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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?

#51

Post by delaaxe »

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.

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

#53

Post by vishnugupta »

For one concrete data point refer to this[1] chart which tracks the mortgage backed securities (MBS) held by the fed. This is fed creating money (for the lack of a better word) to indirectly fund home ownership. What started out as a short term measure to avoid a Great Depression post 2008[2] crisis ended up being a more permanent policy fixture. That is about $2.7T of new money created since 2008. Let that sink in.

2010s were quite unprecedented years in terms of new money (and hence new debt) created. The repercussions were everywhere; crazy VC funding (Uber/Airbnb etc.,), insane tech salaries, record high stock markets and so on.

[1] https://fred.stlouisfed.org/series/WSHOMCB

[2] https://home.treasury.gov/data/troubled-assets-relief-progra...

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

#54

Post by cs702 »

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.

I'm not sure what you mean by "excess liquidity ends up in assets." Keep in mind that asset prices are set at each instant by the marginal buyer and the marginal seller. If someone buys a single share of, say, TSLA for twice its most recently quoted price, the market cap of TSLA would instantly double (until the next trade is executed). Prices can rise or drop a lot, even if little money trades hands.

If you're asking how the net present values of long-lived assets change as a consequence of quantitative easing, the answer lies in the impact of quantitative easing on long-term interest rates. All else being equal, when long-term interest rates rise, net present values decline; when long-term interest rates decline, net present values increase.[a]

For example, when the Fed engaged in quantitative easing from 2008 to 2022, it did so expressly with the intention of reducing long-term interest rates. Since last year, the Fed has been engaged in quantitative tightening (selling bonds or letting them mature) expressly with the intention of pushing long-term interest rates up.

--

[a] Asset prices (market caps) eventually tend to follow net present values, usually in fits and starts.

EDIT: Changed 1998 to 2008 (typo).

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

#55

Post by paulryanrogers »

refurb wrote: post #44
andrepd wrote: post #31

Earlier quoted context omitted.

> 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.

I'm not sure how saying 10% of people control decision isn't distributed decision making .

If the trend is more and more concentration of control then that can be concerning. And concerning even if still technically distributed until the moment when there are only 2 people controlling 100% of the resources, in a world of billions of people.

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

#56

Post by twawaaay »

> When the rate of return is high, savers can achieve their goals by buying, holding, and harvesting the resulting cash flow. When it is low, they must turn to other strategies: leverage, arbitrage, momentum trading, more sophisticated quant trading, and “beauty contest trading“: betting on what others will find popular, for (arguably) extra-economic reasons.

I don't think this is how people behave.

I think collective behaviour can be better explained by people discounting the painful lessons of previous downturns the more the longer prosperity lasts. Our brains are wired this way, unfortunately and it requires a conscious effort to objectively (if it can be done at all) take into account risks of serious and long lasting financial winter.

Most people don't have the self discipline to do this. They kinda know about it but then they see other people making shitload of money in risky "investments" and our greedy primate brains take over.

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

#57

Post by spicyusername »

I interpret "excess liquidity" to mean that there is a larger than average share of people, businesses, or governments that have enough excess wealth to want, need, or be required to invest that excess wealth.

i.e. There are more people with money that needs to be spent.

I interpret "sloshing around" to be a metaphor for the damage that can be caused to various markets (real estate, stock, etc) by a sudden increase in demand (caused by the above people, businesses, or governments excess money suddenly flowing into a given market).

i.e. When lots of money is suddenly spent in a single market it causes a harmful amount of price inflation.

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

#58

Post by flakeoil »

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…

If there are 1000000 stocks of a company around and a lot of people want to buy and almost no-one wants to sell. If one person manage to buy 10 stocks from another person at 10% above last days price ($100), i.e. at $110, then the total marked value of that company has increased by 10% to $110 * 1000000 = $110 million. So $10M were created driven by a small transaction of just $110 * 10 = $1100.

It's not that all 1 million stocks have to trade for the total value to go up. All the people who did not trade, but who own the other stocks, have seen their (paper) value go up.

And the same, but opposite happens when it goes down of course.

Let's say some major event would trigger a panic on the stock market, then very few trades could cut the total market by 50% and very few would get any money for their stocks at the price when the panic started. Most would not have sold and would sit on stocks worth 50% less than the day before.

Kind of extreme examples here, but just to show what I believe you are "getting wrong".

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

#59

Post by delaaxe »

cs702 wrote: post #54
delaaxe wrote: post #51

Earlier quoted context omitted.

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

I'm not sure what you mean by "excess liquidity ends up in assets." Keep in mind that asset prices are set at each instant by the marginal buyer and the marginal seller. If someone buys a single share of, say, TSLA for twice its most recently quoted price, the market cap of TSLA would instantly double (until the next trade is executed). Prices can rise or drop a lot, even if little money trades hands. If you're askin…

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?

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

#60

Post by amirhirsch »

airstrike wrote: post #52

If you believe crypto is purely speculative, maybe you can argue it's a near perfect measurement of excess liquidity sloshing around the financial system Food for thought

It seems like stable coins would track the excess liquidity people are hoping to reinvest and all other crypto currencies track the amount of excess people are willing to just lose.
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