We all know that since the Top If You Are Not Crashing You’re Not Trying Vintage Shirt stock market started crashing, the Fed has lowered its interest rates and started the regime of “infinite quantitative easing”. This was in an effort to provide liquidity to effectively everyone. What does this all mean, and how does this help the economy, why did the stock market go up because of this, and how long can this liquidity pumping last? Banks create money by accepting deposits from customers and leveraging that money to create loans. Suppose you decide to deposit $1000 into his checking account.
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First, what is liquidity? It’s the availability of Top If You Are Not Crashing You’re Not Trying Vintage Shirt liquid assets in an organization or economy. A liquid asset is an asset that is easily convertible to cash at the market price. An easy way to look at the liquidity of an asset is looking at the bid-ask spread of it. In fact, for organizations/people that hold a vast amount of wealth, they would probably hold more of their wealth in treasuries than cash (or bank deposits). We’ll go over that later. In contrast, a house is fairly illiquid. It might take months to find a buyer, may have high transaction fees if you go through an agent, and the fair value of it is uncertain.
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Okay, so how do the Fed’s policies affect liquidity? In general, a Top If You Are Not Crashing You’re Not Trying Vintage Shirt central bank will either be adopting an expansionary or contractionary monetary policy, meaning the goal of increasing or decreasing the supply of “money” in the system. A key distinction here to point out is that “money” does not necessarily mean “cash”. There’s actually several official definitions and calculations of what counts as “money”, but all of them go with the notion of anything that can be considered “cash equivalents”, like bank deposits.









