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2012
Michael D. BallantineGreen Party Presidential Candidate201211/18/2011
 
Reserve Currency Liquidity Trap… Keynes 2.0
 
Reserve Currency Liquidity Trap…Keynes 2.0 – Prepared by Michael D. Ballantine,Green Party Candidate
Unless one has been sleeping these past three years, it is blindingly obvious that theAmerican economy is very troubled. Further, it appears that the so-called experts lack the meansto change or repair the damage. Despite multiple efforts to stimulate the economy and providequantitative easing (QE), the economy continues to stumble along much like a drunken sailor.Government officials announce that everyone must be satisfied with a jobless recovery and that jobs formerly held a bare three years past would not be coming back. That is the state of affairsthat one finds oneself in and one must ask the question, why?The most common refrain heard among the pundits and candidates in the Presidential primary campaigns is that we must accept cuts to entitlements and elimination of regulations.Only by gutting our programs for the poor and the elderly will the nation begin its long recovery.Further, the draconian regulations imposed recklessly upon business over the past thirty years areresponsible for the nation’s difficulties. There is no mention of the cost and burden of fightingmultiple wars in multiple theaters without having allocated funds sufficient to cover those costs. Nor, is there mention of the many tax cuts provided to the wealthy at the expense of the poor.The tragic result of the current proposed cuts will be to cut benefits for the poor so the rich canreceive tax cuts. That seems suspiciously like class warfare but it depends on a point of view.One of the key characteristics of this crisis is its similarity to the one faced by Japan over the past 20 years. Then as now, Japan’s real estate market crashed initiating a 20-year periodwhen economic activity barely changed despite massive infrastructure spending and amplemonetary easing. In 1998, Paul Krugman described the Japanese malaise as a liquidity trap. He posited that no matter how much spending Japan initiated, Japan’s economy could not escape itsmonetary trap. Another decade has passed and Japan continues to suffer the consequences of itsfailure to find a relevant solution.
2November 18, 2011
 
Reserve Currency Liquidity Trap…Keynes 2.0 – Prepared by Michael D. Ballantine,Green Party Candidate
America faces the same malaise today. One could do a lot of graphs and render someinteresting tables but for the sake of arguing, this analysis assumes a liquidity trap exists and proposes some novel solutions to repair the damage. This analysis includes a review of thecurrent policies, their economic theoretical underpinnings, and the negative impact of their initiation. Further, a presentation of out of the box recommended solutions provides strong proposals to overcome the cancer that is spreading through our economy.
Defining a Liquidity Trap
In his paper from 1998 titled ‘Japan’s Trap,’ Paul Krugman describes a liquidity trap as a situation “when monetary policy becomes ineffective because you can’t push interest rates belowzero” (p. 1). Essentially, the Bank of Japan (BOJ) once it had set interest rates near zero wasunable to stimulate the economy because real interest rates were below zero. To get nominalinterest rates below zero, banks must pay borrowers for borrowing money or the governmentmust offer a subsidy to borrowers. This type of action is unprecedented and violates thecommon sense clause of most conservative people. Without any political support for a borrower subsidy program, the BOJ remains helpless to effect any change in the economy.The Japanese government in keeping with Keynesian thinking began fiscal stimulus programs building roads, bridges, rail transport, airports, and other infrastructure projects to provide support for the economy. Despite this unprecedented stimulus over the past 20 years,Japan’s economy continues to move sideways. There are many valid criticisms of the Japanese policies and each will be reviewed in turn. The primary question is whether America’s current problems mirror the Japanese ones, and are there lessons to be learned?Over the past three years, the Federal Reserve (FED) under Ben Bernanke provided threeQE packages as well as promoting a stimulus package and bank recapitalization programs
3November 18, 2011
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