The graph below summarizes what has gone on with our economy since the Financial Crisis in 2008: Nominal interest rates are at 0%. This along with high unemployment are the defining features of the current Great Recession.
0% nominal interest rates (real interest rates are negative when you take into account inflation) are important for a couple of reasons. First, they indicate we are in a liquidity trap (http://goo.gl/GHDqX
): aggregate demand is down and people are hoarding cash to pay off debts instead of spending it. Second, because we are against the zero lower bound (ZLB http://goo.gl/fG797W
), the government can't stimulate the economy by lowering interest rates further. You can't have negative interest rates (i.e. the bank pays
you interest for borrowing
money). Third, inflation is simply not an issue at all. Because we are in a liquidity trap, any injections into the monetary supply get hoarded. Any rise in inflation would cause a rise in interest rates. This simply has not happened at all.
What is incredible is that libertarians like R[a/o]n[d] Paul and Tea Party Intellectuals like Paul Ryan simply refuse to acknowledge or understand this graph. How can you talk about "debasing the currency" or uncontrolled inflation when interest rates are stuck at 0%? Pure and simple ignorance coupled to pandering to billionaires who want their tax rates lowered.
If they gave a Nobel Prize for Economics Writing, then Professor Krugman would deserve a second Nobel Prize. He was one of the first (if not the first) to correctly diagnose the situation (liquidity trap and ZLB) and offer the correct remedy (stimulus http://goo.gl/5UQpk5