{"id":39449,"date":"2018-10-20T12:13:35","date_gmt":"2018-10-20T17:13:35","guid":{"rendered":"http:\/\/olduvai.ca\/?p=39449"},"modified":"2018-10-20T12:13:35","modified_gmt":"2018-10-20T17:13:35","slug":"the-ominous-problem-with-global-liquidity","status":"publish","type":"post","link":"https:\/\/olduvai.ca\/?p=39449","title":{"rendered":"The (ominous) problem with global liquidity"},"content":{"rendered":"<h3 class=\"entry-title fusion-post-title\" data-fontsize=\"18\" data-lineheight=\"27\"><a href=\"http:\/\/gnseconomics.com\/en_US\/2018\/10\/12\/the-ominous-problem-with-global-liquidity\/\">The (ominous) problem with global liquidity<\/a><\/h3>\n<div class=\"post-content\">\n<p>Market liquidity is crucial for well-functioning capital markets. There has been a quite lot of talk about diminished market liquidity and the role of machines in it (see, e.g. <a href=\"http:\/\/gnseconomics.com\/wp-content\/uploads\/2012\/03\/Q-review-4_2017.pdf\">Q-review 4\/2017<\/a>, <a href=\"https:\/\/www.cnbc.com\/2017\/07\/05\/etfs-may-lead-to-a-market-liquidity-problem-bank-of-america-says.html\">this<\/a> and <a href=\"https:\/\/ftalphaville.ft.com\/2018\/09\/10\/1536589635000\/Most-bonds-don-t-trade\/\">this<\/a>). These are worrying developments.<\/p>\n<p>However, while market liquidity is crucial for markets, <em>global financial flows<\/em>, i.e. liquidity, is also essential to the real economy and for global economic growth. The availability of credit on a global basis fuels investments and growth around the world. \u00a0Such financial flows fell by a <a href=\"https:\/\/www.foreignaffairs.com\/articles\/world\/2018-08-13\/forgotten-history-financial-crisis\">massive 90 %<\/a> during the 2008 crisis, which quickly translated into a global recession. \u00a0Investment and consumption collapsed almost everywhere, with the exception of China where a massive credit stimulus was enacted.<\/p>\n<p>Since then, there has been an uneven recovery. Cross-border bank lending has never really recovered (see <a href=\"http:\/\/gnseconomics.com\/wp-content\/uploads\/2012\/03\/Q-review-1_2017.pdf\">Q-review 1\/2017<\/a>), but the issuance of vast amounts of government and corporate debt has taken its place. This creates a serious risk for the global real economy if highly over-valued capital markets crash.<\/p>\n<p><strong>The metamorphosis of global liquidity<\/strong><\/p>\n<p>In its recent <a href=\"https:\/\/www.bis.org\/publ\/qtrpdf\/r_qt1809.htm\">quarterly report<\/a>, the Bank of International Settlements, or BIS, raises three crucial points for global liquidity:<\/p>\n<ol>\n<li>Global outside-US dollar denominated debt has risen to a record.<\/li>\n<li>The role of non-bank institutions on providing funding has increased.<\/li>\n<li>The composition of international credit has shifted from bank loans to debt securities.<\/li>\n<\/ol>\n<p>Combined with the asset purchase programs of central banks (QE) these developments have far-reaching consequences for the global economy.<\/p>\n<p>Currently, non-banking institutions and households outside the US hold over 11.5 trillion worth of dollar-denominated debt\u2014a record. The \u201cshadow banking\u201d sector could conceivably hold the same amount. This means that all policies affecting global dollar liquidity, will have a large effect on the global economy.<\/p>\n<p>\u2026click on the above link to read the rest of the article\u2026<\/p>\n<p>.<\/p>\n<\/div>\n","protected":false},"excerpt":{"rendered":"<p>The (ominous) problem with global liquidity Market liquidity is crucial for well-functioning capital markets. There has been a quite lot of talk about diminished market liquidity and the role of machines in it (see, e.g. Q-review 4\/2017, this and this). These are worrying developments. However, while market liquidity is crucial for markets, global financial flows, [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"footnotes":""},"categories":[2],"tags":[1733,1269,124,10208,19965,487,5414,661,662],"class_list":["post-39449","post","type-post","status-publish","format-standard","hentry","category-economics","tag-bank-for-international-settlements","tag-bis","tag-central-banks","tag-global-liquidity","tag-gns-economics","tag-liquidity","tag-market-liquidity","tag-qe","tag-quantitative-easing"],"_links":{"self":[{"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/posts\/39449","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/olduvai.ca\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=39449"}],"version-history":[{"count":1,"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/posts\/39449\/revisions"}],"predecessor-version":[{"id":39450,"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/posts\/39449\/revisions\/39450"}],"wp:attachment":[{"href":"https:\/\/olduvai.ca\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=39449"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/olduvai.ca\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=39449"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/olduvai.ca\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=39449"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}