Thursday, August 4, 2011

The Liquidity Trap

This is a historic week for us. Our national debt will now exceed 100% of Gross Domestic Product. Mathematically speaking, we are hosed.

A liquidity trap occurs when a government can no longer stimulate it's economy. And since our government uses Keynesian theory I suppose the Keynesian definition is appropriate.

Japan's debt has exceeded 100 and 200% of GDP for 21 years. They have one thing going for them that we don't. Their citizens pick up the country's debt tab through individual investment. They get a small interest return. We sell our debt to the world, we also pay them the interest.

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