Monday, 28 January 2008

US Slides into Dangerous 1930s 'Liquidity Trap'

The United States is sliding towards a dangerous 1930s-style "liquidity trap" that cannot easily be stopped by drastic cuts in interest rates, Nobel economist Joseph Stiglitz has warned.
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"The Federal Reserve and the Bush Administration didn't want to hear anything about these problems. The Fed has finally got around to closing the stable door (on subprime lending), but the after the horse has already bolted," he said.
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/01/24/bcnstig124.xml

There is so much bad money (basically loans that cannot be recovered) that we will see a continued contraction in almost every aspect of the US economy for many months, or even years, to come.

Consider all those sub prime home loans, the equity used by middle income earners who used their houses like an ATM, the money used by big companies to engage in all those "mergers and acquisitions", the highly leveraged trades (bets) taken out by large banks to play games in the financial markets including the on-selling of debt via CDO & derivative vehicles etc etc ...

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