Drowning In Liquidity?
Here’s a term I’ve heard for the first time: Liquidity Trap. If you start paying attention, you’ll hear the term more frequently. You’ll also start observing the term is sometimes tied to Keynesian economics; however, the Japanese have proved its fundamental verity with their lost economic decades.
The Liquidity Trap, when simplified, is this: no matter how much money is pumped into an economy, you can’t get the economy going again. No matter how cheap the money is to borrow, you can’t get anyone to borrow it. The flip side of this is nobody will loan this money, either, because the ROI is negative. Here is an old economic paper that defines this phenomenon well. In 1999, when it was written, it was still considered widely theoretical at the time: <a href=’http://web.mit.edu/krugman/www/trioshrt.html’ target=’_blank’ />1999 Krugman MIT Report</a>.
With a dollar that is increasingly worthless, who wants to borrow something with no value? How do you convince banks, which have rebuilt their cash reserves, it is prudent to loan money when they can only get a minuscule interest rate for their efforts? The interest, after inflation, is actually less than zero. Essentially, the money loses value because there is too much of it. Scarcity dictates value, not abundance. So money sits, the economy stagnates, and we drown in our liquidity.
So who warned us of a liquidity trap, in roundabout terms, about FOUR years ago? Steve Forbes. At T.R.A.F.F.I.C East 2007, he warned us about our monetary policy. He said if the Federal Reserve did not tighten its monetary policy, there would be a blood bath within a year. Almost like clockwork, in 2008, that predicted bloodbath happened. Now we have Part Deux. The more we look at that keynote address, the more valuable it becomes.
Now that we’re living it, the prospects are frightening. Everything my ancestors fought to preserve, everything my parents believed, everything Reagan tried to achieve, has been undone in five years. Everything. Frankly, I find this “new economy”, this “new normal” very frightening, indeed. I can honestly say that I am glad I have domain names in my asset kit. Without them, I’d be facing the prospect of being penniless (relatively).
What a shame.
The stock market will be on a volatile swing for weeks and months to come, and gold will continue to increase in value, portending the “stalling of the engine”, as Forbes put it in 2007. I wonder, of the hundreds of people gathered at the Westin Diplomat that night, how many took to heart what he said.
We could *gasp* consider putting the US Dollar back on the gold standard. We have the largest national reserves of gold in the world, the equivalent of the next three top nations, combined. Italy is one of those nations, as are Germany and France. China is a distant number five, with just over 1,000 tons of gold in reserve, which is about 12 percent of what we have.
Of course, the problem with the gold standard is you can only print so much money, because gold reserves must be the equivalent of a set percentage of the money supply. That would prevent us from inflating our way out of debt.
If you can not print new money, you have no choice but to let the economic winds blow where they may. Of course, for many of us watching and living this perfect investment storm, that does appear to be happening anyway.
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