How to Change the Dreary Economic Outlook

David Beckworth submits:

The anemic economic recovery can be tied to the ongoing elevated demand for safe and liquid assets. Paul Krugman and Brad DeLong refer to this phenomenon as a liquidity trap; I like to call it an excess money demand problem. Either way the key problem is that there are households, firms, and financial institutions who are sitting on an unusually large share of money and money-like assets and continue to add to them. This elevated demand for such assets keeps aggregate demand low and, in turn, keeps the entire term structure of neutral interest rates depressed too. (Note, that since term structure of neutral interest rates is currently low, it makes no sense to talk about raising interest rates soon. That would push interest rates above their neutral level and further choke off the recovery.)

As Scott Sumner notes, the weak aggregate demand also makes structural problems more pronounced. Many

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