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Deflation and liquidity
- Thread starter trading1
- Start date
I think you need to educate yourself on what deflation means.
http://en.wikipedia.org/wiki/Deflation
http://en.wikipedia.org/wiki/Deflation
Thank you for that, I believe my question makes sense though, When interest rates fall, is it not good to hold debts and lending dries up? As according to the articule, âinvestors and buyers will hoard currency rather than invest it. This can produce the theoretical condition, much debated as to its practical possibility, of a liquidity trap.â
âIn a liquidity trap environment, banks are unwilling to lendâ (hence my point that lending dries up.)
They go on to describe liquidity trap:
âa central bank or finance ministry) can stimulate the economy by lowering interest rate targets or increasing the monetary base.â
Hence, thatâs the 2nd part of my question: Does the government act in some way, like providing liquidity? It appears that they do.
Though, itâs unclear what effect his may have on the price of commoditys.
âIn a liquidity trap environment, banks are unwilling to lendâ (hence my point that lending dries up.)
They go on to describe liquidity trap:
âa central bank or finance ministry) can stimulate the economy by lowering interest rate targets or increasing the monetary base.â
Hence, thatâs the 2nd part of my question: Does the government act in some way, like providing liquidity? It appears that they do.
Though, itâs unclear what effect his may have on the price of commoditys.
Quote from trading1:
Thank you for that, I believe my question makes sense though, When interest rates fall, is it not good to hold debts and lending dries up? As according to the articule, âinvestors and buyers will hoard currency rather than invest it. This can produce the theoretical condition, much debated as to its practical possibility, of a liquidity trap.â
When rates fall, it is common sense to take your current debt and refinance. The logical assumptions is that your old debt has a higher rate, so let's refinance.
At the same time, borrowing becomes more attractive, which means new loans.
Lending can't dry up, banks make/print money by lending and with rates lower, they know the demand for debt will rise, hence lend more.
Rates rise, borrowing becomes less attractive. But the fed funds rate is far from the only tools for liquidity. It's not even the biggest one, just the most publicized.
âIn a liquidity trap environment, banks are unwilling to lendâ (hence my point that lending dries up.)
They go on to describe liquidity trap:
âa central bank or finance ministry) can stimulate the economy by lowering interest rate targets or increasing the monetary base.â
Great Depression, that is what happened. The Fed purposely refused to inject liquidity after withdrawing it with force, years before.
Hence, thatâs the 2nd part of my question: Does the government act in some way, like providing liquidity? It appears that they do.In the US and most other 1st world nations, not really. The concept is called "monetizing the debt" but this is not done by the government alone and is really more of the private central bank scheme.
The government has ways of injecting some money by government spending but this isnt that significant.
Though, itâs unclear what effect his may have on the price of commoditys.
This I am not gonna answer because you should derive this on ur own. Take the 3 concepts: price, commodity & money and do a little reading on them. There is an direct relationship between amount of money and the price of vital commodities.