For the economy as a whole, lots of cash in frightened hands is a liquidity trap.
In fact, I view his General Theory as a guide for getting out of a recession or liquidity trap.
Remember, during that entire period, Japan was stuck in a liquidity trap.
When the economy is in a liquidity trap, monetary policy is ineffective because individuals and businesses hoard money rather than spend it.
And you could become caught in a liquidity trap where people have to sell good assets even though there's no sensible economic reason to do so.
Recall that a Keynesian liquidity trap occurs at the point when interest rates become so low that cash balances are passively held regardless of their size.
Japan seems to be stuck in a classic liquidity trap: it needs lower real interest rates to boost demand, but because of deflation they are stuck painfully high.
Monetarists and other non-Keynesians believed that further expansion of money and related credit aggregates would stimulate the economy further even if interest rates were stuck in a liquidity trap.
FORBES: Allow Interest Rates To Rise While Keeping Monetary Policy Accommodative
Washington politicians are pointing the U.S. economy straight into a liquidity trap and instead of a bright economic future, the U.S. is looking at years of high unemployment, weak GDP growth and the possibility of widespread deflation.
Governments are fighting to save their economies from a liquidity trap in which individual banks choose, rationally, to shore up their capital by withdrawing loans from healthy firms and households, but collectively tip the economy into depression.
Over the last couple of weeks, many prominent economists, several of which have the ear of Ben Bernanke, have come out and said that massive QE2 is a horrible idea given that we are in a liquidity trap and it could have long-term damaging inflation implications.
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