tag:blogger.com,1999:blog-1740670447258719504.post3350130635893373156..comments2024-03-27T03:00:27.024-04:00Comments on Facts & other stubborn things: Some liquidity trap thoughtsEvanhttp://www.blogger.com/profile/12259004160963531720noreply@blogger.comBlogger5125tag:blogger.com,1999:blog-1740670447258719504.post-73022275605294119522012-07-24T16:14:06.408-04:002012-07-24T16:14:06.408-04:00Liquidity has option value on the prospect of bett...Liquidity has option value on the prospect of better future investment opportunities. Cash is not cost free or riskless. There can be inventory, storage, transfer, and access costs, in terms of both money and time. There can be risks of physical loss, theft, embezzlement, and insolvency. Often treasuries are the only riskless overnight possibility or at least the easiest.Lordhttps://www.blogger.com/profile/06747994571555237739noreply@blogger.comtag:blogger.com,1999:blog-1740670447258719504.post-42912388375684322492012-07-24T11:56:31.950-04:002012-07-24T11:56:31.950-04:00"If foreigners are buying a lot of Treasuries..."If foreigners are buying a lot of Treasuries and there is some exchange rate risk involved, the yield on cash may not be zero. But that doesn't seem to work because the exchange rate risk is going to impact demand for Treasuries (which are denominated in dollars) as well. Perhaps transaction costs associated with working with bonds is lower for foreigners than cash? I don't know. "<br /><br />A few suggestions....<br /><br />One of the principle problems of holding a lot of cash is robbery. The probability of it may be high enough to prefer a lower yielding investment. A bank account isn't necessarily a true money-substitute if the chances of the bank going bust are high. It may be that some investors don't believe the government will live up to FDIC promises or can bail out very large banks.<br /><br />Swiss bonds recently dropped to negative yields because of Italians and other southern europeans coming over the border to buy them. They may prefer swiss bonds to swiss cash because the latter is simpler to spend if robbed. Other european bonds also dropped negative, potential robbery may be the reason here too though it could be something else. If one of the PIIGS were to leave the euro then some scheme will replace paper euros for something else. Some of the people who suspect this will happen have apparently been putting their faith in serial numbers (ie. accumulating bills with German and Northern European serial numbers). Others believe that when an exit occurs it will become impossible to spend large quantities of euro cash from, say, Greece in the eurozone. The other european countries may limit the amount of euros each Greek person can bring back into the eurozone. This makes bonds an attractive investment.<br /><br />Of course none of this applies to the US. But the recent "negative yield" on TIPS is a negative real yield not a negative nominal one. So, those bonds may still beat cash.<br /><br />Another possible reason if limitations that pension funds and other funds have on what they can buy. In Europe many governments have been raising the demand for treasuries by raising the legally required amount of treasuries that pension funds must hold.Currenthttps://www.blogger.com/profile/08645195276844244481noreply@blogger.comtag:blogger.com,1999:blog-1740670447258719504.post-970467287277791102012-07-24T10:42:13.626-04:002012-07-24T10:42:13.626-04:00I'm not saying that you are mathematically inc...I'm not saying that you are mathematically incompetent, nor am I trying to condescend to you. I'm just pointing out that Keynes's technical proofs are in Book V of the <i>General Theory</i>. On Page 209, Keynes explicitly attaches a footnote to the following sentence: "<i>For the purposes of the real world it is a great fault in the Quantity Theory that it does not distinguish between changes in prices which are a function of changes in output, and those which are a function of changes in the wage-unit.</i><br /><br />The footnote says: "<i>This point will be furthered developed in Chapter 21 below.</i>"<br /><br />I have recently acquired a copy of Dr. Michael Emmett Brady's dissertation, <i>The Foundation of Keynes's Macrotheory: His Logical Theory of Probability and Its Application in The General Theory and After</i>. He discusses a way to get out of the liquidity trap by distinguishing between types of borrowers and lenders. Banks lending to those who speculate will waste and destroy the loans. Lending to entrepreneurs will generate a positive feedback loop to get out of the liquidity trap and restore the economy to a healthier state.Blue Aurorahttps://www.blogger.com/profile/02044362251868221897noreply@blogger.comtag:blogger.com,1999:blog-1740670447258719504.post-83381229304098965412012-07-24T10:29:09.683-04:002012-07-24T10:29:09.683-04:00Well it also happens to be the chapter where he ta...Well it also happens to be the chapter where he talks about the liquidity trap specifically, so it seems the appropriate one to go to in a post on the liquidity trap - calculus aside (which I feel plenty competent in).Daniel Kuehnhttp://www.factsandotherstubbornthings.blogspot.comnoreply@blogger.comtag:blogger.com,1999:blog-1740670447258719504.post-28374236498134895252012-07-24T10:27:08.471-04:002012-07-24T10:27:08.471-04:00Agreed on the lack of accessibility of the actual ...Agreed on the lack of accessibility of the actual economics literature.<br /><br />Going back to the topic at hand...<br /><br />Keynes never said that monetary policy was totally useless, given the fact he was taught by Alfred Marshall in the Cambridge monetary tradition. I think he just thought it wouldn't be enough to deal with uncertainty.<br /><br />Regarding page 202 of the <i>General Theory</i>...that is in Chapter 15. Keynes made a footnote reference on Page 209 to Chapter 21 - yes, of Book V of the <i>General Theory</i>, which many economists have overlooked. According to Dr. Michael Emmett Brady, Chapter 15 is really a chapter for those who are unable to do differential calculus and integral calculus.Blue Aurorahttps://www.blogger.com/profile/02044362251868221897noreply@blogger.com