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The Keynesian Liquidity Trap Fable

The Keynesian Liquidity Trap Fable
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Commentary

Many economists wrongly assume economic activity is accurately presented as a circular flow of money. Spending by one individual becomes part of the earnings of another individual; spending by another individual becomes part of the first individual’s earnings. Assuming this, recessions are because individuals—for whatever psychological reasons—have decided to cut down on their expenditure and raise their savings.

Frank Shostak
Frank Shostak
Author
Frank Shostak, Ph.D., is an associated scholar of the Mises Institute. His consulting firm, Applied Austrian School Economics, provides in-depth assessments and reports of financial markets and global economies. He has taught at the University of Pretoria and the Graduate Business School at Witwatersrand University.