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Frank Shostak: Is Krugman Joking? Liquidity Traps Are Impossible

The Mises Institute’s Frank Shostak is out with another simple-yet-edifying piece on the “liquidity debate”, that is, is the US facing a liquidity or solvency crisis? Shostak argues that liquidity traps are impossible.

Shostak ranks with Gary North as one of the most accomplished observers of economic events through an Austrian lens, in my opinion. Here’s the salient snippet, though I recommend reading the whole piece:

To suggest then that people could have an unlimited demand for money (hoarding money) that supposedly leads to a liquidity trap, as popular thinking has it, would imply that no one would be exchanging goods.

Obviously, this is not a realistic proposition, given the fact that people require goods to support their lives and well-being. (Please note: people demand money not to accumulate indefinitely but to employ in exchange at some more or less definite point in the future).

Being the medium of exchange, money can only assist in exchanging the goods of one producer for the goods of another producer. The state of the demand for money cannot alter the amount of goods produced, that is, it cannot alter the so-called real economic growth. Likewise a change in the supply of money doesn’t have any power to grow the real economy.

Contrary to popular thinking we suggest that a liquidity trap does not emerge in response to consumers’ massive increases in the demand for money but comes as a result of very loose monetary policies, which inflict severe damage to the pool of real savings.

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