The CGFS has put out a new report on this topic.
Abstract
Global liquidity has become a key focus of international policy debates over recent years. This reflects the view that global liquidity and its drivers are of major importance for international financial stability. The concept of global liquidity, however continues to be used in a variety of ways and this ambiguity can lead to unfounded and potentially destabilising policy initiatives.
This report analyses global liquidity from a financial stability perspective, using two distinct liquidity concepts. One is official liquidity, which can be used to settle claims through monetary authorities and is ultimately provided by central banks. The other concept is private (or private sector) liquidity, which is created to a large degree through cross-border operations of banks and other financial institutions.
Understanding the determinants of private liquidity is of particular importance. As many financial institutions provide liquidity both domestically and in other countries, globally, private liquidity is linked to the dynamics of gross international capital flows, including cross-border banking or portfolio movements. This international component of liquidity can be a potential source of instability because of its own dynamics or because it amplifies cyclical movements in domestic financial conditions and intensifies domestic imbalances.
Policy responses to global liquidity call for a consistent framework that considers all phases of global liquidity cycles, countering both surges and shortages. Measures to prevent unsustainable booms in private liquidity are linked with micro- and macroprudential policies as well as the financial reform agenda. Country-specific or regional liquidity shocks, in turn, may effectively be addressed through self-insurance in the form of precautionary foreign exchange reserves holdings and existing arrangements which essentially redistribute liquidity. However, truly global liquidity shocks necessitate direct interventions in amounts large enough to break downward liquidity spirals. Only central banks have this ability.
5 replies on “Global Liquidity”
Some useful ideas from Doug Noland
http://www.prudentbear.com/index.php/creditbubblebulletinview?art_id=10589
With the ECB refusing to raise the Gold price to ease tensions between creditor and debtor nations in the eurozone the now synthetic almost interest free FRN is acting like the Greenback of old – its all very strange.
Anyhow FRNs are looking tasty as a medium of exchange if not a long term holder of value if it all goes pear shaped in Europe.
Its absolutely crazy to see a CB with such immense poltical power now – with Goldman boys located in both the head of the ECB and Italy while a ECB technocrat is installed in Greece.
If Goldman has ultimate loyality to the US treasuary (although loyality is perhaps a incorrect word when used in conjunction with Goldman ) then Europe is in a very deep dudu.
The dollar is not pretty but it is still a functional powerful medium of exchange – maybe it was wrong to get into the ring with it.
http://www.youtube.com/watch?v=gQEL5sd2aOo
Animation has come to the aid of the EZ crisis.
Quite accurate except that the Greeks work more hours and retire later than Germans. So much for the lazy Mediterranean types.
http://www.creditwritedowns.com/2011/11/video-european-crisis-explained.html#.Tr8JnMSs6Tw.gmail
Global liquidity means oil.
Liquidity is a beautiful concept, but somewhat dubious in practice.
The theory behind liquidity (leverage) vs capital at risk….is that money should be sweated efficiently. So some low risk investments, can be leveraged with funding.
The problem is that risk measurement…is the hoily grail of Markets…and he who measured risk perfectly…would be a quintazillionaire.
Even worse is that some nonsensical/crude leverage ratios were used (e.g. the blunt instrument of 8:92 common under Basel).
Also a few years back the market for retail CFDs blew up when daily margin calls jumped from 2% to 20%+ (due to market volatility)
Also I’m not happy that BIS stats, or constituent CB’s, actually give a good picture of what money is up to. And various q/e experiments are tainted by all sorts of artefacts, not the least of which is seigniorage.
the very concept of liquidity, needs to be sternly questioned – imo, it risks far too great a ‘blow up’ during Black Swan/paradigm shifting events. in fact, with increased globalisation and attendant inter-connectedness of financial systems – I’d say it guaruntees explosions.
Unless people divulge extra lorryloads of useful information…I see a much diminished role for leverage.