What is a Liquidity Trap?

The liquidity trap refers to when the nominal interest rate is reduced to an irreducible level, or even close to zero, due to the role of certain "liquidity preferences", people prefer to hold wealth in cash or savings rather than put their wealth in These wealth are invested in the form of capital, and they are unwilling to consume it as a personal enjoyment. Any increase in the country's money supply will be absorbed in the form of "free capital", as if it has fallen into a "liquidity trap", so it will have no impact on overall demand, income and prices. ^[1]

Liquidity trap

The liquidity trap refers to when the nominal interest rate is reduced to an irreducible level, or even close to zero, because people

The liquidity trap is

According to the theory of money demand, interest rate is the opportunity cost of holding money. In other words, when people do not use wealth-bearing bonds to hold wealth, they lose the interest they could have earned. When interest rates are low, the cost of holding money is low. ^[3]

Liquidity stagnation mainly includes:

Cash storage of residents and enterprises;

Bank

in

From a macro perspective, a country's economy is trapped in three main characteristics:

(1) The entire macro economy has fallen into serious

The first manifestation of the liquidity trap

The performance of the liquidity trap The first performance of the liquidity trap at the financial level is that the representative interest rate of financial markets has been declining and has reached a very low level.

In terms of the money market, the weighted average borrowing rate fell from 2.06% to 1.45% in August. If the excess reserve interest rate is removed from it, the actual borrowing rate is only 0.46%, which is not much different from the performance of the Japanese currency market after the Asian financial crisis. As far as the bond market is concerned, it has been in a rapid upward trend, which has resulted in extremely low bond yields. The yield on the shorter-term government bonds is not only lower than the one-year deposit rate of banks, but even lower than the inter-bank lending rate. For example, in the interbank market on September 20, the yield of 04 national debt 11 with a maturity of 1.236 years was only 1.3261%, and the yield of 05 national debt 07 with a maturity period of 1.816 was only 1.7432%. It can be expected that as the reserve interest rate continues to fall, the focus of interest rates in financial markets will also move downward.

Liquidity Trap Second Performance

The second performance of the liquidity trap at the financial level is that the deposits of all financial institutions are accelerating, which has promoted the rapid rise of the broad money supply. The monthly growth rate of all deposits continued to rise, rising from less than 16% to over 18%. From the perspective of composition, the rapid increase in total deposits is mainly due to changes in household savings deposits, which account for about half of the total. The growth rate of household savings deposits is less than 15% and has exceeded 17%. Because deposits are the main component of broad money M2, M2 has also shown an accelerated growth trend during the same period, with the growth rate rising from less than 14% to over 17%.

The performance of the liquidity trap in the real economy is that domestic demand has begun to decline. In the composition of China's GDP expenditure, the proportion of investment and consumption has been above 95%. Among them, the proportion of investment demand, that is, the capital formation rate, has a typical procyclical characteristic, and the proportion of consumption has been Decline situation. During the 1990-2000 economic cycle, the capital formation rate increased from 35.2% in 1990 to 43.5% in 1993, and maintained at a level of more than 40% in 1994 and 1995, after which it continued to decline to 2000. 36.4%. In 2001, with the start of the current economic cycle, the capital formation rate again rose from less than 39% to nearly 44%. As of August, the cumulative year-on-year growth rate of investment still reached 27%, but compared with a growth rate of 40% or even 50%, it is clearly at the end of the crossbow. If the price of oil and other raw materials and production materials have risen sharply, the actual investment growth rate will be much lower.