Is this grandma’s liquidity trap?: I say no and David Andolfatto agrees: 'In grandma’s liquidity trap, the real interest rate is too high because of the zero lower bound. Steve [Williamson] argues that in our current liquidity trap, the real interest rate is too low, reflecting the huge world appetite for relatively safe assets like U.S. treasuries. If this latter view is correct, then “corrective” measures like expanding G or increasing the inflation target are not addressing the fundamental economic problem: low real interest rates as the byproduct of real economic/political/financial factors.' I remain surprised at how many policy discussions fail to draw this basic distinction."
The large demand for relatively safe assets like U.S. Treasury securities means that the interest rate consistent with full employment--the "natural" interest rate, in Wicksell's terms--is lower than normal, and the natural rate is in fact less than zero. Since the market interest rate is bounded below by the zero lower bound, the market rate is too high.
Once you distinguish--as Knut Wicksell does: this is cutting-edge economics as of 1890 after all--all of the following things are true:
- The current natural interest rate is much lower than it is normally--the natural rate is too low--and that is a problem.
- The current market interest rate is higher than the natural rate--the market rate is too high--and that is a problem.
- Increasing G--printing more Treasury bonds, selling them, and buying goods and services--(a) increases the supply of safe assets, (b) lowers the proper value of safe assets via supply and demand, thus (c ) raises the "natural" rate of interest, and (d) could fix our problems if the policy raises the natural rate of interest so much that it is no longer lower than the market rate of interest.
In general, when the market rate of interest is higher than the natural rate of interest--when ex ante saving at full employment is greater than ex ante investment--you can fix the problem and restore full employment by (i) reducing the market rate of interest via expansionary monetary policy, (ii) raising the natural rate of interest via expansionary fiscal policy, (iii) raising the natural rate of interest via summoning the Confidence Fairy, or (iv) raising the natural rate of interest via summoning the Inflation Expectations Imp. At the ZLB, (i) is out of the question, so you must have resort to one or more of (ii), (iii), and (iv)...
This is not rocket science. This is basic Geldzins und Guterpreis...