Frank Shostak has provided an excellent review of the Keynesian concept of liquidity trap and some of its key theoretical problems in his column today at mises.org.
For those who are unaware, Paul Krugman, the current ringleader of Keynesian (read: voodoo/shaman/theoretically challenged) economists, has been proclaiming that the United States is in a liquidity trap-meaning individuals are hoarding money with no intention of spending or investing it. This literally means the hoarding of cash-deposits in your bank account do not count since banks are financial intermediaries and, consequently, an indirect means of investing.
To overcome this liquidity trap, Krugman feels the Federal Reserve needs to crank up the printing presses even faster so that the value of the dollar will fall more quickly and prompt inviduals to get rid of dollars the second they get them so as to avoid the loss of value. Essentially, the Keynesian prescription is to turn the entire concept of monetary exchange into a giant game of “hot potato.” If you’re holding the potato too long, you’re going to lose.
While the Keynesian voodoo artists have cloaked their “hot potato” approach to economic policy in scientific jargon, it’s not difficult to imagine how such a rapidly depreciating currency complicates exchange in the real world. Businesses that contract for the delivery of goods or services six months to a year in advance, for instance, must guess at how fast Keynesians plan to play the “hot potato” music over that time period. If they guess too low or too high, then one party to the contract or the other is likely to lose his shirt. This complication is multiplied millions of times over, as contract upon contract throughout the global economy become subject to “hot potato” antics.
While this charade might sound completely ridiculous, it’s universally accepted by Keynesians as scholarly economic theory.
It’s a brave new world out there…