WHAT IS LIQUIDITY ?
Below is an extract from a commentary posted at www.speculative-investor.com on 11th May 2006. When we say there’s a huge amount of liquidity in the financial system we don’t mean that the money supply is growing at a rapid pace. A high rate of money-supply growth will often lead to a period of high liquidity, but it’s possible for low/contracting financial market liquidity to coincide with rapid growth in the money supply. For example, the rate of money-supply growth in the US hit a 2-decade high during 2001-2002, but this was a period of low financial market liquidity. On the other hand, the US money supply grew at a relatively slow rate during 2003-2005, but this was a period of high financial market liquidity. Of course, the rampant monetary growth of 2001-2002 helped bring about the highly liquid environment of 2003-2005. Financial market liquidity is difficult to define and impossible to measure, but the effects of liquidity changes are readily observable. Therefore, although we
