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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?

#81

Post by spicyusername »

mcntsh wrote: post #79
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…

It really sparks optimism when the economic system you live in considers people and businesses having lots of wealth as a bad thing.

It's not the economic system "considering" excess wealth as a bad thing.

It's just an unfortunate natural consequence of how people spend money when they have a lot of it, and of how businesses react when their products or services are in demand.

There's no natural law, or tenet of capitalism, that says people acquiring lots of money is a bad thing.

There's only our historical observations that

- When lots of people have extra money to spend, they spend or invest it.

- When lots of money is being spent or invested prices rise.

Keeping those two forces in balance is the challenge, and the function of regulation, or FED policy, etc, etc.

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

#82

Post by spicyusername »

s1artibartfast wrote: post #80
spicyusername wrote: post #78

Earlier quoted context omitted.

The rationale that seems most reasonable to me is decades of low interest rates. Interest rates are essentially an indication of how expensive money is. When interest rates are low, money is "cheap". Outside of the FED purchasing bonds, Banks giving loans is another way to "print money". So when interest rates are low, more people and businesses take out loans, and as a consequence there is more money circulating, "s…

That's the part I do get. The part I dont get is why it moves from place to place.

Because, due to inflation, it evaporates sitting still.

So anyone with a lot of money laying around knows they need to put it to work, so that it evaporates more slowly than it grows (due to investment returns).

And the best places to put your excess wealth are often constantly changing, so the money moves around following what everyone perceives to be the best places to put it to get the highest return.

This is actually one of the reasons central banks try to keep positive inflation, because it encourages people to put their money to work rather than just keepping it in a savings account providing no value.

When people are putting their money to work, human flourishing is increased. More jobs, more restaurants, more research, more activity, etc.

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

#83

Post by s1artibartfast »

spicyusername wrote: post #82
s1artibartfast wrote: post #80

Earlier quoted context omitted.

That's the part I do get. The part I dont get is why it moves from place to place.

Because, due to inflation, it evaporates sitting still. So anyone with a lot of money laying around knows they need to put it to work, so that it evaporates more slowly than it grows (due to investment returns). And the best places to put your excess wealth are often constantly changing, so the money moves around following what everyone perceives to be the best places to put it to get the highest return. This is actu…

thanks for trying to help, but I feed like you just described normal investment.

Does Excess liquidity "move" any different than normal liquidity?

My understanding is that the difference is that excess liquidity is excessive because it it is greater than available positive growth investments to lock it up.

Maybe you are right and the movement from sector to sector is simply herd mentality and trend following, but I would intuitively expect that process to reach equilibrium faster

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

#84

Post by bawana »

heisenbit wrote: post #75

I strongly believe there is not one but there are two monetary systems today. One is for assets and the other for daily life consumption. They are only weakly coupled less than maybe in the past. This allowed raging inflation in the asset system for decades while daily life saw deflation or low inflation. And now we have exactly the opposite. There are a lot of reasons - many related to decision body captures - why t…

That distinction should be formalized and a simple law could fix the inequality- financial gains can only be spent/reinvested in Real world goods and services unrelated to finance. Real world money would have no restrictions

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

#85

Post by neilwilson »

The viewpoint in the OP is largely backward.

There is always as much liquidity as is required. "Excess liquidity" flows around until it finds somebody where paying off the loan they hold is the 'best use of funds'. That destroys the liquidity, and the loan - shrinking financial balance sheets and freeing up whatever physical asset collateral that loan is secured upon, which then becomes 'equity'.

Increasing base rates is an artificial market intervention that suppresses asset prices. High asset prices, as with everything else priced high, is just a market signal to produce more of that particular asset.

Asset prices rise until the portfolio indifference point is reached - loans created against asset collateral are matched by loans destroyed by received liquidity created by those loans (as the 'best use' of that liquidity).

All fairly straightforward once you accept there isn't a fixed amount of money and that money and bonds are essentially the same thing with different terms and interest rates.

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

#86

Post by bawana »

paulryanrogers wrote: post #55
refurb wrote: post #44

Earlier quoted context omitted.

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.

In other words, as capitalism succeeds it tends to favor transformation into a tyranny (communist?)

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

#89

Post by zie »

vinyl7 wrote: post #70
delaaxe wrote: post #59

Earlier 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 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 b…

Deflation exists, the US Federal Reserve has a 1 page article about it here, in case you need proof for some reason: https://files.stlouisfed.org/files/htdocs/publications/es/10...

Otherwise, your comment is like grade school levels of understanding of how this all works. Modern banks have the ability to create money.

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

#90

Post by mrcode007 »

somewhereoutth wrote: post #68
delaaxe wrote: post #59

Earlier 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?

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 large…

This is the correct answer.
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