Tags: bove | liquidity | trap

Bove: U.S. Enters Perfect Liquidity Trap

By    |   Friday, 02 Jan 2009 10:54 AM

The U.S. has created the perfect liquidity trap, said Ladenburg Thalmann banking analyst Richard Bove said in a research report.

When nominal interest rates are nearly zero, a liquidity trap is developed, he said. The theory was invented by John Maynard Keynes and a great proponent of it is Nobel Prize winner Paul Krugman.

“The problem arises because holders of funds refuse to use them preferring to hoard instead,” said Bove in the report.

“They have made the collective decision that it makes more sense to hold money at zero rates because they believe that purchase of assets of any type will lead to losses.”

Thus the recent cut made to the federal funds rate to virtually zero will not stimulate the economy, he said.

“It will be doing this to get the published rate down to the market rate,” Bove said.

“Also, there may be over $600 billion in excess reserves at the Fed, at the present time, and the monetary base may be expanding at the fastest rate ever recorded.”

The GDP is likely to present a decline of 2 percent to 4 percent in the quarter, the “weakest showing since the Depression,” Bove said.

“Thus, the interest rate and monetary stimulus being afforded to the economy is having no effect at present and this would be a perfect liquidity trap — i.e., no one wants to spend or take risk.”

Investors now brag about how much cash they are holding, instead of what hot stocks they own, Jim Anderson, president of SVB Analytics, a firm providing solutions to analytical and valuation problems, told Marketwatch.

“Now they crow about how much of their money is in cash,” he said.

“Those holding cash have been richly rewarded with no losses and opportunities to buy assets (condos and equities) at huge discounts.

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The U.S. has created the perfect liquidity trap, said Ladenburg Thalmann banking analyst Richard Bove said in a research report.When nominal interest rates are nearly zero, a liquidity trap is developed, he said. The theory was invented by John Maynard Keynes and a great...
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2009-54-02
Friday, 02 Jan 2009 10:54 AM
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