Money, Credit and 'Global Liquidity'

by Michael J. Howell10. February 2014 09:07
Another liquidity boom, another bubble! A recent report defines and track what we mean by liquidity, which in essence is money, we can spend, in all its multiple forms, including bank money and shadow bank money. Summed together this totalled over US$90 trillion at end-2013, or 5 times US GDP. The financial sector component of this liquidity drives asset prices. Global liquidity makes the modern world go around. However, many wrongly hark back to money supply measures. If you still think only high street banks matter, then dream on. They are less than half the story. The key to understanding Global Liquidity is to think 'debt' and particularly the role that collateral plays. Fair enough, an expansion of Central Bank liquidity will facilitate credit expansion, but so too may an expansion of Treasury debt issuance because it could increase the economy's pool of 'good' collateral. The collateral multiplier, akin to the bank reserve multiplier, was a major reaon behind the last bubble. The latest deflating bubble as we have been warning is Chinese credit and its top-heavy shadow banking sector. It is the reality of Chinese tightening not US tapering that is currently hitting EM. Just think that since 2005 Global Liquidity is 80% higher, but Chinese Liquidity is up a whopping 430% and only now is starting to skid.

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