It means greedy people have too much cash and are still looking for investments. They are forced to put money into investments that are less than ideal. If something isn't worth it but you can't find anything else that is the case with everyone else meaning all the shitty assets are going to be driven up. If a billionaire has a billion dollars they are looking to get rid of that trash and find something they can write their name on. They know where that toilet paper came from. I mean money.
What does “excess liquidity sloshing around the financial system” mean?
121–130 of 151 posts
Re: What does “excess liquidity sloshing around the financial system” mean?
#122Earlier quoted context omitted.
> 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…
> You can’t create money without a demand for it first.
Why not? At the individual level it literally works the same as any purchase of existing assets. In practice, the counterparty of that transaction will probably spend that money in turn on something else that she actually planned to hold.
> This view derives from monetarist theory, it’d be fair to say this view enjoys less support today than it did in the past.
Well, the biggest flaw of monetarist theory is that it treats "the creation of money" as if it was somehow special, whereas what really matters is the product of money and velocity. (Velocity can be seen as a reflection of external changes in the demand for money balances. It also explains how money can seemingly be "created" out of thin air by entities other than the central bank; what we're really seeing in these expanded money measurements is higher velocity for the actual "high-powered" money that the central bank issues.)
Re: What does “excess liquidity sloshing around the financial system” mean?
#123Earlier quoted context omitted.
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.
Unless you purchased a treasury bill from the central bank as part of a money-draining operation, the money is still there. Your counterparty has sold a treasury bill and received money for it, that she'll most likely spend elsewhere.
Re: What does “excess liquidity sloshing around the financial system” mean?
#124Earlier 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…
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Re: What does “excess liquidity sloshing around the financial system” mean?
#125Earlier quoted context omitted.
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.
> How would you describe the situation when you purchase a treasury bill then?
Your cash (i.e., money) goes to the seller of the treasury bill.
If the seller is a private investor, your cash goes to the private investor (e.g., a mutual fund, a pension plan, an individual).
If the seller is the US Treasury (i.e., you bought a newly issued treasury bill), your cash goes to the US Treasury, which will deposit it, and later on, will use it to pay for the federal government's expenses, including bond interest. (Recall that, unlike the Fed, the Treasury cannot issue newly created money. The Treasury must borrow or collect taxes from the private sector to fund federal spending.)
If the seller is the Fed (through one of its primary dealers, acting as an intermediary), the trade is quantitative tightening.
Re: What does “excess liquidity sloshing around the financial system” mean?
#126Earlier quoted context omitted.
>> 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.
Unless you purchased a treasury bill from the central bank as part of a money-draining operation, the money is still there. Your counterparty has sold a treasury bill and received money for it, that she'll most likely spend elsewhere.
We’re not talking about the unless case though - as you say the money would still exist in that case.
Re: What does “excess liquidity sloshing around the financial system” mean?
#127Earlier 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
Also, how many kids and the United States have eaten tied pods? Is it anywhere approaching a meaningful proportion?
Re: What does “excess liquidity sloshing around the financial system” mean?
#128Earlier quoted context omitted.
Both posts are important here, IMHO. We have two signals to arrive at economic and productive decisions in our society, which favors distributed decisionmaking: democratic votes and price. There are all kinds of problems with the former, as for the latter: we rely on individuals to make efficient decisions, however this requires some kind of scarcity. Scarcity which is largely in effect for the majority of the popula…
Disagree here. Some rich people make stupid decisions and get flushed out. It's very darwinistic. But in general rich people are rich BECAUSE they are good at thinking about being rich. Your point made sense until you mentioned wealth inequality-- but wealth inequality exists EXACTLY because rich people are good at thinking about being rich. These decisions may not be productive in terms of society -- but they genera…
I generally agree with you, and I could probably have chosen a better word than "stupid" (not a native speaker though). That's why I tried to clarify in my last sentence, that "stupid" in this context means that their decisions don't align with societies interests at large anymore. Kind of like "stupid" as in: a central planner would be stupid, if they applied those decisions when they actually had the goal of maximizing societies productivity and wellbeing.
Re: What does “excess liquidity sloshing around the financial system” mean?
#129Earlier quoted context omitted.
In shipping industry, to avoid sloshing which could destablize the oil containers, you compartmentalize.
I guess in personal finance it could be the same :)
Which just means maintaining a balanced asset portfolio and not chasing every hot asset unless you are intentionally trying to ride a pump and dump wave.
Re: What does “excess liquidity sloshing around the financial system” mean?
#130Here'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 (…
Reserves are money -- they are the key component of the monetary base, included in all money aggregates.
Yes, the Fed trades with the rest of the world only via its primary dealers. But note that these dealers are non-US-government entities (specifically, they're for-profit businesses, part of the private sector), or trade with the Fed acting as intermediaries for other non-US-government entities (businesses, individuals, etc., also part of the private sector). Thus, newly issued money with which the Fed pays to purchase instruments in open-market transactions ends up in the hands of... non-US-government entities -- mainly domestic businesses (e.g., mutual funds), domestic organizations (e.g., pension plans), domestic individuals (e.g., day traders), etc., all part of the private sector.[a] The newly issued money ends up as private cash balances.
[a] For simplicity, I'm excluding foreigners from this mental model. I'm also excluding the so-called "multiplier effect" of bank lending.