My first Pieria post about matters discussed at the Lindau Economics Meeting looks at the ever-increasing liquidity of financial assets and the consequences for monetary policy:
Several economists at the Lindau meeting were severely critical of central banks' conduct of monetary policy in the light of continuing depression in the US, Japan and much of Europe, and called for greater use of fiscal policy to bring about recovery. Among the most critical was Christopher Sims, who gave a trenchant presentation on “Inflation, Fear of Inflation and Public Debt”.
He started by announcing the death of the quantity theory of money, MV=PY. Due to interest on reserves and near-zero interest rates, “money” can no longer be clearly distinguished from other financial assets....
Read on here.


  1. That was a thought-provoking read. Being a bit hard of economics, though, I didn't quite understand "nearly everything bears interest, and almost nothing pays interest" - what's the difference? I was particularly confused since you seem to use the two interchangeably in the third para.

  2. So the hypothesis is that there is some link between liquidity and return?

    But what happens, say, if government bond rates should rise, yet bonds, as you note through technological change, are fully liquid?

    1. The hypothesis is that bond yields are falling because liquidity is increasing. However, liquidity is also a function of safety. Things that are no longer regarded as safe lose their liquidity - like the CDOs I mentioned. Therefore, if bond yields are rising, their liquidity is falling. Same with a currency that is hyperinflating - it is actually becoming illiquid, so people are dumping it as quickly as possible. Wheelbarrows of money are a sign of illiquidity, not liquidity.

    2. Sorry, that doesn't make a huge amount of sense. I will try again.

      Really what I am saying is that both increasing liquidity and falling yields are a function of safety. When yields rise, bonds are perceived as less safe, so although their technological liquidity wouldn't change, people's willingness to accept them would decline, which reduces their liquidity. If no-one will accept your bond-fund card, you can't pay for your meal.

    3. Thanks for the clarification.

  3. Fascinating read.
    The implication about monetary and fiscal policy collapsing together seems all too correct.
    What your piece made me think of is that (as a small business owner) the new "low interest" environment stifles outsiders (or to put it another way, entrenches inequality.)

    Capital is now cheap, if you meet the other criteria for borrowing. On the SME side these often include: so much money, you don't need to borrow and/or large scale collateral.

    Now risk is real and banks have been burned, so this makes sense at their level.
    However, it's a disaster for the economy as it entrenches the already successful as the only ones who can take on new debt and try new things...

    1. I agree with you. Everyone is so terrified of risk at the moment - except for yield-hunters, who are blithely ignoring risk. It's not healthy. And I also agree that demand for collateral is a serious barrier to finance for small businesses, particularly start ups and those whose assets are mainly in their heads. If you don't have property, you can't get finance. Small businesses really are the Ancient Mariner.

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