4 ms·

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, n

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 in demand (caused by the above people, businesses, or governments excess money suddenly flowing into a given market). i.e. When lots of money is suddenly spent in a single market it causes a harmful amount of price inflation.

s1artibartfast 4y ago
The part that I don't get is why the money is sloshing. Edit: That is to say, why is the liquidity moving from place to place. To follow the analogy, If I put water in a bucket, it levels relatively quickly. Why does the liquidity "slosh" around for years.
- passion__desire 4y ago
  In shipping industry, to avoid sloshing which could destablize the oil containers, you compartmentalize.
  - hungryforcodes 4y ago
    I guess in personal finance it could be the same :)
    - s1artibartfast 4y ago
      Which just means maintaining a balanced asset portfolio and not chasing every hot asset unless you are intentionally trying to ride a pump and dump wave.
- spicyusername 4y ago
  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, "sloshing around", in the economy. There are other factors at work though, outside of interest rates, that can cause wealth to pool. Various forces since the mid-1990s in the United States, mostly related to the tax and regulatory environment of corporate compensation packages (i.e. paying senior employees in stock, etc), have caused net wealth transfers to the upper classes. The wealth gains those classes have achieved also causes them to have excess wealth that wants to go somewhere.
  - s1artibartfast 4y ago
    That's the part I do get. The part I dont get is why it moves from place to place.
    - spicyusername 4y ago
      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.
      - s1artibartfast 4y ago
        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
mcntsh 4y ago
It really sparks optimism when the economic system you live in considers people and businesses having lots of wealth as a bad thing.
- spicyusername 4y ago
  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.

s1artibartfast 4y ago

The part that I don't get is why the money is sloshing. Edit: That is to say, why is the liquidity moving from place to place. To follow the analogy, If I put water in a bucket, it levels relatively quickly. Why does the liquidity "slosh" around for years.

passion__desire 4y ago
In shipping industry, to avoid sloshing which could destablize the oil containers, you compartmentalize.
- hungryforcodes 4y ago
  I guess in personal finance it could be the same :)
  - s1artibartfast 4y ago
    Which just means maintaining a balanced asset portfolio and not chasing every hot asset unless you are intentionally trying to ride a pump and dump wave.
spicyusername 4y ago
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, "sloshing around", in the economy. There are other factors at work though, outside of interest rates, that can cause wealth to pool. Various forces since the mid-1990s in the United States, mostly related to the tax and regulatory environment of corporate compensation packages (i.e. paying senior employees in stock, etc), have caused net wealth transfers to the upper classes. The wealth gains those classes have achieved also causes them to have excess wealth that wants to go somewhere.
- s1artibartfast 4y ago
  That's the part I do get. The part I dont get is why it moves from place to place.
  - spicyusername 4y ago
    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.
    - s1artibartfast 4y ago
      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

mcntsh 4y ago

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

spicyusername 4y ago
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.