Trouble ahead? Easy money vs. Turkey 1:0

by Andreas Hoffmann

While the US, Japan and Europe slashed interest rates to unprecedented low levels, growth remains sluggish. Dealing with debt problems and supporting the recovery, the ECB provided money to quasi-finance the euro area problem children. Similarly the Federal Reserve is trying to jump start the economy and has been flooding markets with money so that they have no idea about what to do with all the liquidity.

But – wait – there are emerging markets. They are booming from Brazil to Turkey. Hence, investors target emerging market asset markets until there is something to gain at home. As a consequence Poland and Brazil just raised interest rates to fight inflationary pressure in goods and asset markets. On the contrary, while inflation picks up (expected rate for 2011 is 5.9 percent), Turkey LOWERED interest rates and raised reserve requirements.

This might seem odd? Continue reading

Exhaustion of the Welfare State’s “Reserve Fund”

by Mario Rizzo  

“An essential point in the social philosophy of interventionism is the existence of an inexhaustible fund which can be squeezed forever. The whole system of interventionism collapses when this fountain is drained off: The Santa Claus principle liquidates itself.”  Ludwig von Mises, Human Action: A Treatise on Economics, 3rd edition, p. 858 (1966).  

During the bad old days of the Bush Administration I wrote a post, “The Disorderly Bankruptcy of the Welfare State.”  I stand by it all.  Continue reading

Keynes on How to Create a Liquidity Trap

by Mario Rizzo


There is frequently confusion about whether John Maynard Keynes thought monetary policy is effective. This confusion is furthered by some renditions of John Hicks’s graphical IS-LM analysis (which, by the way, he repudiated in the 1980s). Most economics undergraduates have been subjected to this art.


The simple story about Keynes’s view is that he thought that the Bank of England should keep long-run interest rates low. This would be effective in maintaining high employment over long periods of time.  But short run, countercyclical monetary policy is another matter.


Economists are familiar with the Keynesian liquidity trap. This is the idea that the demand to hold money, rather than invest it, is so high at very low rates of interest that further lowering does no good. In other words, monetary policy cannot induce more investment even at lower rates. One reason proffered for this is that when entrepreneurial expectations are very pessimistic the interest rate is the least of a potential investor’s concerns. He does not expect a positive net return even at near-zero interest rates.


This was not Keynes’s principal argument, according to Allan Meltzer (with whom I concur). Keynes’s argument in “How to Avoid a Slump” is that “[v]ariability of interest rates creates uncertainty and inhibits investment” (Meltzer, Keynes’s Monetary Theory: A Different Interpretation, p. 195). Continue reading