I disagree here. A liquidity trap is a situation where the monetary policy of the central bank is unable to increase GDP because more money will not result in lower interest rates, as they are already near zero. Britain is in a liquidity trap I'll say "well, that's a piece of jargon coined by economists to make you think they know something you don't when in actuality what they mean is 'does Britain have enough spending money'"
Crack that down into human language: "A situation where the monetary policy of the central bank" = Britain "Is unable to increase GDP" = can't spend money "because more money will not result in lower interest rates, as they are already near zero" = non sequiturA liquidity trap is a situation where the monetary policy of the central bank is unable to increase GDP because more money will not result in lower interest rates, as they are already near zero.
The central bank is independant from the political power. We have to distinguish the monetary policy (central bank) from the fiscal policy (government). If the central bank increases the money supply (how much money there is in the economy), it's not going to lower interest rates as they are already near zero, and thus it's not going to increase investments, and thus it's not going to increase GDP. That's the liquidity trap. Britain spending money is something different, it's about the fiscal policy. It might help the country exit the liquidity trap, but it's not what the liquidity trap is fundamentally about.
See, you're trying to make it complex again. When people are talking about a country in a liquidity trap, they're talking about whether that country has freely flowing cash in its economy. The US had a "liquidity trap" in 2009 for the simple reason that banks were gunshy about lending money. Cash for Clunkers was a way out of that liquidity trap that didn't involve monetary policy. This is why people don't trust economists. There's a driving need to over-complicate things in order to obfuscate the levers of power.
Yes. But what's important is the implication : when you are in a liquidity trap, you can't use only monetary policy as a lever for growth. On this graph (it represents the key interest rate from the FED, BCE, BoJ), you can see that the FED (in red) lowered it's interest rate after the crisis. They wanted banks to lend again and it worked. We are still in 2015 at a very low rate, and the US is currently in a liquidity trap and it has been the case for 5-6 years. Janet Yellen (FMI's director) should announce today an increase of this key interest rate (how much the banks pays the FED to have money) : the US should step out of the liquidity trap today. The US government used all sorts of policy to get the economy back up. Now that it seems stable, the FED is stopping the quantitative easing (a monetary policy which is not supposed to happen where you buy, among other things, private securities) and wants to increase the interest rate to be able to target the 2% inflation rate. It's not hard to understand and I'm not trying to complicate things (but I could be clearer). But wanting to explain the whole thing in one sentence where you don't explain the difference between fiscal/monetary policy and how the key interest rate from the FED impacts the economy and could lead in what is called "liquidity trap" doesn't let you understand what a liquidity trap is and what it means for the economy.When people are talking about a country in a liquidity trap, they're talking about whether that country has freely flowing cash in its economy
If you can't explain it simply, you don't understand it well enough. - Albert Einstein -Look, I know that was a cheap shot. And I know that you're attempting to explain my misconception, not yours. But the fact remains: I explained a liquidity trap as "the country lacks cash flow" and you threw a graph and Janet Yellen at it. It doesn't change the fact that to the average man on the street, a liquidity trap is a lack of cash flow. Most people don't know that the Fed isn't the government. Let's be real, though - they don't have to know that. In fact, it complicates things: try to explain how Bush's tax rebates weren't monetary policy without invoking The Beast from Jeckyll Island. Taxpayers got money as the result of a policy from the government. et voila. "Monetary policy." And really, it's turtles all the way down with this shit. Economics is a profession where you're derisively labeled a "quant" if you understand differential equations, where Piketty bent over backwards to apologize for using algebra in a populist book. I worked for a company that worshipped EBITDA but of 8 VPs polled, 6 couldn't tell me what the fuck it was or why we used that metric instead of something, you know, defensible. Obfuscation is a fundamental tenet of economics, and the only reason it doesn't piss more people off is that economists are largely successful at it. A liquidity trap is where the country doesn't have enough free cash flow for a gazillion different reasons that economists will attempt to explain using graphs full of acronyms, units you've never heard of and calendars that don't match the one on your desk. They do this so that you aren't tempted to ask them for an answer they can't give you.