Liquidity Trap?

[Krugman - This Age of Hicks].

Mr. Krugman knows a lot more about economics than I do but could there be another reason we're not seeing inflation from an increase in the money supply? I think it could depend on who captures the increase in the money supply, the masses or the wealthy.

If the increase in money supply is going into the hands of the masses here in the US, they would spend it buying cars, houses, flat screen TVs, etc, driving up the general price level up. Bang! Inflation!

But,.. if the increase in the money supply goes to a relatively few rich, whether individuals or firms, its effect on the price level in US would depend on how they choose to invest it.

If they invest in building factories, electric cars, power-plants and consumer-goods in the US then it should eventually spur economic growth which could lead to inflation, though it probably wouldn't happen right away since we have a lot of excess capacity at this time.

If they invest it in speculating on, and driving up the prices of commodities we'd have some inflation.

If they invest it in building factories, electric cars, power-plants and consumer-goods outside of the US it could spur economic growth and inflation in the rest of the world but not in the US, at least for a while.

If the rich basically just sit on it, put it away in government bonds, gold, diamonds, islands, paintings, dot com stocks, or housing based securities, it would lead to increases in asset prices possibly creating bubbles.

These last two are what appear to be happening now. The developing world is seeing some inflation. US corporations are setting on large piles of cash. Stock prices have reflated since the bust. Gold is sky-high. Bond prices are high, driving interest rates down (from either the FED buying or investors who still have a bad taste from the housing bust or are scared of the European PIGS) and there's no inflation in sight.

Liquidity trap? maybe? but it looks to me like the wealthy aren't using their money wisely for the good of the economy. That, in my opinion, is a good reason for a tax increase on the rich.

tnb