The Fed Needs To Create An Expectation of Inflation To Stimulate The Economy

This article explains what happens when we are in a liquidity trap. In a sense, a liquidity trap is like being in a black hole in which the laws of physics no longer apply. Ordinarily, central bankers do what they can to convince the world that they will provide price stability. When we are in black hole, like we are now in a liquidity trap, central bankers must show that they will be irresponsible and use monetary policy to create an expectation of inflation. If everyone believes that prices will rise they will begin spending to avoid purchases at higher prices. That will help to stimulate economic growth. Unfortunately, the Fed has such a strong reputation for responsibility that its expansion of the money supply has not created an expectation of inflation.