{"id":6480,"date":"2011-07-05T19:18:08","date_gmt":"2011-07-06T00:18:08","guid":{"rendered":"http:\/\/ssgreenberg.name\/PoliticsBlog\/?p=6480"},"modified":"2011-07-05T21:53:04","modified_gmt":"2011-07-06T02:53:04","slug":"delong-sorrow-and-pity-of-another-liquidity-trap","status":"publish","type":"post","link":"https:\/\/ssgreenberg.name\/PoliticsBlog\/2011\/07\/05\/delong-sorrow-and-pity-of-another-liquidity-trap\/","title":{"rendered":"Supply And Demand Mysteries Easily Solved"},"content":{"rendered":"

Executive Summary<\/h3>\n

Rising prices in the face of rising supply is not a violation of the law of supply and demand. If the demand curve shifts upward faster than the supply curve shifts upward, then prices will rise even as supply rises. This is what the law of supply and demand tells us. <\/p>\n

Now For The Rest Of The Story<\/h3>\n

There is a long and circuitous path to the article, DeLong: Sorrow and Pity of Another Liquidity Trap<\/em>. <\/p>\n

On Brad Delong’s web site he posts the article Paul “Cassandra” Krugman Croaks Again!<\/strong><\/a> in which he praises Krugman’s article. <\/p>\n

In turn Krugman’s article Liquidity Trapped<\/strong><\/a> praises a previous DeLong article. <\/p>\n

Finally we get to DeLong’s article in Bloomberg<\/em>, DeLong: Sorrow and Pity of Another Liquidity Trap<\/strong><\/a>. In this article DeLong sets up the premise to justify explaining a seemingly odd deviation from economic law. <\/p>\n

\n

There is only one real law of economics: the law of supply and demand. If the quantity supplied goes up, the price goes down.<\/p>\n

…<\/p>\n

Thus by late 2007, the 10-year U.S. Treasury rate was exactly where it had been when the Clinton surpluses ended at the close of 2001. \u201cHow long could this go on?\u201d we wondered. Eventually the market\u2019s appetite for Treasury bonds at high prices and low interest rates had to reach its limit, right? Supply and demand isn\u2019t just a good idea — it\u2019s the law.<\/p>\n<\/blockquote>\n

Now, maybe the setup is just a strawman for the purposes of easily knocking it down. Otherwise, I am surprised that two economists who have my deep respect can fluff such basic stuff as the law of supply and demand.<\/p>\n

I have plotted some hypothetical and simple examples of some supply and demand curves to show what the law of supply and demand is really about and how the experts proceeded to miss the details. <\/p>\n

\n \"Supply
Hypothetical, Simple Supply and Demand Curves\n<\/div>\n<\/p>\n

DeLong’s premise is that If the quantity supplied goes up, the price goes down.<\/q> We see that in the first scenario in the following table.<\/p>\n