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 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.