Citizen's United II - the other foot

[kandrathe]

What I don't understand, is how a long period of easy money can lead to the ZLB. The only way to the ZLB is for investors to believe that the government is a really good credit risk. That comes in one of two flavours: Either people believe very strongly in central bank credibility in fighting inflation, or the risk of everything else goes through the roof.

If the problem was excessively easy money eroding confidence in the system, then inflation would go up, forcing bankers to increase rates to maintain positive real interest rates. The problem we have today is the opposite - bankers can't get nominal interest rates low enough.

The problem is most likely that the Fed (and all central banks really) have a credibility problem in helping to boost the economy. People are concerned that at the first sign of economic strength, the fed will undo it by tapering, or raising rates.

So then, t-bills are the best paying liquid instrument for holding cash value, on a risk/reward basis. There are large amounts (about 1/2) of t-bills held to be denominated in U.S. dollars to hedge foreign exchange exposure. With a sluggish economy, stock picking is a risky uncertain investment. With a lack of consumption, most commodity prices are falling or pretty flat and have a pretty high volatility (risk). With the exception of those commodities which are in short supply.