Monthly Archives: April 2013

“There are many signs that the Cypriot government’s desperate attempts to keep its system afloat – capricious bailout dealing, an extended bank holiday, and widespread capital controls – have deeply shaken confidence in the entire Western financial system.

Just a few days ago, the Financial Times covered the post-Cyprus spike of interest and inflows into my 100% reserve Euro Pacific Bank. (EP Bank is based in the Caribbean and due to financial regulations, not available to US citizens.)

We’re also seeing the rise of the ‘unbanking’ movement, whether through barter associations, Bitcoin, or precious metals.”

“For years we have been warned by Keynesian economists to fear the so-called ‘liquidity trap,’ an economic cul-de-sac that can suck down an economy like a tar pit swallowing a mastodon. They argue that economies grow because banks lend and consumers spend. But a ‘liquidity trap’ convinces consumers not to consume and businesses not to borrow. The resulting combination of slack demand and falling prices creates a pernicious cycle that cannot be overcome by the ordinary forces that create growth, like savings or investment. They argue that a liquidity trap can even resist the extraordinary force of monetary stimulus by rendering cash injections into useless ‘string pushing.’ Some of these economists suggest that its power can only be countered by massive fiscal stimulus (in the form of a world war or other fortunately timed event) that leads to otherwise unattainable levels of government spending.

Putting aside the dubious proposition that the human desire to strive and succeed can be permanently short-circuited by an economic contraction, and that modest price declines can make penny pinchers of us all, the Keynesians have overlooked a much more dangerous and demonstrable pitfall of their own creation: something that I call ‘The Stimulus Trap.’ This condition occurs when an economy becomes addicted to the monetary stimulus provided by a central bank, and as a result fails to restructure itself in a manner that will allow for robust, and sustainable, growth. The trap redirects capital into non-productive sectors and starves those areas of the economy that could lead an economic rebirth. The condition is characterized by anemic growth (masked by the delivery of perpetual stimulus) and deteriorating underlying economic fundamentals.”