Editing Liquidity trap (section)

==Origin and definition of the term==
[[John Maynard Keynes]], in his 1936 [[General Theory of Employment, Interest and Money|''General Theory'']],<ref name=keynes1/> wrote the following: <blockquote>There is the possibility...that, after the rate of interest has fallen to a certain level, liquidity-preference may become virtually absolute in the sense that almost everyone prefers cash to holding a debt which yields so low a rate of interest. In this event the monetary authority would have lost effective control over the rate of interest. But whilst this limiting case might become practically important in future, I know of no example of it hitherto.</blockquote>

This concept of [[monetary policy]]'s potential impotence<ref>{{cite book |author-link=Robert J. Gordon |first=Robert J. |last=Gordon |title=Macroeconomics |edition=Eleventh |year=2009 |location=Boston |publisher=Pearson Addison Wesley |isbn=9780321552075}}</ref> was further worked out in the works of British economist [[John Hicks]],<ref name=suggested>[[John Hicks|Hicks, John R.]] (1937) "[http://public.econ.duke.edu/~kdh9/Courses/Graduate%20Macro%20History/Readings-1/Hicks_Mr.%20Keynes%20and%20the%20Classics.pdf Mr Keynes and the Classics: A Suggested Interpretation]", ''[[Econometrica]]'', Vol. 5, No. 2, April 1937, pp. 147-159</ref> who published the [[IS–LM model]] representing Keynes's system.<ref group=note>The model depicts and tracks the intersection of the "[[investment (macroeconomics)|investment]]–[[saving]]" (IS) curve with the "[[liquidity preference]]–[[money supply]]" (LM) curve. At the intersection, according to the mainstream, Neo-Keynesian analysis, simultaneous equilibrium occurs in both interest and financial-assets markets</ref> [[Nobel Memorial Prize in Economic Sciences|Nobel laureate]] [[Paul Krugman]], in his work on monetary policy, follows the formulations of Hicks:<ref group=note>Hicks, subsequently and a few years before his passing, repudiated the IS/LM model, describing it as  an "impoverished" representation of Keynesian economics. See Hicks (1981)</ref> <blockquote>A liquidity trap may be defined as a situation in which conventional monetary policies have become impotent, because nominal interest rates are at or near zero: injecting [[monetary base]] into the economy has no effect, because [monetary] base and [[Bond (finance)|bond]]s are viewed by the [[private sector]] as perfect substitutes.<ref name=back/></blockquote> In a liquidity trap, people are indifferent between bonds and cash because the rates of interest both [[financial instruments]] provide to their holder is practically equal: The interest on cash is zero and the interest on bonds is near-zero. Hence, the central bank cannot affect the interest rate any more (through augmenting the [[monetary base]]) and has lost control over it.<ref>{{cite news|url=https://krugman.blogs.nytimes.com/2010/07/14/nobody-understands-the-liquidity-trap-wonkish/|title=Nobody Understands The Liquidity Trap | work=[[The New York Times]] | first=Paul R.|last=Krugman|author-link=Paul Krugman|date=14 July 2010}}</ref>

In Keynes' description of a liquidity trap, people simply do not want to hold bonds and prefer other, more-liquid forms of money instead. Because of this preference, after converting bonds into cash,<ref group=note>Whereby "cash" includes both currency and bank accounts, aka [[Money supply#United States|M1]]</ref>  this causes an incidental but significant decrease to the bonds' prices and a subsequent increase to their yields. However, people prefer cash no matter how high these yields are or how high the central bank sets the bond's rates (yields).<ref name=pilk2014>[[Philip Pilkington|Pilkington, Philip]] (2014) "[https://www.nakedcapitalism.com/2014/07/philip-pilkington-paul-krugman-understand-liquidity-trap.html Paul Krugman Does Not Understand the Liquidity Trap]", ''Naked Capitalism''website, 23 July 2014</ref>

[[Post-Keynesian economist]] [[Hyman Minsky]] posited<ref name=stab>[[Hyman Minsky|Minsky, Hyman]] (1986 [2008]) ''[https://altexploit.files.wordpress.com/2017/08/hyman-minsky-stabilizing-an-unstable-economy-2008.pdf Stabilizing an Unstable Economy]'', 1st edition: Yale University Press, 1986; reprint: McGraw Hill, 2008, {{ISBN|978-0-07-159299-4}}</ref> that "after a debt [[deflation]] that induces a deep [[Depression (economics)|depression]], an increase in the [[money supply]] with a fixed head count of other [[financial asset|[financial] assets]] may not lead to a rise in the price of other assets." This naturally causes interest rates on assets that are not considered "almost perfectly liquid" to rise. In which case, as Minsky had stated elsewhere,<ref name=minsky>[[Hyman Minsky|Minsky, Hyman]] (1975 [2008]) ''John Maynard Keynes'', McGraw-Hill Professional, New York, 2008, {{ISBN|978-0-07-159301-4}}</ref><blockquote>The view that the liquidity-preference function is a demand-for-money relation permits the introduction of the idea that in appropriate circumstances the demand for money may be infinitely [[Elasticity (economics)|elastic]] with respect to variations in the interest rate… The liquidity trap presumably dominates in the immediate aftermath of a [[recession]] or [[financial crisis]].</blockquote>