The remarkable economics of the liquidity trap with Bas JacobsThe remarkable economics of the liquidity trap with Bas Jacobs

The aftermath of the Great Recession of 2008 can still be felt in the Netherlands. Architecture and the construction industry have still not fully recovered from the crisis. Economist Bas Jacobs talked about the roots of this extraordinary state of affairs: like most Western economies, the Dutch economy has been caught in a liquidity trap for some years. Architect and partner of OMA Reinier de Graaf took part in this evening as a respondent.

A liquidity trap is an extraordinary phenomenon in macroeconomics that arises when interest rates reach or approach zero, as has been the case for some years in most Western countries. When an economy falls into in a liquidity trap many of the laws of economics are turned on their head. For example it is possible that, following a deep recession, the economy does not recover by itself but becomes stranded in long-term and persistent stagnation; the American economist Larry Summers has described a situation of endless or so-called 'secular' stagnation.

More flexible markets or structural economic reforms can even lead to economic shrinkage instead of growth. An increase in the national debt through a greater budget deficit does not lead to rising interest rates on the national debt. Furthermore, the central bank can print massive amounts of money without causing inflation and can even become impotent in monetary terms.

In order better to understand the extraordinary economics of the liquidity trap, in this Reading Room Jacobs introduced a text by economist John Maynard Keynes (1883-1946) who first described the phenomenon in his famous book _The General Theory of Employment, Interest and Money _(1936).

Bas Jacobs is Professor of Economics and Public Finance at the Erasmus University Rotterdam. His research interests include public finance, optimal taxation, the economy of the welfare state and macroeconomics. Jacobs is also academic partner of the Netherlands Bureau for Economic Policy Analysis, president of the Dutch Royal Society of Economists and a member of the advisory committee of the Norwegian Center for Taxation. Jacobs regularly writes opinion pieces and has his own blog.

The Reading Room is a series of evening exploring contemporary forms of reading. It is a place to decipher and interpret the world with its countless languages, signs and systems, including ideas and things that are hard to identify, let alone read. Guided by a researcher, designer or scholar, a small audience will reflect upon a text, a design, an object or a series of images. Reading Room is a space for intimate, provocative conversations.