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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?

#91

> 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 collectiv…

I don't think either take is correct but the former is closer to the truth.

It is all risk reward trade-off. If bonds have the same yield as other Investments with no risk, of course Savers and investors would select them over riskier strategies. This has less to do with discounting painful lessons and more to do with the spread on the return rate.

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

#92

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…

I totally had this happen. When I was growing up we didn't have much money, and I've always tried to be really frugal. I tend to agonize over minor necessary expenses like gloves or shoes. When I went from a couple hundred bucks in the bank to almost a million I felt strange. I tried to ignore those feelings, so I could live like a normal person. It only took me about a year to...

I mean... Well... It goes pretty fast and things are pretty much back to the way things were.

I did not understand at all how people who win the lottery could blow through it all so quickly. Growing up, the limit on my spending was availability. When that availability went up, I didn't really have the right tools to change my internal spending algorithm quickly enough to maintain a comfortable level for a longer time.

It truly didn't fix as many problems as I had hoped, and it turns out a million dollars isn't nearly as much as I thought it was.

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

#93

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…

If you want a little more reading on the subject, there's a neat writeup here:

https://www.philosophicaleconomics.com/2013/08/the-great-rot...

"(1) For every share of every asset in existence, someone must willingly hold that share at all times. If no one can be found who wants to hold a share, its market price will fall until someone is found.

(2) The total “amount” or “supply” of a financial asset is the total market value of it in existence: the number of shares outstanding times the market price. Asset “amount” or “supply” is therefore flexible for all assets except cash, whose market price is always unity. If there is more financial wealth that wants to be allocated into an asset than exists of that asset, the market price of each share of the asset will rise, which will expand the supply of the asset so that the demand can be satisfied."

"Money is not something that can go into or come out of assets; rather, it itself is an asset that is traded for other assets. The offered rate of exchange is the price. Changes in the price can create the perception that money is moving, but, in reality, nothing needs to be moving at all. Any movement that does occur is incidental to the underlying process.

Likewise, investors cannot leave or enter any asset class. All they can do is fight with each other over who will hold each asset class, offering to exchange money at various rates in exchange for the privilege of holding something else. The consequence of shifting preferences and exchange rates may be a destruction or creation of wealth in various places, but it is never a “movement” of wealth."

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

#94
post #23
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…

>rich people make stupid decisions. And stupid, in this case, means unproductive for the society/enviroment etc etc in general.

I completely agree but I think you've defined rich wrong. There's only so many multimillionaires and billionaires and most of their money gets plowed into business ventures (even if dumb ones), investments and other things like that that aren't too off the wall.

The economic volatility comes from the much, much more numerous hordes of upper middle class doctors, lawyers, techies and whatnot that are "post scarcity" enough that they can swing a fair amount of money around in pursuit of that.

When a large subset of them decides to do something, like buy toilet paper, or TSLA, or a second house or whatever, there's a huge effect and that's where you get bad tulip mania style volatility and economic patterns from. Nobody on food stamps and nobody with millions to their name lost their ass on beanie babies.

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

#95
This is tangential but I asked it in another thread a little too late. But with the Fed's interest payments exceeding their asset income interest for the first time in history, does this effectively cause an increase in M1 like QE? The official charts seem to imply that the answer is "no" but I don't understand why.

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

#96

Earlier quoted context omitted.

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 inter…

What options for those looking to place their chips on AI in a more specific sense than Google or Microsoft?

In a gold rush, the guy selling shovels makes the most reliable income.

These models run on hardware. Pretty specific hardware.

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

#97

> 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 collectiv…

I don't think either take is correct but the former is closer to the truth. It is all risk reward trade-off. If bonds have the same yield as other Investments with no risk, of course Savers and investors would select them over riskier strategies. This has less to do with discounting painful lessons and more to do with the spread on the return rate.

kids eat tide. Call me crazy, but I don't think assuming people make rational decisions is a good starting point for economics

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

#98

Earlier quoted context omitted.

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 w…

The shorthand that I have seen is that every actor in financial markets has a preference for cash/stocks/bonds/real estate/other things; the market equilibrium is when all of those preferences are satisfied. There can be dislocations to these preferences which cause "sloshing".

As an example - consider the sale of an owned house, where the buyer takes out a mortgage. The owner who sold now has cash, and the buyer has a liability (mortgage), meaning he has need for cash in the future. This type of mismatch can create excess liquidity (now, at the sale point), and the cash keeps moving until someone who needs to pay off a loan acquires it (cash gets "destroyed" when paying off asset-backed loans from the bank). In the meantime, that cash can go towards bidding up financial assets (until it finds the marginal need to service debt obligations)

This comment is the best explanation: https://news.ycombinator.com/item?id=34858813

Also this article could be helpful: https://www.philosophicaleconomics.com/2013/08/the-great-rot...

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

#99
post #95

This is tangential but I asked it in another thread a little too late. But with the Fed's interest payments exceeding their asset income interest for the first time in history, does this effectively cause an increase in M1 like QE? The official charts seem to imply that the answer is "no" but I don't understand why.

The interest income the Fed earns now, is from assets which were created in the past at lower interest rates, where what it's paying out to banks is in current higher interest rates. While this may seem like it could essentially result in QE, the Fed covers the difference via what's considered a deferred asset, which is something that goes away when the income balance changes in the future. It's kind of like paying a future expense now. So, the effect is temporary.

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

#100

Earlier quoted context omitted.

I don't think either take is correct but the former is closer to the truth. It is all risk reward trade-off. If bonds have the same yield as other Investments with no risk, of course Savers and investors would select them over riskier strategies. This has less to do with discounting painful lessons and more to do with the spread on the return rate.

kids eat tide. Call me crazy, but I don't think assuming people make rational decisions is a good starting point for economics

I'm not saying everything's rational either, but you can't deny a difference in return rates make a difference.

More people will opt for a risky investment if it's paying substantially more then their safe one.

If there is little difference in return, few people will opt for the risky bets

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