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Economics
Liquidity Trap
A situation where interest rates are near zero but people and businesses still refuse to spend or invest — they just hold cash.
In a liquidity trap monetary policy stops working because lowering rates further doesn’t encourage borrowing. Governments then have to use massive fiscal stimulus instead. It’s very hard to escape once it starts.
It's like offering free money to people who are too scared to take it because they think the world is ending.
Real world: Japan has been in a liquidity trap for decades. Even with near-zero or negative interest rates, people and companies prefer to save rather than spend or invest, keeping growth low.
💡 A liquidity trap is the nightmare scenario where printing money and cutting rates no longer help the economy.