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

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

#111

Post by fleischhauf »

readthenotes1 wrote: post #97
s1artibartfast wrote: post #91

Earlier quoted context omitted.

I don't think either take is correct but the former is closer to the truth. It is all risk reward trade-off. If bonds have the same yield as other Investments with no risk, of course Savers and investors would select them over riskier strategies. This has less to do with discounting painful lessons and more to do with the spread on the return rate.

kids eat tide. Call me crazy, but I don't think assuming people make rational decisions is a good starting point for economics

are there any alternatives being explored actually?

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

#112

Post by Supermancho »

Geee wrote: post #41
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…

Excess liquidity gets eventually absorbed in the form of broad inflation. I.e. the money loses the excess value.

Eventually, meaning decades, as long as a near equilibrium is eventually reached, wages will rise and wealth ceases to be self-reinforcing at a grand level (back to a few percent). There hasn't been equilibrium for at least a decade. The long tail (the vast majority of people) will continue to suffer for decades and wealth will continue to be disgustingly easy to grow (with a few hundred thousand) in relation to the price increases most people encounter day-to-day. Ofc, maybe I'm just biased.

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

#113

Post by shostack »

madaxe_again wrote: post #96
shostack wrote: post #71

Earlier quoted context omitted.

What options for those looking to place their chips on AI in a more specific sense than Google or Microsoft?

In a gold rush, the guy selling shovels makes the most reliable income. These models run on hardware. Pretty specific hardware.

Got it. So Nvidia related companies.

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

#114

Post by spicyusername »

s1artibartfast wrote: post #83
spicyusername wrote: post #82

Earlier quoted context omitted.

Because, due to inflation, it evaporates sitting still. So anyone with a lot of money laying around knows they need to put it to work, so that it evaporates more slowly than it grows (due to investment returns). And the best places to put your excess wealth are often constantly changing, so the money moves around following what everyone perceives to be the best places to put it to get the highest return. This is actu…

thanks for trying to help, but I feed like you just described normal investment. Does Excess liquidity "move" any different than normal liquidity? My understanding is that the difference is that excess liquidity is excessive because it it is greater than available positive growth investments to lock it up. Maybe you are right and the movement from sector to sector is simply herd mentality and trend following, but I w…

When there's less excess it doesn't "slosh", which is to say investments cause less damage because supply and demand reach equilibrium without as much disruption.

The metaphor is supposed to conjure an image of liquid smashing into something, as the money does when there's too much of it and it all tries to go to the same place.

I think the focus should be on the volume not the motion.

Investment moving from place to place is natural. Too much is disruptive.

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

#115

Post by Nemi »

heisenbit wrote: post #75

I strongly believe there is not one but there are two monetary systems today. One is for assets and the other for daily life consumption. They are only weakly coupled less than maybe in the past. This allowed raging inflation in the asset system for decades while daily life saw deflation or low inflation. And now we have exactly the opposite. There are a lot of reasons - many related to decision body captures - why t…

I agree. What we have seen over the past decade+ has been asset inflation. This is exactly the same as goods inflation (what we are seeing now), except that asset inflation seems like a good thing at first blush. People want their assets to go up in price. It makes them feel rich. But assets should be priced based on what they return to you in future dollars, and THAT return has been going down and down over the past decade. This is not a good thing.

What is happening now is that asset inflation is correcting and goods inflation (a related but distinct concept) is taking hold.

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

#116

Post by CraigJPerry »

cs702 wrote: post #48

Here's a mental model I find helpful for understanding current circumstances: "Quantitative easing" means issuing new money -- a government obligation that pays no interest -- to purchase treasury (and agency) bonds -- government obligations that pay interest. Until very recently, for good reasons (a global financial crisis, a global pandemic), the Fed and other central banks around the world have been engaged in qua…

>> Quantitative easing" means issuing new money

Issuing new reserves not new money. New money can then be issued by the counterparties of the Fed’s open market operations The counterparties are the “primary dealer” banks (theres around 30 of them), these are the banks whose reserve accounts at the fed get topped up in exchange for the assets the fed wishes to buy. This is the US model, the UK model is a bit simpler (replace the entire faux market with the BoE’s asset purchase facility or APF).

>> replacing … bonds … with money

this is basically the effect and you did say you were describing a model not necessarily the actual system but i’d be remiss not to point out the model you describe is not faithful to how the system operates

>> The result has been an unprecedented increase in private cash balances

This is a function of both private debt (150% GDP) and public debt (125% GDP) in the US. Private debt in the US is more of less ignored by many economists but we know from history that this is a mistake regardless of the kinds of stories certain macro economists prefer.

>> The result has been a gradual decrease in private cash balances

Too early to say yet. There are signs private credit growth has continued despite increased interest rates, in which case cash balances could be higher.

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

#117

Post by bigcloud1299 »

delaaxe wrote: post #51
cs702 wrote: post #48

Here's a mental model I find helpful for understanding current circumstances: "Quantitative easing" means issuing new money -- a government obligation that pays no interest -- to purchase treasury (and agency) bonds -- government obligations that pay interest. Until very recently, for good reasons (a global financial crisis, a global pandemic), the Fed and other central banks around the world have been engaged in qua…

Explaining the mechanics of central banks isn’t as informative as explaining through which specific channels this excess liquidity ends up in assets.

This is a very valid question. Up until 2018 or so the liquidity was provided to banks which in turn controlled how much money to loan out. Hence keeping the inflation in check and reducing their risks. however, due to COVID our governments directly handed money to general public through various bills and benefits. That liquidity found its way into other assets. The low mortgage rates pushed housing markets to new highs increase by 100%-200% further increasing net worth of millions who in turn are spending more (wealth effect) further fueling inflation. Now how do you tame this spending? Only way to do so is to reduce the wealth effect or accept the inflation to be higher than 2% target and admit it will take several years to stop it from increasing.

The Taylor rule is showing that the interest rates should be over 10%.

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

#118

Post by davidf18 »

ClumsyPilot wrote: post #50
AnimalMuppet wrote: post #35

Earlier quoted context omitted.

So let's say that the entire world is index funds (plus the stocks they own). An index fund has "too much cash", so they buy stocks. Some other index fund sees that the price is attractive, and sells, but then that fund has too much cash. But the funds each keep some amount (1%?) of their assets in cash. So isn't the net result that stock prices go up until the value of the stock is 99 times the amount of cash in the…

Yes, Exactly. So if you double amlunt of money is the system, house prices will double. It is not 'inflation' because food prices do not react in the same way. You 'normal' inflation could stay at zero. You can create housing shortage through financial system alone, without changing population/ housebuilding rates

[dead]

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

#119

Post by CraigJPerry »

zozbot234 wrote: post #105
delaaxe wrote: post #59

Earlier quoted context omitted.

I’m asking a practical question, not broad economic theories (which are mostly bs). How does newly created money (which first goes in commercial bank reserves) finally ends being used to buy houses and stocks?

> How does newly created money (which first goes in commercial bank reserves) finally ends being used to buy houses and stocks? Well, you have some newly created money, whilst the demand for holding money balances (which depends on the price level and the volume of economic activity) stays the same. So what happens is that money is exchanged away like a hot potato until the demand for money balances rises to match th…

>> you have some newly created money, whilst the demand for holding money balances … stays the same

This is a contradiction. You can’t create money without a demand for it first. In this specific case through the demand for money in exchange for treasuries/MBS/etc.

>> So what happens is that money is exchanged away like a hot potato until the demand for money balances rises to match the extra created money

This view derives from monetarist theory, it’d be fair to say this view enjoys less support today than it did in the past. As with all macro views, it’s primarily BS with perhaps a little bit of truth that may or may not apply in any given real world scenario. Probably not a useful model.

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

#120

Post by CraigJPerry »

cs702 wrote: post #67
delaaxe wrote: post #59

Earlier quoted context omitted.

I’m asking a practical question, not broad economic theories (which are mostly bs). How does newly created money (which first goes in commercial bank reserves) finally ends being used to buy houses and stocks?

The same way previously created money ends up being used for anything in the private sector: by the actions of individuals, businesses, and non-governmental organizations. If money is cheaper to borrow, they may choose to borrow more, or take on more risk, or what have you. But money does not "go into assets." That's a misconception. Money trades hands: For every buyer of a house there is a corresponding seller, and…

>> But money does not "go into assets." That's a misconception

How would you describe the situation when you purchase a treasury bill then?

You gave money, the money you gave ceased to exist in the economy - it is no longer available for anyone to spend, you gained an asset.

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