'..excessive consumption relative to the production of consumer goods leads to a decline in the pool of real savings.'

'As long as the rate of growth of the pool of real savings stays positive, this can continue to sustain productive and nonproductive activities. Trouble erupts, however, when, on account of loose monetary and fiscal policies, a structure of production emerges that ties up much more consumer goods than the amount it releases. This excessive consumption relative to the production of consumer goods leads to a decline in the pool of real savings.'

<blockquote>'Contrary to popular thinking we suggest that a liquidity trap does not emerge in response to consumers' massive increases in the demand for money but comes as a result of very loose monetary policies, which inflict severe damage to the pool of real savings.

Liquidity Trap and the Shrinking Pool of Real Savings

As long as the rate of growth of the pool of real savings stays positive, this can continue to sustain productive and nonproductive activities. Trouble erupts, however, when, on account of loose monetary and fiscal policies, a structure of production emerges that ties up much more consumer goods than the amount it releases. This excessive consumption relative to the production of consumer goods leads to a decline in the pool of real savings.

This in turn weakens the support for economic activities, resulting in the economy plunging into a slump. (The shrinking pool of real savings exposes the commonly accepted fallacy that the loose monetary policy of the central bank can grow the economy.)

Needless to say, once the economy falls into a recession because of a falling pool of real saving, any government or central-bank attempts to revive the economy must fail.

Not only will these attempts not revive the economy; they will deplete the pool of real savings further, thereby prolonging the economic slump.

Likewise any policy that forces banks to expand lending "out of thin air" will further damage the pool and will reduce further banks' ability to lend.

The essence of lending is real savings and not money as such. It is real savings that imposes restrictions on banks' ability to lend. (Money is just the medium of exchange, which facilitates real savings.)

Note that without an expanding pool of real savings any expansion of bank lending is going to lift banks' nonperforming assets.

Contrary to Krugman, we suggest that the US economy is trapped, not because of a sharp increase in the demand for money, but because loose monetary policies have depleted the pool of real savings. What is required to fix the economy is not to generate more inflation but the exact opposite. Setting a higher inflation target, as suggested by Krugman, will only weaken the pool of real savings further and will guarantee that the economy will stay in a depressed state for a prolonged time.'

- Frank Shostak, Is the United States in a Liquidity Trap? January 25, 2012


Frank Shostak is an adjunct scholar of the Mises Institute and a frequent contributor to Mises.org. His consulting firm, Applied Austrian School Economics, provides in-depth assessments and reports of financial markets and global economies.</blockquote>


Context '..the recession was a problem of under-saving, and over-consumption..'

<blockquote>Mises - Money and Credit - '..the recession was a problem of under-saving, and over-consumption..'

'..central banks worldwide are rendered insolvent..' - '..[there] will emerge a new global economy that is stronger and healthier, provides better living standards..'

(To recover) '..the increase in saving permits the financing of new investment projects..'

(Greece defaults) - '..Europe is going to have a very strong, sound currency..'

'Bernanke Is Destroying The Savings Class'

Policy Deserving Of A Rant - By Doug Noland</blockquote>