http://krugman.blogs.nytimes.com/2009/06/13/way-off-base/
he says you can’t have inflation in a liquidity trap even if you increase the supply of money
He means that he’s a political shill who is trying everything he can to bamboozle people into believing that money is completely neutral, especially the supply of it.
Krugman wants people to spend because he thinks there is a “paradox of thrift”, each though that obviously is a myth.
Because he wants people to spend, it’s a problem for him that there is a deflation (as credit/debt is marked down and loans paid back). With deflation, people can earn a nominal, theoretical return on their existing purchasing power by just not spending their money.
People also don’t want to borrow money, because the money they are paying back is worth a lot more than the money they get. Thus when the government increases the supply of money, the banks don’t necessarily loan it out, they just keep excess reserves. So just by expanding the money supply significantly, it likely won’t have too much effect on consumer prices because the new money never gets to be involved in a consumer transaction.
Krugman’s fallacies all come from his belief that when individuals make the best decisions for themselves, the “collective” suffers. This is false. Right now, the individuals in this country are rightly seeing that they need to save more and pay down debt - in fact, lack of savings and too much debt contributed to the financial crisis/recession. Austrian Business Cycle Theory teaches that too many resources have been diverted into long term projects instead of replenishing savings and first-order goods. The shift back to existing projects that will replenish savings is necessary, and forcing people to continue reducing savings by taking out loans and starting new projects (or continuing old ones that waste resources) will not allow the capital structure to adjust to actual market demand.
Hope this helps.
A liquidity trap occurs when the interest rate on Treasury bonds is zero and so banks are not willing to trade money for Treasuries anymore. This means that standard monetary policy is ineffective as monetary policy consists of buying and sellng Treasuries.
doesn’t it also have to do with the elasticities of the real and money sides of the economy? I remember that’s how I learned it maybe your scenario implies mine but I don’t see how --am I missing something?
They are the same thing. They imply each other.