A Glut of Liquidity?

Friday, February 09, 2007 | 09:10 AM

Liquidity We've heard the word "Liquidity" bantered about incessantly over the past few years. The Economist looks into exactly what this means (A fluid concept). 

Just about everyone agrees that there's a lot of liquidity about—whatever it is

LIQUIDITY is everywhere. Depending on what you read, you may learn that the world's financial markets are awash with it, that there is a glut of it or even that there is a wall of it. But what exactly is it? Again depending on what you read, you may be told that “it is one of the most mentioned, but least understood, concepts in the financial market debate today” or that “there is rarely much clarity about what ‘buoyant liquidity’ actually means...”

Globally, money looks plentiful. In the euro area and Britain, broad money growth is running well ahead of nominal GDP. Or take the global supply of dollars, fuelled by America's large current-account deficit, the accumulation of reserves by foreign governments and their recycling back to the United States. A common measure of this, says Mr Barnes, is the American monetary base plus United States securities held by the Fed for foreign countries. Its annual growth rate peaked in 2004, at more than 20%. But because those securities have continued to pile up, this measure of liquidity is still growing at a rate of around 10% (see right-hand chart, above). Another gauge, combining all foreign-exchange reserves with America's monetary base, has risen at an average rate of perhaps 18% in the past four years. And this omits the contribution to global liquidity of the Bank of Japan, whose low interest rates are fuelling the “carry trade”.

All this is reflected in financial markets for everything from developing-country debt to corporate junk, commodities and art. Global willingness to save and lend is running ahead of investment. Ben Bernanke, chairman of the Fed, has spoken of a savings glut. Then again, the real puzzle could be companies' “investment restraint”, according to Raghuram Rajan, of the University of Chicago's business school (and until recently chief economist at the IMF). Maybe, he suggests, investment is becoming more centred on people and less on physical capital; maybe physical investment is being switched to emerging economies; maybe uncertainty still holds back investment abroad—as it does not, say, investment in property at home. Whatever the cause, a shortage of investment in fixed assets implies a shortage of debt collateralised on them. The financing glut has thus spilled over into markets for existing assets."

Th entire column is worth a read . . .


A fluid concept
The Economist, Feb 8th 2007

Friday, February 09, 2007 | 09:10 AM | Permalink | Comments (19) | TrackBack (0)
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Thanks, BR. Another commentary said this:

In Australia, the M3 money supply is 13% higher from a year ago, British M4 is 13% higher, the Euro Zone's M3 is 9.3% higher, a 16-year high, Korea's M3 is 10.3% higher, China's M2 is 16.9% higher, a 16-year high, and Russia's M2 is 45% higher.

And Mish has an article on how printing money endlessly is a win/win for everyone, until it isn't.

Let’s say that I invent a printing press that allows me to produce counterfeit money (let’s say US dollars) by the trillions – these dollars look EXACTLY like real ones, so no one can tell the difference, not even the government or the bank. So I start off the first year by counterfeiting $3 trillion dollars...

Posted by: Michael C. | Feb 9, 2007 9:44:47 AM

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