Liquidity is a state of mind

Quickie post here.  Check out Daneric’s post on the nature of this thing people like to call liquidity.

People and media in general like to use the term liquidity. You here things like “its all about liquidity and liquidity moves the markets” or some such dictum. Or “High Frequency Trading” provides liquidity. Or the choking of liquidity is a therefore a “credit crisis”. You here media stories talking about it all the time as if “liquidity” is a living thing in and of itself!

But what does it really mean?

What is liquidity? Breaking it down to its most basic definition I googled the term several times and came up with this: “Market liquidity refers to an asset’s ability to be easily converted through an act of buying or selling without causing a significant movement in the price and with minimum loss of value. Money, or cash on hand, is the most liquid asset. “

Sounds ok and something CNBC would approve of (the minimal loss of value part). But is that a truthful or useful definition? Is liquidity a natural occurring substance that can be harnessed or controlled for the good of mankind? Can we drill for liquidity in deep reservoirs under the ocean and provide economic benefit for all? Of course not!

(Ok Dan just get to the point!) I came up with my own set of definitions for liquidity:

1) Liquidity is the easy flow of assets, fiat money and credit from one entity (person) to another.
2) Liquidity in the 21st century is mostly the result of the creation and flow of credit.
3) Liquidity is a state of mind.
.
I wholeheartedly agree with this perspective:
So that is what bonkers (sic) me sometimes when I hear that term “liquidity” and how it is used. The term has become a placeholder for social mood. An excuse. Saying things like “The market crashed because liquidity dried up in a credit crisis is akin to saying, “The dog ate my homework”.

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