Liquidity Trapped

Paul Krugman's blog
NYT

Brad DeLong has a nice piece for Bloomberg about the nature of the trap we’re in — and I’m only partly saying that because he gives me credit for warning about this very trap back in the 1990s.

But I’d emphasize something a bit different from what Brad does. His piece is set up as a mea culpa — he should have seen the possibility of this kind of trap, but didn’t.

I’d say that’s a very pardonable error compared to the many people who are still denying the nature of the trap we’ve been in for more than 2 1/2 years.

Think of it this way: those of us who worried about the liquidity trap (see the macro readings off to the side for background) made two big predictions that ran very counter to the kind of stuff you were hearing on CNBC and reading in the Wall Street Journal. We said that even if the Fed printed lots of money (not really, of course; we’re talking mainly about bank reserves), it would not be wildly inflationary. And we also said that even very large government deficits would not cause soaring interest rates as long as the economy stayed depressed.

(More here.)