More on the Liquidity Trap (PIMCO's Take)

Paul McCulley opined on pre-collapse work done by Krugman and Bernanke (hat tip to ZeroHedge). One thing that continues to irk me on the subject of the liquidity trap is the the failure to understand that money can exit a market and never return. Inflation is a closed system, bound by internal, national parameters. Same with interest rates on government bonds. But, equity ownership and real business investment is global.

Simply put, the central bank's effort to reflate a battered economy through monetary policy will fail -- no matter what! -- if there is no confidence in the business environment. The sideline cash can go to China, India, or South Korea. Peru or Botswana. It can fund Swedish bailouts of the Baltic banks. It can buy farmland in SE Asia. It can dump itself in oil futures. It can wait for US companies to relocate to Switzerland, then invest in their equity.

In the US, this means one thing only. Jobs. If the jobs do not return soon, the taxation war will scare off investors. If jobs do not return soon, the liquidity trap will morph into full scale deflation. If jobs do not return soon, the American way of life will take a permanent step back. We will work harder, make less, and have less to show for it socially.

I really think there is only one solution to this mess. Extreme tax cuts. We're already running a deficit, why not let the people earning money stow a little away, or spend some, or pay down their debt? Let the next President raise taxes back up. Confidence returns immediately because businesses will have instant increased demand. Increased demand will mean business expansion, which means jobs.