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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?

#31

Post by andrepd »

groestl wrote: post #23
bell-cot wrote: post #8

Earlier quoted context omitted.

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 popula…

> which favors distributed decisionmaking: [...] price

Seeing as the top 10% hold over 60% of the wealth (in the US, globally we have a dozen people with as much wealth as the bottom 50%), I don't see how this follows.

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

#32

Post by moffkalast »

Cwizard wrote: post #20
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…

(I'm not an economist) Good, point but think of the following example. You have 10 startups and supply and demands has dictated that $1M is a good price for 10% equity. Now let us say a group of VC suddenly have $20M dollars to deploy. The system only has capacity for $10M, what will play out over time is that VC will bid ever higher amounts for that 10% of equity because they _have_ to deploy capital. It seems silly…

> Now let us say a group of VC suddenly have $20M dollars to deploy.

Wouldn't that come from their ever decreasing margins? it sounds like there's a feedback loop there that should balance itself at some value, but that's probably assuming people are rational which they are most decidedly not.

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

#33

Post by JumpinJack_Cash »

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…

> > Or is this just an often repeated falsehood?

This is correct. Except for inflation it’s impossible for asset prices to rise everywhere.

Some places and some assets will see a rise while other places and other assets will see a drop.

While everybody was screaming at the everything bubble there were real assets that became defacto worthless (at least temporarily) the entire fleet of passengers Boeings and Airbus. Not to mention cruise ships, casinos, theme parks..

What about NYC real estate? The pandemic had people thinking that life is too short to live in such packed conditions in places so sensitives to pandemics.

Can we also talk about oil which collapsed during Covid and hit a negative 37 dollars per barrel? All commodities did bad during the pandemic, oil, LNG, copper etc.

It’s a form of selection bias because pundits and commentators always watch where the money is going , not places where money is hemorrhaging (that is unless there is a big bankruptcy), but sector wise they just dont focus on it.

A clear example is OPEC. Every pundit focuses on what OPEC does but nobody focuses on what it means for shale oil producers and their survival. The only people who focus on those are their lenders and investors as well as city officials but this profile doesn’t show up on your TV on Bloomberg or CNBC , because these outlets are too busy interviewing the Saudi or the UAE secretary of energy in the aftermath of the OPEC decision

As you grow up you understand they most of phenomenons that people swear by are selection bias.

There are theories that even stuff like physics is selection bias because we swear by the physics we know but it could be entirely rubbish because it’s not the truth of Nature but just our best intuition of the truth of Nature which is of course subject to selection bias anthropomorphically speaking

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

#34

Post by groestl »

andrepd wrote: post #31
groestl wrote: post #23

Earlier 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…

> which favors distributed decisionmaking: [...] price Seeing as the top 10% hold over 60% of the wealth (in the US, globally we have a dozen people with as much wealth as the bottom 50%), I don't see how this follows.

We still arrive at concensus based on a (more or less free) market. Weights on this market are heavily skewed to the top, that's true. And as I said, democratic votes also don't exactly live up to the cultural standard that we at least say we have. But in general, we're very far away from a planned economy.

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

#35

Post by AnimalMuppet »

ThrustVectoring wrote: post #30
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 relatio…

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 system?

More generally, then, doesn't the price of assets go up until the participants are comfortable with that much cash as part of their asset mix?

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

#36

Post by AnimalMuppet »

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…

I don't think it's a one-way flow. Here's a company that makes, say, cars. And here's a company that invests. Money flows into the investment company and away from the car company. At some point, the rate of return on the car company starts looking good enough that even the investors notice. At that point, at least some money comes back.

Now, you may say that net "well-being" of society will go up if we make more cars and fewer investments in financial firms. (In the end, you can't eat money.) But where the line should be drawn is going to depend very sensitively on your definition of "well-being". That's not an easy question to answer, even before politics gets involved.

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

#37

Post by somewhereoutth »

JumpinJack_Cash wrote: post #33
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…

> > Or is this just an often repeated falsehood? This is correct. Except for inflation it’s impossible for asset prices to rise everywhere. Some places and some assets will see a rise while other places and other assets will see a drop. While everybody was screaming at the everything bubble there were real assets that became defacto worthless (at least temporarily) the entire fleet of passengers Boeings and Airbus. N…

Except that when lots of new money is created (by the formation of loans) inflation is exactly what you get.

Ultra low interest rates are just a (not very) complicated way of printing money.

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

#38

Post by somewhereoutth »

It means lots of new money has been created by loan formation as interest rates have been so low.

Thus assets will see their price rise. Certain hot assets will see large price rises.

This will continue until interest rates revert to the norm (whatever that is) and correctly price risk.

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

#39

Post by JumpinJack_Cash »

somewhereoutth wrote: post #37
JumpinJack_Cash wrote: post #33

Earlier quoted context omitted.

> > Or is this just an often repeated falsehood? This is correct. Except for inflation it’s impossible for asset prices to rise everywhere. Some places and some assets will see a rise while other places and other assets will see a drop. While everybody was screaming at the everything bubble there were real assets that became defacto worthless (at least temporarily) the entire fleet of passengers Boeings and Airbus. N…

Except that when lots of new money is created (by the formation of loans) inflation is exactly what you get. Ultra low interest rates are just a (not very) complicated way of printing money.

Those loans or better we should say that new loan potential is up for grabs for everybody.

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

#40

Post by college_physics »

Until there is a widely available open source model of how the economic system works (here and now) people will go on beating about the bush in eternal cycles.

The elements for this to happen are actually there. We are not talking about a detailed replica with real time data, but a reasonably accurate model that includes all the public data from central banks, private bank statements, public market valuations etc.

With such a system the question "excess liquidity sloshing around" is a specific query with a quantitative answer, not an endless, low-information discussion.

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