All financial markets are, from time to time, victims of media stories saying that liquidity has dried up. Or the obverse of the coin: sellers are overwhelming the supply of buyers. One example: For decades, scaremongers have described the disaster which would follow liquidation of the hoard of Treasurys held by Japan or China, but in the currency instabilities of the last year, a couple of trillion-worth have been sold to defend overseas currencies from an overstrong dollar -- with no noticeable harm here at all. “Liquidity” in its most useful sense means the ability for markets to accommodate the sale or purchase of financial objects in quantity without dramatic changes in price. That’s exactly what has happened with China’s sales of U.S. Treasurys. “Liquidity” in its most broad sense -- all of the cash in the world -- has no meaning. When it gets interesting Liquidity gets interesting when investors are trying to buy or sell large amounts of something unusual...
- Liquidity gets interesting when investors are trying to buy or sell large amounts of something unusual.
- Mortgages are weird because the makers of the IOUs and the collateral are unique -- no two the same.
- It may help readers seeing “drying up” scare stories to understand just how immense these markets are, and hence how hard it is to dry them into a state of motionless adobe.