As saltwater Keynesians have been saying since forever (or for a while anyway), you can't have inflation in a liquidity trap, a situation where short-term rates are near or at zero:
Here’s 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 don’t do anything, because you’re just swapping one more or less zero-interest rate asset for another. Alternatively, you can say that there’s no incentive to lend out any increase in the monetary base, because the interest rate you get isn’t enough to make it worth bothering.At zero percent interest, money just sits in big stagnant pools.
How do you get to zero percent interest? One way is by trying to stimulate (with lower and lower interest rates) an unstimulatable economy — one riddled with personal debt, joblessness, and inefficient demand — one like ours. Rates go to zero, the economy still lays flat as a pancake, and nothing moves. Everyone's trapped.
Well, in 2008, when the above was written, there were lots of bright little freshwater Friedman-esque minds arguing that liquidity traps don't matter (despite the evidence of Japan) and that increasing the monetary base (i.e., "printing money") is always inflationary, even hyper-inflationary.
Welcome to the real world (h/t Krugman):
Bank of New York’s move to charge a fee on large deposits is emblematic of much broader strains that plague the U.S. economy and the global financial system.Put simply, if you have a lot of money, BNY will charge you to take your deposit. Why? Your money is useless to them. What will they do with it, invest? In what? The next big bubble isn't on the horizon yet. And interest rates, even for banks, are (ahem) at all time lows.
In response to the recession and anemic recovery, the Federal Reserve has pushed interest rates to zero and purchased $2.6 trillion worth of mortgage and Treasury securities. In the process, it has flooded the financial system with cash. But banks and investors are reluctant to put that cash to work because they are worried about the economic outlook. With no other place to put it, they’re parking it in banks.
In essence, they're charging you a storage fee. And with Barack Obama's eager hand at the wheel, government spending is going into reverse, fast, which will almost guarantee low demand and low employment for (my best guess) five to ten years.
I've had Rubicon dreams for the last few days. On this Super Congress with its hair-trigger triggers, all we need is one bad Dem and the Republicans have a majority for anything they want to do. Do you think Pelosi and Reid will limit the damage to just one bad Dem? (Do you think Team Bipartisan will have some input on that as well?)
As I look back, it seems we've been heading up this destructive hill since Reagan (some argue since Carter). It's been work, wrecking the country, fighting progressive and populist gravity for every mile gained.
This week, they may have finally crossed the peak. Gravity now works on their side, and the awesome slide downhill now has its own pre-triggered inevitability.
God I hope that's just a very bad dream, and we all wake up.
GP
