The Meaning of

[Jim Nickerson]

In today's 'Daily News with Anti-Spin' the anti-spin master in his anti-spinning about the number of countries raising short-term interest rates wrote

The wild card is whether the result of this concerted global liquidity drain results in the global economy slowing more quickly than CPI inflation.

I believe 'liquidity' mainly means the readiness into which an asset can be converted into cash without greatly disturbing the prevailing prices of the asset class.

I am not sure I fully understand the use of 'liquidity' as EJ used it in the quote.

I take his use of 'draining liquidity' to infer an action by central banks to make credit less available by making it cost more. Is this process of making credit cost more or less another definition of 'liquidity'? That is to say 'adding liquidity' is making credit cost less, and 'draining liquidity' makes obtaining credit more costly, is this correct?

Jim

[Pilot Fish]

Jim,

Your first definition is indeed one meaning of liquidity as it relates to a particular financial instrument.

You are basically on the right track with your other definition as well. I would only add that it is possible for a situation to arise where liquidity is ample and thus credit is, in theory, easily available but nobody wants to lend or borrow.

This is what commentators sometimes refer to as "pushing on a string". One example would be what happened in Japan when, domestically, nobody seemed to want to take advantage of the cheap money - although carry traders around the world certainly did.