Liquidity preference trap or Keynesian trap: when the interest rate is extremely low, people will think that this interest rate is unlikely to fall again, or when the price of the securities market is unlikely to rise but will only fall, people are willing to hold it in their hands, no matter how much money there is. This situation is called "liquidity preference trap" or "Keynesian trap".

The characteristics of economy falling into liquidity trap;

From a macro perspective, a country's economy is caught in a liquidity trap, which has three main characteristics:

(1) The whole macro-economy has fallen into a serious depression, the demand is seriously insufficient, the spontaneous investment and consumption of individual residents have been greatly reduced, and the unemployment situation is serious. It seems that it is not enough to rely solely on market regulation.

(2) When the interest rate reaches the lowest level, the nominal interest rate drops obviously, even to zero interest rate or negative interest rate. At the extremely low interest rate level, investors have poor expectations for the economic prospects and consumers are pessimistic about the future, which makes the leverage of interest rates to stimulate investment and consumption ineffective. The reduction of nominal interest rate by monetary policy can no longer start the economic recovery, and we can only rely on fiscal policy to get rid of the economic depression by expanding government spending and reducing taxes.

? (3) The elasticity of money demand and interest rate tends to infinity.

Modern explanation:

Liquidity stagnation mainly includes: (1) cash hoarding by residents and enterprises; (2) The balance of the bank.

The difference between bank deposits and losses can be turned into national debt and deposits in the central bank. Part of the national debt can be used in the real economy sector through government expenditure, while the part deposited in the central bank can only be deposited in the banking system. As for the cash hoarding of enterprises and residents, it is obviously the stagnation of liquidity.

There is also a form of cellar storage, that is, when the difference between bank deposits is too large, in order to reduce the burden of deposit interest, banks will lower the interest rates of residents and enterprises on bank deposits, further cancel the deposit interest, and even charge for deposits. In the case that banks directly benefit from deposits rather than loans, it is equivalent to depositors hoarding cash through banks, similar to renting bank safes. At this time, the bank has become a "black hole" to absorb funds. The real liquidity trap has emerged. Reference: MBA think tank