Liquidity...

Article;

We Must Ensure the Real Economy Grows before the Liquidity Bubble Bursts


Comment;

The situation is different in the US and Europe. The US is in liquidity trap; people are sitting on a lot of cash. They have no incentive to save in banks and probably they are expecting prices to go down. Consumer spending, wages and income are depressed, too. To push them up we need to infuse some purchasing power either by increasing nominal wages or by increasing real wages. The first one is under consideration but the second one needs laxity on the part of the central bank to not to support prices and let them go down. People sitting on cash or with fixed wages and income will find the value of their hoards going up and that will boost consumer spending. During the recession unemployment insurance/benefits restricted the economy from going demand bust. The increase in liquidity in the US will add to stock of money people sitting on and we need to break this thing. And that can be done by fiscal policy, too. But the government is budget constrained. Europe is also constrained by demand but is not in liquidity trap. They have raised interest rate a few times. They bailed out economies with stringent government finances but unemployment is still high because the governments have stalled their spending and multiplier is not working. Probably they are stuck with excess supply. The ECB too can decide to not to intervene in the market and let prices go down and that will increase the competitiveness of euro products in foreign market, and, will increase the value of euro and the demand with in the economy. Liquidity if finds its way in the market is good…