He observes that (a) interest rates can and do go negative, (b) storing physical currency turns out to be startlingly expensive and therefore (c) people are gonna just let the cash stack up in their checking or whatever account. My words, but that's what I understand him to be saying.
"Once interest rates on safe assets are zero or lower, however, liquidity has no opportunity cost ... [which means] ... that the marginal dollar of money holdings is being held solely as a store of value — the medium of exchange utility is irrelevant."
Back in the Bad Old Days of inflation and being able to put your money into a money market fund and earn interest (or a CD or whatever), people would limit the amount of money sitting in non-interest bearing accounts, and transfer it over to an interest bearing account so as to make some money off their money. From a policy perspective, this is a good thing, because the money sitting in checking and most savings accounts has severe limitations on how it can be invested by the bank, so it sits idle. Once it is in a CD or a money fund or stocks or bonds or whatever, there are a lot fewer limits -- that money can go out in the world and circulate, hopefully usefully. Now, there's just little point in taking the money out of the checking or whatever account, because what you have to do to make money off of it is so risky for most people that it is intolerable.
"And I am pinching myself at the realization that this seemingly whimsical and arcane discussion is turning out to have real policy significance."
I don't quite understand why he thought this was whimsical or arcane, but hey, I bought gold in 1997-8 time frame out of some concerns about the possible future, so I really get storage costs and medium of exchange and wtfery. Clearly, by being a Normal Person (for these purposes, that just means less crazy than me), he had not yet worked through the implications.
Article about super-contango, and the current theory that oil prices will do something Really Interesting when we run out of places to store the oil (that is, one of the things supporting oil prices at the moment is people going, hey, oil is cheap now but futures are more expensive so if I buy it and store it, I'll make money -- but of course, _buying_ it to store it supports the price. Hrm.).
I put this on the Krugman liquidity trip post, because, you know, currency is liquid in a metaphorical sense, but oil is liquid in a not so metaphorical sense and being in contango with storage filling up suggests that there is a really good joke here about liquidity traps and oil, I'm just not actually clever enough to make it. Or at least, not clever enough to make it without then having to explain the thing after, crushing every last bit of humor present in it.
So, you know me: just start with the explanation.