If anybody feels knowledgeable enough, I’d appreciate your explanation / opinions on the “liquidity” issue Randall Forsyth mentions briefly in the Sept. 13 Barron’s. The debt part I understand. But the liquidity part is what I’m not fully reeling in.
Here’s Forsyth’s final paragraph:
“As a result of the past 20 years’ policies, America's public debt is one-quarter larger than the economy, versus a little more than half of gross domestic product in the third quarter of 2001. At the same time, the Fed's assets—mainly U.S. Treasury securities—have grown more than 11-fold, to over $8.3 trillion. As a result, the financial system has become so overstuffed with liquidity that more than $1.1 trillion is parked at the Fed's overnight reverse-repurchase facility. Who could have foreseen this two decades ago?”
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As investors, we like to have liquidity. It allows us to move from one position to another easily or take advantage of opportunities that arise. No? So why is having too much of it dangerous to the economy?
Comments
Banks park money overnight at the repo facility to ensure they have enough cash available for the next day and the treasury pays 0.05%. But many of them apparently are just flipping the money over each night, without using it for more productive loans.
the Fed's purpose in buying bonds with created money is to increase the loans banks make to productive uses. Instead much of it is sitting on the sidelines, or in the stock market