is to Create a New Economy
With the Assets of the Old One Without its Liabilities.

Why Not Insure Against the Worst Case Scenario?