What is the relation between deflation and liquidity? When interest rates fall, is it not good to hold debts and lending dries up? Does the government act in some way, like providing liquidity, and does that affect the price of commoditys? Any opinions?
Thank you for that, I believe my question makes sense though, When interest rates fall, is it not good to hold debts and lending dries up? As according to the articule, âinvestors and buyers will hoard currency rather than invest it. This can produce the theoretical condition, much debated as to its practical possibility, of a liquidity trap.â âIn a liquidity trap environment, banks are unwilling to lendâ (hence my point that lending dries up.) They go on to describe liquidity trap: âa central bank or finance ministry) can stimulate the economy by lowering interest rate targets or increasing the monetary base.â Hence, thatâs the 2nd part of my question: Does the government act in some way, like providing liquidity? It appears that they do. Though, itâs unclear what effect his may have on the price of commoditys.
When rates fall, it is common sense to take your current debt and refinance. The logical assumptions is that your old debt has a higher rate, so let's refinance. At the same time, borrowing becomes more attractive, which means new loans. Lending can't dry up, banks make/print money by lending and with rates lower, they know the demand for debt will rise, hence lend more. Rates rise, borrowing becomes less attractive. But the fed funds rate is far from the only tools for liquidity. It's not even the biggest one, just the most publicized. Great Depression, that is what happened. The Fed purposely refused to inject liquidity after withdrawing it with force, years before.