Liquidity traps, like what was experienced during theUS2009 crisis originates from the presence of huge amounts of debts owing from companies and individuals. In time so of recessions, most government will try to encourage individuals to borrow more and consume.
However, if they are hugely indebted, most of their earning will go into clearing the rising debts, thereby failing to address the stimulation of supply and demand. With producers and consumers utilizing their cash flows to repay debts, and further drops in interest rates are bound to result in increased borrowing with the money going into the clearance of debts.
Improvement in the economic growth in regions concentrated with oil consuming nations is normally a factor that influences the demand for oil and oil based products. Pirog (2005) observed that the economic boom inChinaand the rest of the world contributed significantly to the increase in the oil prices since the turn of the century. The growth rate of the Chinese economy grew at 7.4% in 2003 with projections indicating a 6.8% growth in 2004. In theUS, forecasts indicated a growth of 4.6% in 2004 up from 3.1% in 2003. In both countries, economic growth has been linked to enhanced consumption of oil, with the increase being duplicated across industrial and individual consumers.
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