How long will the liquidity trap last?

Is that too silly a question?  (And have purveyors of the liquidity trap argument been willing to make predictions?)  After all, the TED spread is now below one and there are other pieces of financial good news.  If the liquidity trap ends (assuming there was one in the first place), monetary policy will work to stimulate aggregate demand.  A big fiscal stimulus won't be necessary.

Will there still be a liquidity trap three months from now?  Six months from now?  With all those smart people in the White House and at Treasury?  What if there is a ten percent chance, each month, that the liquidity trap goes away?

The proposed fiscal stimulus is a big, irreversible investment, which may or may not be needed, and of course it takes some time to get rolling.  The traditional economist's recommendation is to apply a very high hurdle rate to such commitments.  One alternative is to wait and see if the liquidity trap ends in the near future.

I am not an optimist about the real side of the economy, but I would be surprised if we still were in a liquidity trap one year from now.


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