It is often suggested that what is called the subprime crisis was the result of lax monetary policies that led to excess liquidity in financial markets. But there is an obvious paradox here, because how can an excess of liquidity result ultimately in a shortage of liquidity that has to be made up by central banks?

Lowering volatility and sopping up excess liquidity can be beneficial, but there are risks here as well regulators can easily overshoot the mark, leaving financial markets with weakened capacity for price discovery and too little liquidity.

Massive liquidity injections carried out by the world s major central banks the Fed, the ECB, and the BOJ are neither achieving traction in their respective real economies, nor facilitating balance sheet repair and structural change. That leaves a huge sum of excess liquidity sloshing around in global asset markets.

This is the movement from Americans defining their success on having things to having liquidity, because the less excess that you have around you, the more nimble and fleet of foot you are.

They held large inventories of these assets, thus providing liquidity and smoothing excess price volatility. But, with new regulations punishing such trading (via higher capital charges), banks and other financial institutions have reduced their market making activity.

Indeed, empirical research suggests that countries without explicit or implicit access to liquidity tend to hold much higher reserves than the privileged few only to be blamed by the same privileged few for contributing to global imbalances by hoarding excess reserves.

In particular, the stubborn Dutchman understood the extreme danger if Europe s top monetary authority became too cozy with Europe s politicians, especially at a time when many EU finance ministers view economic reform and excess liquidity as being essentially the same thing.

The reason is simple while base money is soaring, the velocity of money has collapsed, with banks hoarding the liquidity in the form of excess reserves. Ongoing private and public debt deleveraging has kept global demand growth below that of supply.

Is Liquidity Enough?

The Liquidity Puzzle

If the problem is excess saving, and if uncertainty erodes confidence, a massive injection of liquidity such as the ECB s in response to the subprime crisis may be necessary but not sufficient. A rate cut also may be required to restore confidence.

The Liquidity Time Bomb

China s Excess Capacity Nightmare

Provided that there is no recurrence of the severe external demand shock of 2008 a likely outcome unless Europe implodes there is good reason to hope for a soft landing to around 8 GDP growth. A downshift to this more sustainable pace would provide welcome relief for an economy long plagued by excess resource consumption, labor market bottlenecks, excess liquidity, a large buildup of foreign exchange reserves, and mounting inflationary pressures.

What determines a liquidity crisis?

Excess of politeness is annoying.

If they remove the stimulus too soon by raising taxes, cutting spending, and mopping up the excess liquidity, the economy may fall back into recession and deflation. But if monetized fiscal deficits are allowed to run, the increase in long term yields will put a chokehold on growth.

We have this incredible excess capacity.

Today, as all major developed economies resort to expansionary monetary policy, the global economy is being flooded with excess liquidity, and a currency war is looming large. As a result, short term capital inflows, whether seeking a safe haven or conducting carry trades, are bound to become larger and more volatile.

Excess of authority or contravention of instructions

The breakdown was fundamentally a liquidity crisis, and liquidity was easily restored in several ways the New York banks issued their own liquidity through a clearing house one massively powerful financial institution, J.P. Morgan, bought up collapsing shares, and thus reversed a market panic and a scramble for liquidity and European central banks supplied gold to the American market.

As a result, all of this excess liquidity is flowing to the financial sector rather than the real economy. Near zero policy rates encourage carry trades debt financed investment in higher yielding risky assets such as longer term government and private bonds, equities, commodities and currencies of countries with high interest rates.

He or she should not attempt to centralize information, but rather to make it flow more smoothly. Call it information liquidity, akin to financial liquidity.

(d) Net excess (shortfall) of income over expenditure

First, the exit strategy from monetary and fiscal easing could be botched, because policymakers are damned if they do and damned if they don t. If they take their fiscal deficits (and a potential monetization of these deficits) seriously and raise taxes, reduce spending, and mop up excess liquidity, they could undermine the already weak recovery.

First, with asset prices like housing fueled by global liquidity, goods prices kept quiescent by excess capacity and global trade, and interest rates held down by muted investment, domestic and external imbalances have been easily financed. The traditional signals provided by inflation expectations, long term interest rates, and exchange rates have not started flashing.

The craving for excess wealth kept you people neglectful.

The craving for excess wealth kept you people neglectful.

(c) Interest income in excess of the budgetary estimates

UNICEF met its internal liquidity guideline for the year 2004.

The credit channel also is not working properly, as banks have hoarded most of the extra liquidity from QE, creating excess reserves rather than increasing lending. Those who can borrow have ample cash and are cautious about spending, while those who want to borrow highly indebted households and firms (especially small and medium size enterprises) face a credit crunch.

Any time perspective in excess has more negatives than positives.

Stopping the deployment of excess international search and rescue teams

Suddenly, as today, even big banks did not trust each other. The breakdown was fundamentally a liquidity crisis, and liquidity was easily restored in several ways the New York banks issued their own liquidity through a clearing house one massively powerful financial institution, J.P. Morgan, bought up collapsing shares, and thus reversed a market panic and a scramble for liquidity and European central banks supplied gold to the American market.

O ye who believe! make not unlawful the good things which Allah hath made lawful for you, but commit no excess for Allah loveth not those given to excess.

O ye who believe! make not unlawful the good things which Allah hath made lawful for you, but commit no excess for Allah loveth not those given to excess.

So we have, possibly, liquid water, organic materials and excess heat.

The load of the truck was in excess of three tons.

In 1998, excess capacity was estimated to be 275 Mt. worldwide.

Far more disconcerting is the willingness of major central banks not just the Fed, but also the European Central Bank, the Bank of England, and the Bank of Japan to inject massive amounts of excess liquidity into asset markets excesses that cannot be absorbed by sluggish real economies. That puts central banks in the destabilizing position of abdicating control over financial markets.

The policy response, however, required preventing these shocks from becoming entrenched in medium to long term inflation expectations. In this context and in view of the robust economic growth recorded in 1999 and 2000, the still booming stock markets, and the continued accumulation of excess liquidity the ECB s Governing Council progressively tightened policy, thereby keeping upward risks to price stability from materializing.

Here, Mayhew concludes that new derivative markets clearly increase the liquidity and quality of information in existing financial markets. And it is this liquidity and quality of information that ultimately propels economic growth.

Reinsurance shall be arranged for the portion in excess of this sum.

It doesn't see any excess cost. It doesn't spend any extra time.

A prudent level of liquidity for UNDP regular resources would be the equivalent of expenditure for three to six months, implying a total liquidity between 200 million and 400 million at current expenditure levels.