Liquidity trap
Liquidity trap ( English liquidity trap ) is in the economics one of Keynes introduced term for the part of the curve of the liquidity preference , in which the money demand to speculation endless elastic is.
General
The money supply disappears from the money market during the phase of the liquidity trap and is held as cash because the transaction costs of the financial investment exceed the interest . As a result, the interest rate level drops so low in a liquidity trap that every economic subject tends to expect an increase in the market interest rate and therefore has speculative cash. The extreme case is the negative interest rate , where the liquidity trap is highest. The liquidity trap is connected with infinite interest elasticity of the money demand, so that the money demand for transaction purposes cannot influence the course of the money demand curve.
The General Theory of Employment, Interest and Money by John Maynard Keynes from February 1936 assumes that with very low interest rates, future rising interest rates become more and more probable, resulting in a "mass movement into cash" so that all other liquidity than cash is held so that it tends to be withdrawn from the economic cycle and the interest rate does not fall any further
Basic connection
Immediately available liquid (liquid) money, which is not yet money capital in this state , has a decisive advantage over long-term invested assets and over goods: Liquid money offers the possibility of being immediately available for both purchase and investment . With willingness to pay at any time and thus the ability to act quickly - even over a longer period of time - the money holder can wait for “significantly better” or at least for “better alternatives ” .
Described, the liquid money immanent " cash-flow advantage " in relation to the goods called John Maynard Keynes , the " liquidity premium ( English liquidity preference ) of money". According to Keynes, this advantage can be quantified at around 3 percent. According to this, liquid money would in principle only be available as credit on the financial market and could thus become money capital if the expected cash interest rate as a liquidity waiver premium exceeds this liquidity advantage of around 3% or at least offsets it.
As a result of the “liquidity premium of money” , no money would be made available for investments with a return below this “iron limit” of around 3%. Such investments would therefore not be made. This applies to investments in physical capital as well as investments in the credit market. Since the return to be expected for investments in physical capital (the "real interest" or "real capital interest") steadily decreases with increasing physical capital, i.e. increasing equipment with means of production , important long-term investments are often not made. Liquid money (assets) (liquidity) is then increasingly only available to the economic cycle for a short time. It would be hoarded due to the expectation of the liquidity premium . The medium of exchange money - for the physiocrat François Quesnay a "means of transport" in the economic "bloodstream" - becomes a "liquid" treasure (removed from the economic cycle) , so in reality it becomes "illiquid". The economic cycle is increasingly lacking the necessary long-term financial resources (credit crunch).
The decrease in the return on real capital ("interest in kind") to below three percent, which occurs as a result of improved physical capital, leads, according to Keynes, into the "liquidity trap": money remains increasingly liquid and is only available to the economic cycle for a short time. The consequence is a structural demand gap and long-term deflation , combined with latent underemployment and unemployment . This makes crisis phenomena virulent, which cause increasing state intervention in economic life. This often takes the form of repeated enormous “financial injections” and interest rate cuts by the central bank, which in turn creates a latent risk of inflation and a simultaneous increasing risk of deflation - a “dance on the knife edge”. Hand in hand, the state's willingness to regulate is growing.
The constant flow of the liquidity premium can lead to massive "asset redistributions" according to Keynes.
If economic operators expect interest rates to rise , they do not buy additional interest-bearing securities because their value would fall if interest rates rise and the risk of loss in value is not precluded by the prospect of appreciation as a result of falling lending rates. Hence, money is not spent on securities or goods. It is withdrawn from the economic cycle with speculative intent and kept in the speculative fund, i.e. it disappears into the liquidity trap. Linked to this is the risk of deflation .
The critical interest rate is the so-called strike interest rate , which is not fallen below because economic agents no longer invest in interest-bearing titles despite the increase in their money supply. The central bank's monetary policy as a means of stimulating demand becomes ineffective because even if interest rates continue to fall, the demand for securities does not rise. In this situation, the state must take action to stimulate the economy, for example through an expansive fiscal policy . Such a situation can arise when the interest rate is close to or exactly zero. An increase in government spending due to a liquidity trap means that the economy is forced to invest in order to prevent deflation.
Liquidity trap and effectiveness of monetary policy
The statement that monetary policy is ineffective in the liquidity trap only applies to an expansionary monetary policy. In the case of a sufficiently large reduction in the amount of money, however, it is possible that the economic agents , in order to remain liquid through the excess demand that has arisen on the money market , sell part of their securities, since it is assumed that there is excess demand (i.e. more demand than supply) on the money market with excess supply (ie more supply than demand) corresponds on the securities market (see Walras law ).
However, according to the theory, falling prices cause interest rates to rise. Such a policy is only suitable for increasing the level of interest rates , i.e. for leaving the liquidity trap. The macroeconomic income falls (with interest-elastic investment demand), since less investments are now worthwhile.
In addition to the investment trap and downwardly inflexible wages , this is where the cause of the underemployment equilibrium described by Keynes can be seen.
Keynes believed that money was an incorruptible good and that there could be no such thing as a negative interest rate . However, in an economic system in which investors keep their money in the speculative coffers only at a loss, i.e. cannot withdraw it from the economic cycle without disadvantages, there would be no liquidity trap.
Colloquially, the term liquidity trap is used to describe the phenomenon that companies can not get loans despite having good creditworthiness . The credit crunch is more precise for this situation .
See also
Web links
Individual evidence
- ↑ Verlag Dr. Th. Gabler, Gablers Wirtschafts Lexikon , Volume 4, 1984, Sp. 125
- ^ John Maynard Keynes, General Theory of Employment, Interest, and Money , 1936, p. 172
- ↑ Manfred Borchert: Money and Credit . Introduction to monetary theory and policy. 8th edition. Oldenbourg, Munich 2010, ISBN 978-3-486-59955-8 , pp. 119 ( limited preview in Google Book search).