Tuesday, July 5, 2011

The Sorrow and the Pity of Another Liquidity Trap: Brad DeLong

By Brad DeLong

There is only one real law of economics: the law of supply and demand. If the quantity supplied goes up, the price goes down.

Back in the third quarter of 2008, the public held about $5.3 trillion of U.S. Treasury bills, notes and bonds. As the recession hit, tax revenue plummeted, and government spending rose, that total reached $9.4 trillion by mid-2011.

We’re on target to have $10.7 trillion outstanding by mid- 2012 -- doubling the Treasury debt held by the public in just four years. Supply and demand tells us that a steep rise in Treasury borrowings should produce a commensurate fall in Treasury bond prices and thus higher interest rates -- and that increase should crowd out other forms of interest-sensitive spending, slowing productivity growth.

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