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John Maynard Keynes, the father of this theory of economics, asserted that there could theoretically be a situation (he knew of no such example) in which the central bank could lower interest rates no further, as they would approach zero (known as the zero lower-bound), yet consumers would remain unwilling to spend—a condition known as a “liquidity trap.” If this were to happen, the central bank would be severely limited in its ability to spur economic activity, and government should step in to deficit spend.

Keynes called it a "trap" for two reasons.

One, as long as consumers and businesses hold cash instead of spending or investing it because they expect the economy to be weak, the economy will be weak. The companies of the S&P 500 collectively have $963 billion in cash, a sum equal to twice the annual output of the state of Ohio.

Two, it makes the Federal Reserve's usual monetary policy impotent. Cutting interest rates below zero is (almost) impossible. Printing money to buy bonds creates sterile bank reserves but not much additional lending or spending.

The liquidity-trap notion was the subject of much debate between Keynes and his contemporaries in the mid-20th century and was revived at a 1998 Brookings Institution seminar by Princeton University economist Paul Krugman. "Nobody thought that a liquidity trap could happen in Japan," he wrote. "Now that it has, we should wonder whether it could happen elsewhere." (His guess, then, was Europe.)

If we are in a liquidity trap, how do we get out of it? Economists have three remedies, all with such significant side effects that there's a reluctance to attempt them.

One, the classic Keynesian prescription is for the government to borrow (after all, rates are low and savings idle) and spend to create demand and jobs. In today's context, that would mean Washington borrowing and spending now while enacting credible deficit-reduction policies (not promises, but changes in law) that bite later. Perhaps the government could do in the next couple of years all the infrastructure projects it is likely to undertake over the next decade, leveraging taxpayer money with private partnerships and levying tolls or fees to help pay off the debt later.

But many Americans and most congressional Republicans are convinced that President Barack Obama's first try at fiscal stimulus was a flop, and has created an unbearable debt burden. A second round appears politically impossible—for now.

Two, Lars Svensson, now deputy governor of the Swedish central bank, sees one "foolproof way of escaping from a liquidity trap"—devalue the currency. "This," he wrote in 2001 while in academia, "will jump-start the economy and escape deflation."

Although the U.S. government and the Fed have, though not explicitly, been counting on a decline in the dollar to help boost exports, an explicit dollar-weakening campaign is unlikely—and unwise given the dollar's role as anchor of the global financial system.

Three, the interest rate that matters in the economy is the sticker-price rate adjusted for inflation. So some economists argue that the way out of the trap is for the Fed to convince everyone it's going to create more inflation. If inflation goes up and interest rates don't, then the inflation-adjusted interest rate falls—and goes negative—and that will give people cause to borrow and spend.

This appeals to Kenneth Rogoff, the Harvard economist who argues that adding to the already-heavy government debt burden (see option one) is a mistake: "The only practical way to shorten the coming period of painful deleveraging and slow growth would be a sustained burst of moderate inflation, say, 4% to 6% for several years." Incomes rise with inflation, debts wouldn't, and they'd be easier to pay off.

Keynes himself worried as much: “Even wise and necessary Reform may, in some respects, impede and complicate Recovery. For it will upset the confidence of the business world and weaken their existing motives to action.”

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PeakTrader:

It seems, technological advances or productivity improvements isn’t enough to offset the diminishing returns of shale oil production. So, a rising trend in oil prices is needed.

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Chart:

http://www.theoildrum.com/files/fig04Bakkenspecificprodandwellsaddedmonthly.PNG

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It looks like more Peak Oil, because at some point the number of new Bakken wells will decline, and so will oil production:

“The “average” well now yields around 85,000 Bbls during the first 12 months of production and then experiences a year over year decline of 40%.”

http://www.theoildrum.com/node/9748

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http://www.aei-ideas.org/2013/03/bakken-drilling-times-and-costs-are-dropping/#comments

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Hard to buy beer?:

http://www.aei-ideas.org/2013/03/sunday-night-links-4/#comments

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