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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?

#21

Post by imtringued »

mo_42 wrote: post #9

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 g…

>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.

But you are assuming that there is no zero lower bound. If there is an excess of liquidity like there being an excess of trash then people would expect to get paid to get rid of it and the market would just find a garbage collection fee for this excess liquidity. But if there is a zero lower bound, then the people with the excess liquidity have no incentive to dispose of it. Instead, they would just keep accumulating more and more liquidity indefinitely as the market tells (or rather is forbidden to tell) them there is no excess liquidity.

I mean, take this example. The interest rate in the market is 3% and the interest set by the central bank is 5%. People will accumulate more liquidity than is optimal. There will be an excess of liquidity. It doesn't matter what the absolute numbers are. They can be -3% and 0% and you run into the same problem.

If excess liquidity is a form of economic pollution like CO2 is, then you would expect to pay for this pollution. But since the government doesn't charge a pollution tax, people will overproduce both CO2 and excess liquidity.

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

#22

Post by madaxe_again »

imtringued wrote: post #17
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…

Keynes divided liquidity preference into transaction demand, precautionary demand and speculative demand. Transaction demand refers to earning money with a job or business and then spending it. Precautionary demand refers to demand for money based around uncertainty in the future, you keep some money around because you want to insure against losing your job (rainy day fund) and finally, once you have so much money yo…

Historically, times where there have been excess liquidity and new technical development along with a labour shortage result in an Industrial Revolution. We have all of these things right now.

Consider that newcomen’s engine was based on prior engines, and itself wasn’t that much of a success - but everything that followed was explosive in terms of the changes wrought on society and industry. The technology was interesting, but as long as you could pay a few blokes to man the pumps, installing an expensive engine and buying coal to power it wasn’t an economical route to follow. When the triangle trade had accumulated enough wealth with nowhere to go other than gilding, and when the workforce started emigrating to the colonies to escape their miserable conditions or getting shot on the plains of Europe, and the remaining souls started demanding Real Money, suddenly, those new-fangled engines looked like a sensible investment.

Which technology will be our next revolutionary step is up for debate, but I would (and have) place my chips on AI/ML. The last few rounds have been all about the decoupling of unskilled and semi-skilled labour from productivity. Next up on the block is skilled labour. Why would you hire developers or lawyers or diagnosticians or any knowledge worker for $stupid per annum, when you can spend a bit more, and never have to pay a human again?

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

#23

Post by groestl »

bell-cot wrote: post #8
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...

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 population that relies on income from work to survive. If individuals make decisions without constraints, they tend to go off track real quick. IMHO, this is the main problem of wealth inequality: rich people make stupid decisions. And stupid, in this case, means unproductive for the society/enviroment etc etc in general.

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

#24

Post by imtringued »

Xylakant wrote: post #15
blackbear_ wrote: post #14

Earlier quoted context omitted.

Just to clarify your position, do you think this specific passage contains mistakes or is misleading in any way (if so, please be precise), or are you generally doubtful about this technology but are fine with the text above?

The issue with ChatGPT is that it produces convincingly sounding texts that more often than not contain factual errors that are obvious to people familiar with the field, but require effort to disprove for lay persons. Made up citations, for example. As such, they’re worthless. A human is capable of producing a similar made up text, but ChatGPT makes it trivial to anyone, flooding the conversation with useless noise,…

The problem with ChatGPT is indeed that it is trained to look like an authoritative source independent of the input query. What ChatGPT is doing is transforming the original input and filling the gaps but the gaps it filled must all be acknowledged by the original author and that is hard to impossible for a layman.

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

#25

Post by conformist »

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…

Many good points in the other comments. One important first-order aspect that is usually meant by “excess liquidity” is central bank stimulus: Central banks create more money (buy low risk assets) -> there is more money in the system that has to go somewhere -> more money in total has to go into riskier assets -> they are worth more. This is a very naive equilibrium argument, and the “excess” probably just means “unusually much”, nothing deeper or technical.

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

#26

Post by Xylakant »

imtringued wrote: post #24
Xylakant wrote: post #15

Earlier quoted context omitted.

The issue with ChatGPT is that it produces convincingly sounding texts that more often than not contain factual errors that are obvious to people familiar with the field, but require effort to disprove for lay persons. Made up citations, for example. As such, they’re worthless. A human is capable of producing a similar made up text, but ChatGPT makes it trivial to anyone, flooding the conversation with useless noise,…

The problem with ChatGPT is indeed that it is trained to look like an authoritative source independent of the input query. What ChatGPT is doing is transforming the original input and filling the gaps but the gaps it filled must all be acknowledged by the original author and that is hard to impossible for a layman.

It’s even worse. The model contains the information that claims are statistically likely to be followed by a citation, for example. So when the output produces a claim, it follows up with a citation- and it completely makes that one up. It has no concept of what a citation is, or what purpose it serves or that a reader might actually go and validate that. It's just a specific sequence of words that follows a specific sequence of words.

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

#27

Post by snake_doc »

imtringued wrote: post #21
mo_42 wrote: post #9

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 g…

>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. But you are assuming that there is no zero lower bound. If there is an excess of liquidity like there being an excess of trash then people would expect to get paid to get rid of it and the market would…

Your example doesn’t make any sense. The entire reason for the US Fed’s interest rate is to dictate the lower nominal bound of market returns in global capital markets. The FedFunds rate is the risk free rate, thus the market rate of return cannot be lower than this rate. Ie. The public equity market will return risk free rate + market risk premium.

A better explanation would be:

A pension funds needs to achieve long term nominal returns of 5% to meet liabilities.

Fed funds rate is suddenly set to 0%, and treasury curve peaks at 2%.

Market risk premium is 5% for public equities.

Market risk premium is 10 % for private equities.

To reach target returns while anticipating volatilities, it must allocate capital towards both public and private equities. This is the “sloshing”. Simple mathematics.

Side note: any retail investor can access the risk-free rate (very close to it, minus transaction costs/expenses) through large money market funds. ie. https://investor.vanguard.com/investment-products/mutual-fun...

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

#28

Post by state_less »

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…

But isn’t the cash’s purchasing power getting inflated away, at say 6.4%, so the liquidity evaporates?

We can all be given millions (super liquid) but that doesn’t make us millionaires in terms of purchasing power. At first it seems like everyone is rich, then folks realize it’s funny money and suppliers raise prices. Since money is (dynamically) valued by what you can buy with it.

So the seller of the house sold for a million, for example, but it turns out they actually have ~850k if they sat on the cash for a couple years.

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

#29

Post by janee »

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…

Yeah I've also wondered the same, i.e. I view it as a closed system and excess liquidity usually results in inflation until demand matches supply of money

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

#30

Post by ThrustVectoring »

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…

>What am I getting wrong?

You are correct when taking the view of the financial sector as a whole - every asset purchase merely swaps who has the cash and who has the asset. You're not getting much of anything wrong, merely missing a behavioral trait of many market participants: they desire a fixed ratio between their various financial assets. An extreme example of this is an index fund, which has a formulaic relationship between their book value and how much of what assets they own.

In essence, what happens is that cash gets dumped into the laps of various market participants, who then notice that they have "too much" cash. They then bid on various assets until there no longer is "too much" cash in the system for the total value of assets around.

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