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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?

#61

Post by skybrian »

AnimalMuppet wrote: post #35
ThrustVectoring wrote: post #30

Earlier quoted context omitted.

>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…

Kind of. Desired asset mix is an important motivator. (Seems like it's a respectable version of "fear of missing out?")

But it's not the only one. Fear of a price drop can be motivating too.

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

#62

Post by syntaxing »

vishnugupta wrote: post #53

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.…

Is 2.3T a lot? Since the US GDP is about 23T, is there a situation where printing that much money is a net positive thing?

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

#63

Post by s1artibartfast »

spicyusername wrote: post #57

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 i…

The part that I don't get is why the money is sloshing.

Edit:

That is to say, why is the liquidity moving from place to place.

To follow the analogy, If I put water in a bucket, it levels relatively quickly. Why does the liquidity "slosh" around for years.

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

#65

Post by dclowd9901 »

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

Only when its potential upside vs risk is better than any other option. As is with any other investing (though probably a bit more buffered since it’s relatively scary investing to anyone even mildly risk averse).

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

#66

Post by eastbound »

blackbear_ wrote: post #14
eastbound wrote: post #5

Earlier quoted context omitted.

It’s a nice NLP-generated text, so now, what is scientific correct about it, given that ChatGPT is not configured for reasonings or for citing sources? There is a reason why HN guidelines forbids robot-generated answers.

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?

To clarify my position: I believe the generated text is indistinguishable from human-generated reasonings and is most probably true in most cases (probably no factual error).

However, on average, ChatGPT content will contain more errors than humans (who it can be assumed want to see the truth), and therefore, it should be put in the same bucket as both “propaganda facts” and “con artist facts”. It’s still facts, just misleading.

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

#67

Post by cs702 »

delaaxe wrote: post #59
cs702 wrote: post #54

Earlier quoted context omitted.

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?

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 for every buyer of a share of stock there is a corresponding seller. Asset prices can rise, or fall, with each trade.

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

#68

Post by somewhereoutth »

delaaxe wrote: post #59
cs702 wrote: post #54

Earlier quoted context omitted.

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?

Commercial banks actually create the money (by issuing loans) that is used to buy houses (mortgages) and stocks (leverage).

Central banks affect this process by adjusting the rate to which they lend to the commercial banks, and by quantitative easing /tightening which has a similar effect on long term rates.

Rates are low, more loan value is issued (because the income stream servicing the loan translates into a larger loan amount), asset prices go up. And conversely.

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

#69

Post by bell-cot »

colinsane wrote: post #49
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…

> 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. i must be missing the point you’re trying to make, or the framing, or something . why would i want to be rich if not to direct more resources to achi…

> why would i want to be rich if not to direct more resources to...

These days, I think most of the motivation to be seriously rich (vs. mere "can afford two nicer McMansions, and your kids don't qualify for college financial aid" rich) is a humans-are-primates obsession* with being further up the pecking order.

But your bottom line is still valid. The rich are definitely not allocating resources in ways which are beneficial to society.

*Less-flattering terms, perhaps from the DSM-5, would seem applicable in many cases.

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

#70

Post by vinyl7 »

delaaxe wrote: post #59
cs702 wrote: post #54

Earlier quoted context omitted.

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?

The economy is always inflationary. Money today is worth less than it is tomorrow. Money that the bank has is just rotting away, becoming less valuable over time. Banks need to take the cash they have and invest it in something to offset the inflationary losses. Because bonds weren't paying much interest, it was a better return for the bank to loan out the money for mortgages, investors, etc. Eventually those loans become a part of someone's paycheck or into their bank account (ie home sale that ended up with a 2-300% return). Compared to the bank buying bonds which essentially removes money from the economy.
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