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liquidity trap

  1. BH!
    2,521 Posts.
    From: http://market-ticker.denninger.net/

    How Do You Spell "Liquidity Trap"?

    Ahem.
    Release Date: November 12, 2008
    For release at 10:00 a.m. EST

    On November 10, 2008, the Federal Reserve conducted an auction of $150 billion in 17-day credit through its Term Auction Facility. This was a forward auction designed to provide term funding over year-end--the awarded loans will settle on December 22, 2008. Following are the results of the auction:

    Stop-out rate: 0.528 percent

    Total propositions submitted: $12.629 billion
    Total propositions accepted: $12.629 billion
    Bid/cover ratio: 0.08

    Number of bidders: 16

    The awarded loans will mature on January 8, 2009. The stop-out rate shown above will apply to all awarded loans.

    Institutions that submitted winning bids will be contacted by their respective Reserve Banks by 11:30 a.m. EST on November 12, 2008. Participants have until 12:30 p.m. EST on November 12, 2008, to inform their local Reserve Bank of any error.

    http://www.federalreserve.gov/newsevents/press/monetary/20081112a.htm
    Note the bid-to-cover.

    No further explanation necessary.

    Well, ok, maybe there is one necessary.

    Less than 10% of the available credit was drawn down.

    Why?

    Because when cash becomes competitive with short-term credit in terms of return (that is, cash yields zero, short-term credit costs and yields zero) then there is no reason to take risk; you're better off with the cash.

    Ben pointed his liquidity gun at the market, pulled the trigger, and got......

    CLICK.

    Game's over Ben; you no longer have "liquidity" to shower on the market; there's no take-up.

    Now we're left with either (1) doing the right thing or (2) Weimar Germany-style printing.
    My comment: what do you deflationistas think will happen now?

 
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