Macroeconomics in one paragraph

Andy Harless:

There can be excess demand for safe assets, because one of those assets is money, and the market for money, traded against goods and services, is not continuously clearing. (In fact, it’s usually not clearing at all: it almost always easier to purchase goods and services with money than to sell goods and services for money.) Ordinarily, when the risk-free rate is positive, money is, on the margin, more-or-less dominated by other safe assets, and it is only used for transaction purposes, and under those circumstances you can say that “supply and demand are equated by price” because the relevant price is the interest rate, and money only represents a standard of value and a convenience for transactions. But when the risk-free rate is zero — which happens when the demand for safe assets gets sufficiently high — money becomes just like other safe assets. Money is no longer just a standard of value and a convenience for transactions; it is an asset like any other. And in that case, there is an excess demand for safe assets. The only way to cure that excess demand is for the general price level (i.e. the price of goods and services traded against safe assets) to fall, but prices (and, probably more importantly, wages) are sticky. So the price level doesn’t fall, and you get a depression instead.