Liquidity Trap

The old water-bucket-over-the-door prank. Classic liquidity trap. [cue: Three Stooges clip]

In any investment, the choice basically comes down to holding onto a pile of cash, or handing that cash to someone else for the promise of a bigger pile later. An investor has to get something in return for letting the money out of their grasp. That something is known as a return.

However, if the economic situation gets bad enough, the return on an investment can be so small that investors just say “screw this” and squirrel their cash under their mattresses.

That situation describes a liquidity trap. Basically, interest rates are so low that investors have no incentive to let go of their money. The concept, laid out by legendary economist John Maynard Keynes, states that "liquidity preference" gets to the point that almost everybody would rather keep their money than invest it.