Liquidity Trap

I just learned something from Paul Krugman. Maybe he does deserve the Nobel Prize after all.

You still see people saying, in effect, “never mind the zero interest rate, why not just print more money?” Actually, the Bank of Japan tried that, under the name “quantitative easing;” basically, the money just piled up in bank vaults. To see why, think of it this way: once T-bills have a near-zero interest rate, cash becomes a competitive store of value, even if it doesn’t
have any other advantages. As a result, monetary base and T-bills — the two sides of the Fed’s balance sheet — become perfect substitutes. In that case, if the Fed expands its balance sheet, it’s basically taking away with one hand what it’s giving with the other: more monetary base is out there, but less short-term debt, and since these things are perfect substitutes, there’s no market impact. That’s why the liquidity trap makes conventional monetary policy impotent.

The latest announcement from the Fed is that they have raised the interest rate of bank reserves to equal the target rate. Today, they lent at 0.18%. What idiot wouldn't want to borrow at 0.18% and collect interest at 1%. No wonder there's $420 billion in bank reserves at the Fed. The money is just piling up in the vaults. Japan, here we come!