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We're at the zero lower bound.

See Paradox of Thrift

Two caveats are added to this criticism. Firstly, if savings are held as cash, rather than being loaned out (directly by savers, or indirectly, as via bank deposits), then loanable funds do not increase, and thus a recession may be caused - but this is due to holding cash, not to saving per se. Secondly, banks themselves may hold cash, rather than loaning it out, which results in the growth of excess reserves - funds on deposit but not loaned out. This is argued to occur in liquidity trap situations, when interest rates are at a zero lower bound (or near it) and savings still exceed investment demand. Within Keynesian economics, the desire to hold currency rather than loan it out is discussed under liquidity preference.
This is a better explanation than the one at liquidity trap. Basically, what's going on is that extreme liquidity preference would require negative interest rates in order for "savings not to exceed investment". As the zero lower bound makes that impossible (Ahem... See Negative interest rates: when are they coming to a central bank near you? by WIllem Buiter on May 7, 2009) then you find yourself in a liquidity trap where injections of money into the economy fail to stimulate lending.

The problem with the Wikipedia articles about economics, unlike the ones about, say, physics, is that the causal chains are not very clear in the mind of the article writers (possibly because the theory itself is broken).

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Carrie (migeru at eurotrib dot com) on Mon Mar 19th, 2012 at 05:08:24 AM EST
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