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La trappola della liquidità


December 14, 2011, 9:14 AM
Interest Rates, Inflation, and the Way the World Works (Slightly Wonkish)
Newish commenters here often fail to understand why I highlight things like falling inflation in Britain or the extremely low interest rates at which the governments of non-euro nations can borrow. Is it just I-told-you-so? No. It’s about economic models — how the world works. And of course such models have policy implications.
Early on in this crisis I and quite a few other economists — but not enough! — declared that we had entered a classic liquidity trap. This is a situation in which even a zero short-term interest rate isn’t low enough to restore full employment; it is, if you think through the logic, a situation in which desired saving, or more accurately the savings people would make if we were at full employment, exceed desired investment even at a zero interest rate.
The liquidity trap — which is in effect a special case of IS-LM analysis — has some special properties. Notably, even large government borrowing won’t drive up interest rates (not unless the borrowing is enough to restore full employment), and you can print as much money as you like without causing inflation.
The other side, mainly on the political right, ridiculed these claims. They declared that soaring inflation was just around the corner, and that interest rates would spike.
It’s worth pointing out, by the way, that while conservatives have seized on European sovereign debt for vindication, the euro story is very different from the story conservatives were originally telling. Italian rates are high because of solvency concerns, while the original right-wing story for interest rates was all about competing for private funds, not worries about repayment. Here’s Brian Riedl of Heritage, in early 2009:
The government is going to have to raise interest rates in order to convince people to lend them the full amount they need. We’re already facing a deficit of $1.2 trillion this year, and 700 billion next year. We borrowed $700 billion for TARP, and now we’re going to borrow $800 billion for this stimulus package. Compare those numbers to the entire public debt, which was 5.8 trillion up until a few months ago. It’s going to be very difficult for a global economy, which is already in a recession, to supply the U.S. government with [$3 trillion] in new borrowing. Right now, a lot of banks are happy to buy Treasury bonds because they are safe investments . . . but overall, that may not be enough. The government may have to raise interest rates higher and higher and higher in order to persuade people to lend their diminishing savings to the government. And that’s going to hurt the economy for a long time.
So here we are, at the end of 2011. The Fed has “printed” a lot of money (actually added a lot of money to bank reserves):
And the government has continued to borrow huge amounts:
So how’s it going?
Interest rates have, of course, remained very low. As I post this, the real interest rate on 10-year bonds is actually negative.
On the inflation side, the right seized on the runup in commodity prices between the summer of 2010 and the early part of this year as evidence that inflation was taking off — and this runup did lead to a bump in headline inflation. But as I could have told them — and did, repeatedly — this was not a case of domestically generated inflation, which remained low; it was mainly about demand from emerging markets. Since the spring commodity prices have headed down again, and inflation has been subsiding.
The moral of the story, then, is that one view of macroeconomics has held up very well in the Lesser Depression; the alternatives have been shown wrong again and again.
I would like to see some of the people on the other side of this debate admit that they got it wrong and change their views. Also, I’d like a pony.