What does “excess liquidity sloshing around the financial system” mean?

It’s a nice NLP-generated text, so now, what is scientific correct about it, given that ChatGPT is not configured for reasonings or for citing sources?

There is a reason why HN guidelines forbids robot-generated answers.

Re: What does “excess liquidity sloshing around the financial system” mean?

#6

Post by bell-cot » Sun, Feb 19, 2023, 10:38 AM UTC

A good analogy, for those more familiar with mechanics / engineering / physics - https://en.wikipedia.org/wiki/Free_surface_effect

Re: What does “excess liquidity sloshing around the financial system” mean?

#7

Post by bjornsing » Sun, Feb 19, 2023, 10:38 AM UTC

I was hoping that the OP would address a related idea that I find rather weird: it’s sometimes said that “this excess liquidity has to go somewhere” and that “the excess liquidity has gone into [housing/stocks/commodities/other asset class]”.

But I don’t get this: It might seem plausible that if stock prices go up they absorb liquidity from the system. But (ignoring new stock issues / newly build houses) in every transaction there’s both a buyer and a seller. Sure, the buyer parts ways with cash when they buy a share, but that cash goes to the seller. So there should be just as much liquidity as before, just in different hands.

If anything a rising stock or housing market should just put more excess liquidity into the system because it’s possible to borrow against those assets.

What am I getting wrong? Or is this just an often repeated falsehood?

Re: What does “excess liquidity sloshing around the financial system” mean?

#8

Post by bell-cot » Sun, Feb 19, 2023, 10:40 AM UTC

hmmmcurious1 wrote: post #4

It means wages and employment are too high which causes inflation. Nevermind the printed trillions, the common employee is the true enemy here.

While good as a cynical or satirical answer, our younger readers might want to learn the correct answer first...

Re: What does “excess liquidity sloshing around the financial system” mean?

#9

Post by mo_42 » Sun, Feb 19, 2023, 10:41 AM UTC

I don’t fully understand the point the author is trying to make. I appreciate that there are boom and bust cycles for some sorts of assetes

I would have liked to author to talk more about wording. What is actually liquidity? Today’s money appears in many gradual forms of moneyness.

Also is there anything like "excessive money"? Where does it come from? Central banks don’t just print money. They trade it for usually governmental bonds.

If other than central banks have excessive liquidity they may trade it for other assets. This means they need to find a counter party that has the reverse situation. So overall the economy cannot have excessive money.

Re: What does “excess liquidity sloshing around the financial system” mean?

#10

Post by marketerinland » Sun, Feb 19, 2023, 10:43 AM UTC

bjornsing wrote: post #7

I was hoping that the OP would address a related idea that I find rather weird: it’s sometimes said that “this excess liquidity has to go somewhere” and that “the excess liquidity has gone into [housing/stocks/commodities/other asset class]”. But I don’t get this: It might seem plausible that if stock prices go up they absorb liquidity from the system. But (ignoring new stock issues / newly build houses) in every tra…

Liquidity means capacity to buy, essentially. Not cash per se.

If you reduce the required deposit on a house from 20% to 10%, that increases the liquidity in the market. Suddenly more people ‘have’ the money to buy that $500k property and the market will typically rise until it’s absorbed that added financial capacity

This is why low interest rates had such a dramatic impact.

Monthly repayments are much lower on a low interest loan, so the average person could ‘afford’ to borrow way more.

Note; this is just Real Estate. Lots of other borrowing also occurred.

But when Real Estate markets suddenly go up by 20%, now it’s the owners of these houses that are worth a whole lot more. And they often decide to cash in, in some way (selling their J