7 ms·

What does “excess liquidity sloshing around the financial system” mean?

134 points by cdwhite 4y ago

deleted 4y ago
[deleted]
_nalply 4y ago
[flagged]
- eastbound 4y ago
  It’s a nice NLP-generated text, so now, what is scientific correct about it, given that ChatGPT is not configured for reasonings or for citing sources? There is a reason why HN guidelines forbids robot-generated answers.
  - _nalply 4y ago
    OK, noted, sorry for my post.
  - blackbear_ 4y ago
    Just to clarify your position, do you think this specific passage contains mistakes or is misleading in any way (if so, please be precise), or are you generally doubtful about this technology but are fine with the text above?
    - Xylakant 4y ago
      The issue with ChatGPT is that it produces convincingly sounding texts that more often than not contain factual errors that are obvious to people familiar with the field, but require effort to disprove for lay persons. Made up citations, for example. As such, they’re worthless. A human is capable of producing a similar made up text, but ChatGPT makes it trivial to anyone, flooding the conversation with useless noise, crowding out the signal. Asking your parent to engage with an essentially unlimited firehose of unfounded claims just plays into that hand. I really recommend reading this text on ChatGPTs lack of usefulness for academic conversations https://acoup.blog/2023/02/17/collections-on-chatgpt/ https://acoup.blog/2023/02/17/collections-on-chatgpt/
      - blackbear_ 4y ago
        Thank you for the reference, I know about the dangers of chatgpt and some skepticism is certainly warranted. However, dismissing anything produced by chatgpt simply because it was made by chatgpt is not right, which is why I was asking an opinion about that passage: if the text is accurate, it should not matter who or what wrote it.
        Xylakant 4y ago
        You're missing my point: The text is produced by an agent known to be unreliable. It might be right by chance, but the onus to prove that (by citing references, for example) is on the poster. It's entirely warranted to dismiss the text, otherwise you essentially DOS the conversation.
        wfme 4y ago
        You know, the most unreliable agents still appear to be people. If someone is right 90% of the time, we don’t require references for everything they say to save for that 10%.
      - imtringued 4y ago
        The problem with ChatGPT is indeed that it is trained to look like an authoritative source independent of the input query. What ChatGPT is doing is transforming the original input and filling the gaps but the gaps it filled must all be acknowledged by the original author and that is hard to impossible for a layman.
        Xylakant 4y ago
        It’s even worse. The model contains the information that claims are statistically likely to be followed by a citation, for example. So when the output produces a claim, it follows up with a citation- and it completely makes that one up. It has no concept of what a citation is, or what purpose it serves or that a reader might actually go and validate that. It's just a specific sequence of words that follows a specific sequence of words.
    - eastbound 4y ago
      To clarify my position: I believe the generated text is indistinguishable from human-generated reasonings and is most probably true in most cases (probably no factual error). However, on average, ChatGPT content will contain more errors than humans (who it can be assumed want to see the truth), and therefore, it should be put in the same bucket as both “propaganda facts” and “con artist facts”. It’s still facts, just misleading.
  - c22 4y ago
    I don't see this guideline? [0] [0]: https://news.ycombinator.com/newsguidelines.html https://news.ycombinator.com/newsguidelines.html
    - josephcsible 4y ago
      https://news.ycombinator.com/item?id=33950747 https://news.ycombinator.com/item?id=33950747
hmmmcurious1 4y ago
It means wages and employment are too high which causes inflation. Nevermind the printed trillions, the common employee is the true enemy here.
- bell-cot 4y ago
  While good as a cynical or satirical answer, our younger readers might want to learn the correct answer first...
  - deleted 4y ago
    [deleted]
  - groestl 4y ago
    Both posts are important here, IMHO. We have two signals to arrive at economic and productive decisions in our society, which favors distributed decisionmaking: democratic votes and price. There are all kinds of problems with the former, as for the latter: we rely on individuals to make efficient decisions, however this requires some kind of scarcity. Scarcity which is largely in effect for the majority of the population that relies on income from work to survive. If individuals make decisions without constraints, they tend to go off track real quick. IMHO, this is the main problem of wealth inequality: rich people make stupid decisions. And stupid, in this case, means unproductive for the society/enviroment etc etc in general.
    - andrepd 4y ago
      > which favors distributed decisionmaking: [...] price Seeing as the top 10% hold over 60% of the wealth (in the US, globally we have a dozen people with as much wealth as the bottom 50%), I don't see how this follows.
      - groestl 4y ago
        We still arrive at concensus based on a (more or less free) market. Weights on this market are heavily skewed to the top, that's true. And as I said, democratic votes also don't exactly live up to the cultural standard that we at least say we have. But in general, we're very far away from a planned economy.
bell-cot 4y ago
A good analogy, for those more familiar with mechanics / engineering / physics - https://en.wikipedia.org/wiki/Free_surface_effect https://en.wikipedia.org/wiki/Free_surface_effect
bjornsing 4y ago
I was hoping that the OP would address a related idea that I find rather weird: it’s sometimes said that “this excess liquidity has to go somewhere” and that “the excess liquidity has gone into [housing/stocks/commodities/other asset class]”. But I don’t get this: It might seem plausible that if stock prices go up they absorb liquidity from the system. But (ignoring new stock issues / newly build houses) in every transaction there’s both a buyer and a seller. Sure, the buyer parts ways with cash when they buy a share, but that cash goes to the seller. So there should be just as much liquidity as before, just in different hands. If anything a rising stock or housing market should just put more excess liquidity into the system because it’s possible to borrow against those assets. What am I getting wrong? Or is this just an often repeated falsehood?
- marketerinland 4y ago
  Liquidity means capacity to buy, essentially. Not cash per se. If you reduce the required deposit on a house from 20% to 10%, that increases the liquidity in the market. Suddenly more people ‘have’ the money to buy that $500k property and the market will typically rise until it’s absorbed that added financial capacity This is why low interest rates had such a dramatic impact. Monthly repayments are much lower on a low interest loan, so the average person could ‘afford’ to borrow way more. Note; this is just Real Estate. Lots of other borrowing also occurred. But when Real Estate markets suddenly go up by 20%, now it’s the owners of these houses that are worth a whole lot more. And they often decide to cash in, in some way (selling their J
- tinco 4y ago
  I think that's the sloshing part. Excess liquidity moves from entities that buy real estate, into the hands of those that were selling that real estate. Then the excess liquidity of the entities that sold real estate goes into whatever they're interested in, like maybe the stock markets. This is not one big movement but lots of mostly chaotic reactive systems hench the sloshing.
- mo_42 4y ago
  You’re on the right track. Many people including economists don’t get this. It’s a very useful way of thinking economically. (See also my other comment here).
mo_42 4y ago
I don’t fully understand the point the author is trying to make. I appreciate that there are boom and bust cycles for some sorts of assetes I would have liked to author to talk more about wording. What is actually liquidity? Today’s money appears in many gradual forms of moneyness. Also is there anything like "excessive money"? Where does it come from? Central banks don’t just print money. They trade it for usually governmental bonds. If other than central banks have excessive liquidity they may trade it for other assets. This means they need to find a counter party that has the reverse situation. So overall the economy cannot have excessive money.
- imtringued 4y ago
  >If other than central banks have excessive liquidity they may trade it for other assets. This means they need to find a counter party that has the reverse situation. So overall the economy cannot have excessive money. But you are assuming that there is no zero lower bound. If there is an excess of liquidity like there being an excess of trash then people would expect to get paid to get rid of it and the market would just find a garbage collection fee for this excess liquidity. But if there is a zero lower bound, then the people with the excess liquidity have no incentive to dispose of it. Instead, they would just keep accumulating more and more liquidity indefinitely as the market tells (or rather is forbidden to tell) them there is no excess liquidity. I mean, take this example. The interest rate in the market is 3% and the interest set by the central bank is 5%. People will accumulate more liquidity than is optimal. There will be an excess of liquidity. It doesn't matter what the absolute numbers are. They can be -3% and 0% and you run into the same problem. If excess liquidity is a form of economic pollution like CO2 is, then you would expect to pay for this pollution. But since the government doesn't charge a pollution tax, people will overproduce both CO2 and excess liquidity.
  - snake_doc 4y ago
    Your example doesn’t make any sense. The entire reason for the US Fed’s interest rate is to dictate the lower nominal bound of market returns in global capital markets. The FedFunds rate is the risk free rate, thus the market rate of return cannot be lower than this rate. Ie. The public equity market will return risk free rate + market risk premium. A better explanation would be: A pension funds needs to achieve long term nominal returns of 5% to meet liabilities. Fed funds rate is suddenly set to 0%, and treasury curve peaks at 2%. Market risk premium is 5% for public equities. Market risk premium is 10 % for private equities. To reach target returns while anticipating volatilities, it must allocate capital towards both public and private equities. This is the “sloshing”. Simple mathematics. Side note: any retail investor can access the risk-free rate (very close to it, minus transaction costs/expenses) through large money market funds. ie. https://investor.vanguard.com/investment-products/mutual-funds/profile/vmfxx https://investor.vanguard.com/investment-products/mutual-fun...
somewhereoutth 4y ago
It means lots of new money has been created by loan formation as interest rates have been so low. Thus assets will see their price rise. Certain hot assets will see large price rises. This will continue until interest rates revert to the norm (whatever that is) and correctly price risk.
college_physics 4y ago
Until there is a widely available open source model of how the economic system works (here and now) people will go on beating about the bush in eternal cycles. The elements for this to happen are actually there. We are not talking about a detailed replica with real time data, but a reasonably accurate model that includes all the public data from central banks, private bank statements, public market valuations etc. With such a system the question "excess liquidity sloshing around" is a specific query with a quantitative answer, not an endless, low-information discussion.
- doublespanner 4y ago
  It's the economists paradox, any sufficiently good model will drive decisions and policy, changing the conditions away from the assumptions included in the model.
  - college_physics 4y ago
    This might apply to a dynamic model of the entire economy including agent preferences etc. But that is not what is required to educate and elevate the debate. Accounting what the economic system does at any given moment is not subject to assumptions.
- bannedbybros 4y ago
  [dead]
dschuetz 4y ago
That means: too much money, and it's loosing its worth more quickly.
unyttigfjelltol 4y ago
`Liquidity` = `Value` minus `Debt` `Excess liquidity` simply means we were in the middle period where valuations increased, and debt levels hadn't yet caught up, so new credit was being issued fast, and money from loans was entering the system accelerating the cycle.
cs702 4y ago
Here's a mental model I find helpful for understanding current circumstances: "Quantitative easing" means issuing new money -- a government obligation that pays no interest -- to purchase treasury (and agency) bonds -- government obligations that pay interest. Until very recently, for good reasons (a global financial crisis, a global pandemic), the Fed and other central banks around the world have been engaged in quantitative easing at an unprecedented scale, replacing government-issued financial instruments that pay interest (bonds) with government-issued financial instruments that pay no interest (money). The result has been an unprecedented increase in private cash balances -- what many call "liquidity sloshing around." Last year, some central banks started doing the opposite, "quantitative tightening," i.e., selling previously purchased bonds (or letting them mature), removing liquidity (government-issued money) from financial markets and replacing it, directly or indirectly, with financial instruments that pay interest (government/agency-issued bonds). The result has been a gradual decrease in private cash balances -- one could call it "liquidity evaporating." For example, you can see the value of the financial instruments the Fed owns (i.e., it has purchased them in the past and continues to hold them) here: https://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm https://www.federalreserve.gov/monetarypolicy/bst_recenttren... -- PS. I'm talking only about readily observable facts, not about "excess liquidity" in the abstract sense, e.g., as described by economists who call themselves Keynesians.
- delaaxe 4y ago
  Explaining the mechanics of central banks isn’t as informative as explaining through which specific channels this excess liquidity ends up in assets.
  - cs702 4y ago
    I'm not sure what you mean by "excess liquidity ends up in assets." Keep in mind that asset prices are set at each instant by the marginal buyer and the marginal seller. If someone buys a single share of, say, TSLA for twice its most recently quoted price, the market cap of TSLA would instantly double (until the next trade is executed). Prices can rise or drop a lot, even if little money trades hands. If you're asking how the net present values of long-lived assets change as a consequence of quantitative easing, the answer lies in the impact of quantitative easing on long-term interest rates. All else being equal, when long-term interest rates rise, net present values decline; when long-term interest rates decline, net present values increase.[a] For example, when the Fed engaged in quantitative easing from 2008 to 2022, it did so expressly with the intention of reducing long-term interest rates. Since last year, the Fed has been engaged in quantitative tightening (selling bonds or letting them mature) expressly with the intention of pushing long-term interest rates up. -- [a] Asset prices (market caps) eventually tend to follow net present values, usually in fits and starts. EDIT: Changed 1998 to 2008 (typo).
airstrike 4y ago
If you believe crypto is purely speculative, maybe you can argue it's a near perfect measurement of excess liquidity sloshing around the financial system Food for thought
- amirhirsch 4y ago
  It seems like stable coins would track the excess liquidity people are hoping to reinvest and all other crypto currencies track the amount of excess people are willing to just lose.
- dclowd9901 4y ago
  Only when its potential upside vs risk is better than any other option. As is with any other investing (though probably a bit more buffered since it’s relatively scary investing to anyone even mildly risk averse).
vishnugupta 4y ago
For one concrete data point refer to this[1] chart which tracks the mortgage backed securities (MBS) held by the fed. This is fed creating money (for the lack of a better word) to indirectly fund home ownership. What started out as a short term measure to avoid a Great Depression post 2008[2] crisis ended up being a more permanent policy fixture. That is about $2.7T of new money created since 2008. Let that sink in. 2010s were quite unprecedented years in terms of new money (and hence new debt) created. The repercussions were everywhere; crazy VC funding (Uber/Airbnb etc.,), insane tech salaries, record high stock markets and so on. [1] https://fred.stlouisfed.org/series/WSHOMCB https://fred.stlouisfed.org/series/WSHOMCB [2] https://home.treasury.gov/data/troubled-assets-relief-program/about-tarp https://home.treasury.gov/data/troubled-assets-relief-progra...
- syntaxing 4y ago
  Is 2.3T a lot? Since the US GDP is about 23T, is there a situation where printing that much money is a net positive thing?
  - NhanH 4y ago
    Money supply needs to couple with velocity for the comparison with GDP to make sense (think of the degenerate case, you theoretically could use like a single dollar to handle the entire economy, if it moves fast enough). The easier comparison would be to compare the money supply growth against the GDP growth and see if they differ by much. I have neither number on hands, so someone else might be able to provide them.
twawaaay 4y ago
> When the rate of return is high, savers can achieve their goals by buying, holding, and harvesting the resulting cash flow. When it is low, they must turn to other strategies: leverage, arbitrage, momentum trading, more sophisticated quant trading, and “beauty contest trading“: betting on what others will find popular, for (arguably) extra-economic reasons. I don't think this is how people behave. I think collective behaviour can be better explained by people discounting the painful lessons of previous downturns the more the longer prosperity lasts. Our brains are wired this way, unfortunately and it requires a conscious effort to objectively (if it can be done at all) take into account risks of serious and long lasting financial winter. Most people don't have the self discipline to do this. They kinda know about it but then they see other people making shitload of money in risky "investments" and our greedy primate brains take over.
- s1artibartfast 4y ago
  I don't think either take is correct but the former is closer to the truth. It is all risk reward trade-off. If bonds have the same yield as other Investments with no risk, of course Savers and investors would select them over riskier strategies. This has less to do with discounting painful lessons and more to do with the spread on the return rate.
  - readthenotes1 4y ago
    kids eat tide. Call me crazy, but I don't think assuming people make rational decisions is a good starting point for economics
    - s1artibartfast 4y ago
      I'm not saying everything's rational either, but you can't deny a difference in return rates make a difference. More people will opt for a risky investment if it's paying substantially more then their safe one. If there is little difference in return, few people will opt for the risky bets
    - fleischhauf 4y ago
spicyusername 4y ago
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.
dclowd9901 4y ago
Examples: the 08 housing bubble, the oil price surge following the 08 crash, securities and crypto boom of 2020 People will try to maximize their gains wherever they can.
deleted 4y ago
[deleted]
heisenbit 4y ago
I strongly believe there is not one but there are two monetary systems today. One is for assets and the other for daily life consumption. They are only weakly coupled less than maybe in the past. This allowed raging inflation in the asset system for decades while daily life saw deflation or low inflation. And now we have exactly the opposite. There are a lot of reasons - many related to decision body captures - why transmission between the two sides slowed down. Any analysis looking at only one side and trying to explain the whole is bound to fail. Traditional methods work as long as they focus on one side only - influence from the other can be neglected.
- bawana 4y ago
  That distinction should be formalized and a simple law could fix the inequality- financial gains can only be spent/reinvested in Real world goods and services unrelated to finance. Real world money would have no restrictions
- Nemi 4y ago
  I agree. What we have seen over the past decade+ has been asset inflation. This is exactly the same as goods inflation (what we are seeing now), except that asset inflation seems like a good thing at first blush. People want their assets to go up in price. It makes them feel rich. But assets should be priced based on what they return to you in future dollars, and THAT return has been going down and down over the past decade. This is not a good thing. What is happening now is that asset inflation is correcting and goods inflation (a related but distinct concept) is taking hold.
neilwilson 4y ago
The viewpoint in the OP is largely backward. There is always as much liquidity as is required. "Excess liquidity" flows around until it finds somebody where paying off the loan they hold is the 'best use of funds'. That destroys the liquidity, and the loan - shrinking financial balance sheets and freeing up whatever physical asset collateral that loan is secured upon, which then becomes 'equity'. Increasing base rates is an artificial market intervention that suppresses asset prices. High asset prices, as with everything else priced high, is just a market signal to produce more of that particular asset. Asset prices rise until the portfolio indifference point is reached - loans created against asset collateral are matched by loans destroyed by received liquidity created by those loans (as the 'best use' of that liquidity). All fairly straightforward once you accept there isn't a fixed amount of money and that money and bonds are essentially the same thing with different terms and interest rates.
m3kw9 4y ago
To fight excess cash feds increase interest rates. Excess cash in a low interest rate environment causes inflation because of the multiplier effect of loaning money. The increased rate slows down how much people will borrow.
yieldcrv 4y ago
It means that the wrong people have money and that many of them need to be poor and die to reduce inflation
xhrpost 4y ago
This is tangential but I asked it in another thread a little too late. But with the Fed's interest payments exceeding their asset income interest for the first time in history, does this effectively cause an increase in M1 like QE? The official charts seem to imply that the answer is "no" but I don't understand why.
- Rury 4y ago
  The interest income the Fed earns now, is from assets which were created in the past at lower interest rates, where what it's paying out to banks is in current higher interest rates. While this may seem like it could essentially result in QE, the Fed covers the difference via what's considered a deferred asset, which is something that goes away when the income balance changes in the future. It's kind of like paying a future expense now. So, the effect is temporary.
  - xhrpost 4y ago
    Thanks. I've heard of the deferred asset, kind of an IOU to itself. But that only changes, like you said, when the income balance changes. Similarly, we could say that QE is just deferred until the purchased assets are sold again in the future?
    - Rury 4y ago
      I'm not entirely sure, but I think that depends. It's like the Fed is making up the difference in income, by handing out promises which will be paid in the future when the Fed has a positive net income again, so to speak. If the Fed decides in the future to pay for such with newly printed money, then I think you could consider it deferred QE, but if in the future it merely uses the income from its assets to pay for them, then in effect it's not really QE at all. Or vice versa, if the Fed is paying out new money to cover such today, it is reversed in the future (and it therefore acts like temporary QE and deferred QT). Either way, in aggregate, it should balance out, and would only result in QE if it results in new money added to the monetary base.
euroderf 4y ago
I've been assuming that the "excess liquidity sloshing around" is all those profits from decades of I.T.-fueled increases in productivity that did not trickle down to have-nots, but rather were accumulated by the haves. More than they can spend, or even invest carefully. So it sloshes.
vjulian 4y ago
Perhaps slightly tangential, what does end-of-life of money look like, or put another way, how is money destroyed (assuming that it is)?
Invictus0 4y ago
This article does a pretty bad job of explaining the concept. > This is one instantiation of an idea that was omnipresent in 2021-2022—that much of the weirdness in financial markets, from GameStop to crypto to stock market volatitlity, was driven by an excess of liquidity. This idea made a certain amount of inarticulable, pre-intuitive sense, but that sensibility does not a gears-level understanding make. Seriously? This paragraph is fucking garbage.
komain7 4y ago
It means greedy people have too much cash and are still looking for investments. They are forced to put money into investments that are less than ideal. If something isn't worth it but you can't find anything else that is the case with everyone else meaning all the shitty assets are going to be driven up. If a billionaire has a billion dollars they are looking to get rid of that trash and find something they can write their name on. They know where that toilet paper came from. I mean money.

134 points by cdwhite 4y ago

deleted 4y ago

[deleted]

_nalply 4y ago

[flagged]

eastbound 4y ago
It’s a nice NLP-generated text, so now, what is scientific correct about it, given that ChatGPT is not configured for reasonings or for citing sources? There is a reason why HN guidelines forbids robot-generated answers.
- _nalply 4y ago
  OK, noted, sorry for my post.
- blackbear_ 4y ago
  Just to clarify your position, do you think this specific passage contains mistakes or is misleading in any way (if so, please be precise), or are you generally doubtful about this technology but are fine with the text above?
  - Xylakant 4y ago
    The issue with ChatGPT is that it produces convincingly sounding texts that more often than not contain factual errors that are obvious to people familiar with the field, but require effort to disprove for lay persons. Made up citations, for example. As such, they’re worthless. A human is capable of producing a similar made up text, but ChatGPT makes it trivial to anyone, flooding the conversation with useless noise, crowding out the signal. Asking your parent to engage with an essentially unlimited firehose of unfounded claims just plays into that hand. I really recommend reading this text on ChatGPTs lack of usefulness for academic conversations https://acoup.blog/2023/02/17/collections-on-chatgpt/ https://acoup.blog/2023/02/17/collections-on-chatgpt/
    - blackbear_ 4y ago
      Thank you for the reference, I know about the dangers of chatgpt and some skepticism is certainly warranted. However, dismissing anything produced by chatgpt simply because it was made by chatgpt is not right, which is why I was asking an opinion about that passage: if the text is accurate, it should not matter who or what wrote it.
      - Xylakant 4y ago
        You're missing my point: The text is produced by an agent known to be unreliable. It might be right by chance, but the onus to prove that (by citing references, for example) is on the poster. It's entirely warranted to dismiss the text, otherwise you essentially DOS the conversation.
        wfme 4y ago
        You know, the most unreliable agents still appear to be people. If someone is right 90% of the time, we don’t require references for everything they say to save for that 10%.
    - imtringued 4y ago
      The problem with ChatGPT is indeed that it is trained to look like an authoritative source independent of the input query. What ChatGPT is doing is transforming the original input and filling the gaps but the gaps it filled must all be acknowledged by the original author and that is hard to impossible for a layman.
      - Xylakant 4y ago
        It’s even worse. The model contains the information that claims are statistically likely to be followed by a citation, for example. So when the output produces a claim, it follows up with a citation- and it completely makes that one up. It has no concept of what a citation is, or what purpose it serves or that a reader might actually go and validate that. It's just a specific sequence of words that follows a specific sequence of words.
  - eastbound 4y ago
    To clarify my position: I believe the generated text is indistinguishable from human-generated reasonings and is most probably true in most cases (probably no factual error). However, on average, ChatGPT content will contain more errors than humans (who it can be assumed want to see the truth), and therefore, it should be put in the same bucket as both “propaganda facts” and “con artist facts”. It’s still facts, just misleading.
- c22 4y ago
  I don't see this guideline? [0] [0]: https://news.ycombinator.com/newsguidelines.html https://news.ycombinator.com/newsguidelines.html
  - josephcsible 4y ago
    https://news.ycombinator.com/item?id=33950747 https://news.ycombinator.com/item?id=33950747

hmmmcurious1 4y ago

It means wages and employment are too high which causes inflation. Nevermind the printed trillions, the common employee is the true enemy here.

bell-cot 4y ago
While good as a cynical or satirical answer, our younger readers might want to learn the correct answer first...
- deleted 4y ago
  [deleted]
- groestl 4y ago
  Both posts are important here, IMHO. We have two signals to arrive at economic and productive decisions in our society, which favors distributed decisionmaking: democratic votes and price. There are all kinds of problems with the former, as for the latter: we rely on individuals to make efficient decisions, however this requires some kind of scarcity. Scarcity which is largely in effect for the majority of the population that relies on income from work to survive. If individuals make decisions without constraints, they tend to go off track real quick. IMHO, this is the main problem of wealth inequality: rich people make stupid decisions. And stupid, in this case, means unproductive for the society/enviroment etc etc in general.
  - andrepd 4y ago
    > which favors distributed decisionmaking: [...] price Seeing as the top 10% hold over 60% of the wealth (in the US, globally we have a dozen people with as much wealth as the bottom 50%), I don't see how this follows.
    - groestl 4y ago
      We still arrive at concensus based on a (more or less free) market. Weights on this market are heavily skewed to the top, that's true. And as I said, democratic votes also don't exactly live up to the cultural standard that we at least say we have. But in general, we're very far away from a planned economy.

bell-cot 4y ago

A good analogy, for those more familiar with mechanics / engineering / physics - https://en.wikipedia.org/wiki/Free_surface_effect https://en.wikipedia.org/wiki/Free_surface_effect

bjornsing 4y ago

I was hoping that the OP would address a related idea that I find rather weird: it’s sometimes said that “this excess liquidity has to go somewhere” and that “the excess liquidity has gone into [housing/stocks/commodities/other asset class]”. But I don’t get this: It might seem plausible that if stock prices go up they absorb liquidity from the system. But (ignoring new stock issues / newly build houses) in every transaction there’s both a buyer and a seller. Sure, the buyer parts ways with cash when they buy a share, but that cash goes to the seller. So there should be just as much liquidity as before, just in different hands. If anything a rising stock or housing market should just put more excess liquidity into the system because it’s possible to borrow against those assets. What am I getting wrong? Or is this just an often repeated falsehood?

marketerinland 4y ago
Liquidity means capacity to buy, essentially. Not cash per se. If you reduce the required deposit on a house from 20% to 10%, that increases the liquidity in the market. Suddenly more people ‘have’ the money to buy that $500k property and the market will typically rise until it’s absorbed that added financial capacity This is why low interest rates had such a dramatic impact. Monthly repayments are much lower on a low interest loan, so the average person could ‘afford’ to borrow way more. Note; this is just Real Estate. Lots of other borrowing also occurred. But when Real Estate markets suddenly go up by 20%, now it’s the owners of these houses that are worth a whole lot more. And they often decide to cash in, in some way (selling their J
tinco 4y ago
I think that's the sloshing part. Excess liquidity moves from entities that buy real estate, into the hands of those that were selling that real estate. Then the excess liquidity of the entities that sold real estate goes into whatever they're interested in, like maybe the stock markets. This is not one big movement but lots of mostly chaotic reactive systems hench the sloshing.
mo_42 4y ago
You’re on the right track. Many people including economists don’t get this. It’s a very useful way of thinking economically. (See also my other comment here).

mo_42 4y ago

I don’t fully understand the point the author is trying to make. I appreciate that there are boom and bust cycles for some sorts of assetes I would have liked to author to talk more about wording. What is actually liquidity? Today’s money appears in many gradual forms of moneyness. Also is there anything like "excessive money"? Where does it come from? Central banks don’t just print money. They trade it for usually governmental bonds. If other than central banks have excessive liquidity they may trade it for other assets. This means they need to find a counter party that has the reverse situation. So overall the economy cannot have excessive money.

imtringued 4y ago
>If other than central banks have excessive liquidity they may trade it for other assets. This means they need to find a counter party that has the reverse situation. So overall the economy cannot have excessive money. But you are assuming that there is no zero lower bound. If there is an excess of liquidity like there being an excess of trash then people would expect to get paid to get rid of it and the market would just find a garbage collection fee for this excess liquidity. But if there is a zero lower bound, then the people with the excess liquidity have no incentive to dispose of it. Instead, they would just keep accumulating more and more liquidity indefinitely as the market tells (or rather is forbidden to tell) them there is no excess liquidity. I mean, take this example. The interest rate in the market is 3% and the interest set by the central bank is 5%. People will accumulate more liquidity than is optimal. There will be an excess of liquidity. It doesn't matter what the absolute numbers are. They can be -3% and 0% and you run into the same problem. If excess liquidity is a form of economic pollution like CO2 is, then you would expect to pay for this pollution. But since the government doesn't charge a pollution tax, people will overproduce both CO2 and excess liquidity.
- snake_doc 4y ago
  Your example doesn’t make any sense. The entire reason for the US Fed’s interest rate is to dictate the lower nominal bound of market returns in global capital markets. The FedFunds rate is the risk free rate, thus the market rate of return cannot be lower than this rate. Ie. The public equity market will return risk free rate + market risk premium. A better explanation would be: A pension funds needs to achieve long term nominal returns of 5% to meet liabilities. Fed funds rate is suddenly set to 0%, and treasury curve peaks at 2%. Market risk premium is 5% for public equities. Market risk premium is 10 % for private equities. To reach target returns while anticipating volatilities, it must allocate capital towards both public and private equities. This is the “sloshing”. Simple mathematics. Side note: any retail investor can access the risk-free rate (very close to it, minus transaction costs/expenses) through large money market funds. ie. https://investor.vanguard.com/investment-products/mutual-funds/profile/vmfxx https://investor.vanguard.com/investment-products/mutual-fun...

somewhereoutth 4y ago

It means lots of new money has been created by loan formation as interest rates have been so low. Thus assets will see their price rise. Certain hot assets will see large price rises. This will continue until interest rates revert to the norm (whatever that is) and correctly price risk.

college_physics 4y ago

Until there is a widely available open source model of how the economic system works (here and now) people will go on beating about the bush in eternal cycles. The elements for this to happen are actually there. We are not talking about a detailed replica with real time data, but a reasonably accurate model that includes all the public data from central banks, private bank statements, public market valuations etc. With such a system the question "excess liquidity sloshing around" is a specific query with a quantitative answer, not an endless, low-information discussion.

doublespanner 4y ago
It's the economists paradox, any sufficiently good model will drive decisions and policy, changing the conditions away from the assumptions included in the model.
- college_physics 4y ago
  This might apply to a dynamic model of the entire economy including agent preferences etc. But that is not what is required to educate and elevate the debate. Accounting what the economic system does at any given moment is not subject to assumptions.
bannedbybros 4y ago
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dschuetz 4y ago

That means: too much money, and it's loosing its worth more quickly.

unyttigfjelltol 4y ago

`Liquidity` = `Value` minus `Debt` `Excess liquidity` simply means we were in the middle period where valuations increased, and debt levels hadn't yet caught up, so new credit was being issued fast, and money from loans was entering the system accelerating the cycle.

cs702 4y ago

Here's a mental model I find helpful for understanding current circumstances: "Quantitative easing" means issuing new money -- a government obligation that pays no interest -- to purchase treasury (and agency) bonds -- government obligations that pay interest. Until very recently, for good reasons (a global financial crisis, a global pandemic), the Fed and other central banks around the world have been engaged in quantitative easing at an unprecedented scale, replacing government-issued financial instruments that pay interest (bonds) with government-issued financial instruments that pay no interest (money). The result has been an unprecedented increase in private cash balances -- what many call "liquidity sloshing around." Last year, some central banks started doing the opposite, "quantitative tightening," i.e., selling previously purchased bonds (or letting them mature), removing liquidity (government-issued money) from financial markets and replacing it, directly or indirectly, with financial instruments that pay interest (government/agency-issued bonds). The result has been a gradual decrease in private cash balances -- one could call it "liquidity evaporating." For example, you can see the value of the financial instruments the Fed owns (i.e., it has purchased them in the past and continues to hold them) here: https://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm https://www.federalreserve.gov/monetarypolicy/bst_recenttren... -- PS. I'm talking only about readily observable facts, not about "excess liquidity" in the abstract sense, e.g., as described by economists who call themselves Keynesians.

delaaxe 4y ago
Explaining the mechanics of central banks isn’t as informative as explaining through which specific channels this excess liquidity ends up in assets.
- cs702 4y ago
  I'm not sure what you mean by "excess liquidity ends up in assets." Keep in mind that asset prices are set at each instant by the marginal buyer and the marginal seller. If someone buys a single share of, say, TSLA for twice its most recently quoted price, the market cap of TSLA would instantly double (until the next trade is executed). Prices can rise or drop a lot, even if little money trades hands. If you're asking how the net present values of long-lived assets change as a consequence of quantitative easing, the answer lies in the impact of quantitative easing on long-term interest rates. All else being equal, when long-term interest rates rise, net present values decline; when long-term interest rates decline, net present values increase.[a] For example, when the Fed engaged in quantitative easing from 2008 to 2022, it did so expressly with the intention of reducing long-term interest rates. Since last year, the Fed has been engaged in quantitative tightening (selling bonds or letting them mature) expressly with the intention of pushing long-term interest rates up. -- [a] Asset prices (market caps) eventually tend to follow net present values, usually in fits and starts. EDIT: Changed 1998 to 2008 (typo).

airstrike 4y ago

If you believe crypto is purely speculative, maybe you can argue it's a near perfect measurement of excess liquidity sloshing around the financial system Food for thought

amirhirsch 4y ago
It seems like stable coins would track the excess liquidity people are hoping to reinvest and all other crypto currencies track the amount of excess people are willing to just lose.
dclowd9901 4y ago
Only when its potential upside vs risk is better than any other option. As is with any other investing (though probably a bit more buffered since it’s relatively scary investing to anyone even mildly risk averse).

vishnugupta 4y ago

For one concrete data point refer to this[1] chart which tracks the mortgage backed securities (MBS) held by the fed. This is fed creating money (for the lack of a better word) to indirectly fund home ownership. What started out as a short term measure to avoid a Great Depression post 2008[2] crisis ended up being a more permanent policy fixture. That is about $2.7T of new money created since 2008. Let that sink in. 2010s were quite unprecedented years in terms of new money (and hence new debt) created. The repercussions were everywhere; crazy VC funding (Uber/Airbnb etc.,), insane tech salaries, record high stock markets and so on. [1] https://fred.stlouisfed.org/series/WSHOMCB https://fred.stlouisfed.org/series/WSHOMCB [2] https://home.treasury.gov/data/troubled-assets-relief-program/about-tarp https://home.treasury.gov/data/troubled-assets-relief-progra...

syntaxing 4y ago
Is 2.3T a lot? Since the US GDP is about 23T, is there a situation where printing that much money is a net positive thing?
- NhanH 4y ago
  Money supply needs to couple with velocity for the comparison with GDP to make sense (think of the degenerate case, you theoretically could use like a single dollar to handle the entire economy, if it moves fast enough). The easier comparison would be to compare the money supply growth against the GDP growth and see if they differ by much. I have neither number on hands, so someone else might be able to provide them.

twawaaay 4y ago

> When the rate of return is high, savers can achieve their goals by buying, holding, and harvesting the resulting cash flow. When it is low, they must turn to other strategies: leverage, arbitrage, momentum trading, more sophisticated quant trading, and “beauty contest trading“: betting on what others will find popular, for (arguably) extra-economic reasons. I don't think this is how people behave. I think collective behaviour can be better explained by people discounting the painful lessons of previous downturns the more the longer prosperity lasts. Our brains are wired this way, unfortunately and it requires a conscious effort to objectively (if it can be done at all) take into account risks of serious and long lasting financial winter. Most people don't have the self discipline to do this. They kinda know about it but then they see other people making shitload of money in risky "investments" and our greedy primate brains take over.

s1artibartfast 4y ago
I don't think either take is correct but the former is closer to the truth. It is all risk reward trade-off. If bonds have the same yield as other Investments with no risk, of course Savers and investors would select them over riskier strategies. This has less to do with discounting painful lessons and more to do with the spread on the return rate.
- readthenotes1 4y ago
  kids eat tide. Call me crazy, but I don't think assuming people make rational decisions is a good starting point for economics
  - s1artibartfast 4y ago
    I'm not saying everything's rational either, but you can't deny a difference in return rates make a difference. More people will opt for a risky investment if it's paying substantially more then their safe one. If there is little difference in return, few people will opt for the risky bets
  - fleischhauf 4y ago

spicyusername 4y ago

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.

dclowd9901 4y ago

Examples: the 08 housing bubble, the oil price surge following the 08 crash, securities and crypto boom of 2020 People will try to maximize their gains wherever they can.

deleted 4y ago

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heisenbit 4y ago

I strongly believe there is not one but there are two monetary systems today. One is for assets and the other for daily life consumption. They are only weakly coupled less than maybe in the past. This allowed raging inflation in the asset system for decades while daily life saw deflation or low inflation. And now we have exactly the opposite. There are a lot of reasons - many related to decision body captures - why transmission between the two sides slowed down. Any analysis looking at only one side and trying to explain the whole is bound to fail. Traditional methods work as long as they focus on one side only - influence from the other can be neglected.

bawana 4y ago
That distinction should be formalized and a simple law could fix the inequality- financial gains can only be spent/reinvested in Real world goods and services unrelated to finance. Real world money would have no restrictions
Nemi 4y ago
I agree. What we have seen over the past decade+ has been asset inflation. This is exactly the same as goods inflation (what we are seeing now), except that asset inflation seems like a good thing at first blush. People want their assets to go up in price. It makes them feel rich. But assets should be priced based on what they return to you in future dollars, and THAT return has been going down and down over the past decade. This is not a good thing. What is happening now is that asset inflation is correcting and goods inflation (a related but distinct concept) is taking hold.

neilwilson 4y ago

The viewpoint in the OP is largely backward. There is always as much liquidity as is required. "Excess liquidity" flows around until it finds somebody where paying off the loan they hold is the 'best use of funds'. That destroys the liquidity, and the loan - shrinking financial balance sheets and freeing up whatever physical asset collateral that loan is secured upon, which then becomes 'equity'. Increasing base rates is an artificial market intervention that suppresses asset prices. High asset prices, as with everything else priced high, is just a market signal to produce more of that particular asset. Asset prices rise until the portfolio indifference point is reached - loans created against asset collateral are matched by loans destroyed by received liquidity created by those loans (as the 'best use' of that liquidity). All fairly straightforward once you accept there isn't a fixed amount of money and that money and bonds are essentially the same thing with different terms and interest rates.

m3kw9 4y ago

To fight excess cash feds increase interest rates. Excess cash in a low interest rate environment causes inflation because of the multiplier effect of loaning money. The increased rate slows down how much people will borrow.

yieldcrv 4y ago

It means that the wrong people have money and that many of them need to be poor and die to reduce inflation

xhrpost 4y ago

This is tangential but I asked it in another thread a little too late. But with the Fed's interest payments exceeding their asset income interest for the first time in history, does this effectively cause an increase in M1 like QE? The official charts seem to imply that the answer is "no" but I don't understand why.

Rury 4y ago
The interest income the Fed earns now, is from assets which were created in the past at lower interest rates, where what it's paying out to banks is in current higher interest rates. While this may seem like it could essentially result in QE, the Fed covers the difference via what's considered a deferred asset, which is something that goes away when the income balance changes in the future. It's kind of like paying a future expense now. So, the effect is temporary.
- xhrpost 4y ago
  Thanks. I've heard of the deferred asset, kind of an IOU to itself. But that only changes, like you said, when the income balance changes. Similarly, we could say that QE is just deferred until the purchased assets are sold again in the future?
  - Rury 4y ago
    I'm not entirely sure, but I think that depends. It's like the Fed is making up the difference in income, by handing out promises which will be paid in the future when the Fed has a positive net income again, so to speak. If the Fed decides in the future to pay for such with newly printed money, then I think you could consider it deferred QE, but if in the future it merely uses the income from its assets to pay for them, then in effect it's not really QE at all. Or vice versa, if the Fed is paying out new money to cover such today, it is reversed in the future (and it therefore acts like temporary QE and deferred QT). Either way, in aggregate, it should balance out, and would only result in QE if it results in new money added to the monetary base.

euroderf 4y ago

I've been assuming that the "excess liquidity sloshing around" is all those profits from decades of I.T.-fueled increases in productivity that did not trickle down to have-nots, but rather were accumulated by the haves. More than they can spend, or even invest carefully. So it sloshes.

vjulian 4y ago

Perhaps slightly tangential, what does end-of-life of money look like, or put another way, how is money destroyed (assuming that it is)?

Invictus0 4y ago

This article does a pretty bad job of explaining the concept. > This is one instantiation of an idea that was omnipresent in 2021-2022—that much of the weirdness in financial markets, from GameStop to crypto to stock market volatitlity, was driven by an excess of liquidity. This idea made a certain amount of inarticulable, pre-intuitive sense, but that sensibility does not a gears-level understanding make. Seriously? This paragraph is fucking garbage.

komain7 4y ago

It means greedy people have too much cash and are still looking for investments. They are forced to put money into investments that are less than ideal. If something isn't worth it but you can't find anything else that is the case with everyone else meaning all the shitty assets are going to be driven up. If a billionaire has a billion dollars they are looking to get rid of that trash and find something they can write their name on. They know where that toilet paper came from. I mean money.