December 18, 2008
A liquidity trap occurs when people give up on long term investments due to excessively low returns (interest rates) and maintain hoards of cash in checking accounts or paper instead. I keep a sizeable amount of cash for deflation protection, just in case, and the interest on my savings account is so pathetic I began withdrawing my savings on a regular basis a few months ago. I doubt I’ll take it all out, and it’s spread across several institutions, but I want enough to live for 3-6 months without a bank. The interest return just isn’t enough to compensate me for the risk of failure or bank holiday. I would rather keep the cash in a safety deposit box. Cash that sits outside the system is cash that will not be leant (times 10, look up fractional reserve banking) and cash that will not circulate. This is bad for the economy, but good for people with cash. Holding gold and silver is similar, but it also provides a bonus inflation protection, just in case. I have found that I’m always about 6 to 12 months ahead of everybody else, so I will play Gerald Celente and predict this will be a growing trend in 2009.
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