tag:blogger.com,1999:blog-8897997766931633186.post6569441631019478272..comments2024-02-14T03:21:37.506-05:00Comments on Monetary Freedom: LiquidityBill Woolseyhttp://www.blogger.com/profile/06330232724290161369noreply@blogger.comBlogger13125tag:blogger.com,1999:blog-8897997766931633186.post-7631366944140771222017-01-22T04:51:58.907-05:002017-01-22T04:51:58.907-05:00I really enjoy reading through this blog, as it he...I really enjoy reading through this blog, as it helps big time and keeps me happy with thins. I trade with OctaFX broker and with them, I keep it all easy to do with the wide range of features and facilities having small spreads, zero balance protection, rebate program where I get 50% back on all trades which is on even with losing trades, so that all keeps it entirely comfortable and at ease with doing things which allows me to perform nicely.Hafreeznoreply@blogger.comtag:blogger.com,1999:blog-8897997766931633186.post-72977554439887959742010-04-05T12:57:34.662-04:002010-04-05T12:57:34.662-04:00You wrote: "If you need money in six months,...You wrote: "If you need money in six months, you have less liquidity risk if you hold a six month CD." Well, less than if you hold an immature forest; not less than if you hold currency. (There is risk in holding currency: it might be stolen. But this is not *liquidity* risk.) But I was suggesting that there really is no such thing as "liquidity risk"; at best there are *20-year liquidity risk* (when one will need cash twenty years from now), *1-year liquidity risk*, *six-month liquidity risk*, *1-week liquidity risk*, *1-day liquidity risk*, *1-minute liquidity risk*, etc. (Indeed, it may be necessary to specify even more parameters in order to get a definite concept.) <br /><br />"The difference [between holding NYSE-traded stock--less liquid--and holding T-bills--more liquid] is uncertainty regarding the price." Suppose I'll need $1,000,000 in cash two weeks from now, and my only asset is (scenario 1:) $1,001,000 face amount of T-bills, maturing in one year, or (scenario 2:) $2,000,000 worth (the present market price) of IBM stock. In either case, I am going to hold my asset for two weeks and then sell it. Given the current outlook for interest rates it is very unlikely that the T-bills in scenario 1 will be worth as much as $1,000,000 two weeks from now, though it is not impossible. On the other hand, it is very unlikely that the IBM stock won't be saleable for more than $1,000,000 in two weeks. So would you not grant that my "$1,000,000 two-week liquidity risk" is greater in scenario 1 than in scenario 2? <br /><br />(Generally, I must complain that you fail to distinguish *liquidity risk* [with whatever parametric qualifications] from the risk that an asset will *lose market value*. And surely it is wrong to subsume *interest rate risk* under *liquidity risk*, as you do.) <br /><br />"Posting a price and waiting for a buyer willing to pay a higher price is not an effective strategy for a publicly traded stock . . . ." That's a *limit* sell order; it's quite common.<br /><br />I see no difference between the concept of liquidity in *economics* and in *finance*. The relevant considerations are: (1) how quickly you can sell the asset (for "cash"), (2) how close to the minimum "reasonable" price you can get, and (3) how certain you are *ex ante* about (1) and (2) (or something of the sort). The more liquid an asset, the better holding it substitutes for holding currency; that is the relevance of the concept for monetary theory.<br /><br />"I am not really trying to give a complete account of liquidity." Fair enough. But if you *can*, please *do* (I, at least, would be interested).Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8897997766931633186.post-88510722423983390212010-03-31T08:19:50.673-04:002010-03-31T08:19:50.673-04:00Anonymous:
If you need money in six months, you h...Anonymous:<br /><br />If you need money in six months, you have less liquidity risk if you hold a six month CD. But the liquidity risk doesn't disappear, it is just transfered to someone else. And the risk they bear for you is limited by their wealth, their capital. And so, they are only bearing part of the risk. <br /><br />I agree that the concept of liquidity is vague and includes various independent elements. Perhaps it is only me, but I believe that others are sometimes confused by these quite different concepts.<br /><br />Generally, in economics, stock trading on the NYSE is not very liquid and T-bills are liquid. Both can be easily sold at the going market price. The difference is uncertainty regarding the price.<br /><br />On the other hand, in finance, stock traded on the NYSE is liquid and single family homes are not. Posting a price and waiting for a buyer willing to pay a higher price is not an effective strategy for a publicly traded stock, but people do it with homes all the time. More concretely, I suppose, stock with higher volume is more liquid than stock with lower volume. You can sell larger amounts without moving the price much with your sale. <br /><br />This conception of liquidity is not very important in monetary theory. (Or I don't think it is.) <br /><br />The various money supply statistics include assets that serve as the medium of exchange and then other more or less liquid assets. That concept of liquidity not only includes avoiding fire sale losses, but also relative certainty regarding the price at which it can be sold. Shorter terms of maturity provide for more liquidity, ceteris paribus.<br /><br />Much of the "liquidity risk" I have been discussing is "interest rate risk." What happens to the prices of assets when interest rates change. <br /><br />I have been calling it liquidity risk because it involves the risk that is being shifted when long term projects are funded with short term debt. <br /><br />I am not really trying to give a complete account of liquidity.Bill Woolseyhttps://www.blogger.com/profile/06330232724290161369noreply@blogger.comtag:blogger.com,1999:blog-8897997766931633186.post-43402590548719800622010-03-30T20:00:02.361-04:002010-03-30T20:00:02.361-04:00"Yes, quite churlish." Then I owe you a..."Yes, quite churlish." Then I owe you an apology for asking.<br /><br />"I can give a definition of 'liquidity'. It involves being able to sell a[n] asset at short notice for a known price. It is a matter of degree." That's not much of a definition. 'At short notice' is vague. And what is one to make of your reference to a "known price"? <br /><br />There seem to be three relevant dimensions here: *how quickly* the sale is consummated, *how high* the price is, and *how certain* of consummation the potential seller is *ex ante*. But I don't see how to put these together into a real definition.<br /><br />It still seems to me that an immature forest may be more liquid than a 1-year CD *that one is legally debarred from selling* before maturity. I specified, and am continuing to specify, that the CD is "non-negotiable"; that was one of the possibilities you discussed. If I will need the money *in exactly one year*, I am indeed in a riskier position holding an immature forest the one-year-in-the-future expected value of which is X than holding a CD maturing in one year with a value then of X (assuming I am sure the CD-issuer will not fail). But that doesn't make the CD more "liquid," because the definition of 'liquid' will presumably not privilege the one-year period. If I need the money *in six months* I am better off with the forest: I can sell it some time in the next six months, whereas I am legally debarred from selling the CD then. I would be unsure what price I would get for the forest, but I would be sure I could get nothing (in the next six months) for the CD. (I assume your "known price" is *greater than zero.) <br /><br />You misinterpreted my use of the term 'normative'. My fault.<br /><br />"Are you trying to say that there is really no risk from purchasing long term assets when you will need the funds earlier?" No. There is always risk in purchasing assets that cannot be consumed right away, whether or not one will need money before they have become consumable. I was asking for more clarity about what distinguishes "liquidity risk" from risk in general.<br /><br />But if you can't supply it, never mind.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8897997766931633186.post-58411183159455257862010-03-30T14:17:11.141-04:002010-03-30T14:17:11.141-04:00Some other Anonymous writes:
"Your example i...Some other Anonymous writes:<br /><br />"Your example is evidently based on the assumption that an immature forest is less liquid than a non-negotiable 1-year CD. Why assume that? It will often--I would say, usually--be possible to sell an immature forest for a "reasonable" price in less than a year."<br /><br />I plan to retire in 2020. I buy 1 year CDs for the next 10 years. The last set matures when I need the funds in 2020. The forest is harvested in 2030. If I hold the forest rather than the CDs, I must sell it in 2020.<br /><br />If CDs are used to fund the forest project, someone must bear the risk--the uncertainty regarding the market price in 2020. <br /><br />I am not sure where the claim that I can sell the forest in less than a year fits in.<br /><br />By the way, you appear to be assuming that the one year CD's are not negotiable.<br /><br />I call my broker and sell may CDs maturing in less than a year in a few hours. I undertake the process of selling the forest and complete it in less than a year. Well, maybe if I didn't sell the CD, perhaps it would not have matured before the forest. Maybe. So what?Bill Woolseyhttps://www.blogger.com/profile/06330232724290161369noreply@blogger.comtag:blogger.com,1999:blog-8897997766931633186.post-24607757064508433492010-03-30T14:08:13.580-04:002010-03-30T14:08:13.580-04:00One of the anonymous posters wrote:
"Would i...One of the anonymous posters wrote:<br /><br />"Would it be churlish to ask for a definition of 'liquidity'?"<br /><br />Yes, quite churlish.<br /><br />I can give a definition of "liquidity." It involves being able to sell at asset at short notice for a known price. It is a matter of degree. <br /><br />"Creating liquidity" involves funding longer term projects by selling shorter term debt. It shifts liquidity risk away from whoever is providing the short term funding.<br /><br />I have no idea liquidity risk should be normative at all. It isn't that the losses are evil. It is rather that contracts are used to share risk.<br /><br />Are you trying to say that there is really no risk from purchasing long term assets when you will need the funds earlier?Bill Woolseyhttps://www.blogger.com/profile/06330232724290161369noreply@blogger.comtag:blogger.com,1999:blog-8897997766931633186.post-11174984237382814422010-03-29T14:16:28.699-04:002010-03-29T14:16:28.699-04:00Your example is evidently based on the assumption ...Your example is evidently based on the assumption that an immature forest is less liquid than a non-negotiable 1-year CD. Why assume that? It will often--I would say, usually--be possible to sell an immature forest for a "reasonable" price in less than a year.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8897997766931633186.post-58500037699342187332010-03-29T11:58:33.990-04:002010-03-29T11:58:33.990-04:00Would it be churlish to ask for a definition of &#...Would it be churlish to ask for a definition of 'liquidity'? <br /><br />Apparently, "liquidity risk" is the risk that when one tries to sell an asset (how quickly?) he will have to accept a price lower than . . . what? Lower than he expected? Lower than the (quasi-medieval) "just price"? Lower than he would be able to get if some counterfactual situation had obtained? (But what situation is that, and why is it in any way normative?)Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8897997766931633186.post-933810830332084622010-03-23T18:34:47.233-04:002010-03-23T18:34:47.233-04:00I will edit the post to make it clearer that I was...I will edit the post to make it clearer that I wasn't referring to Mises, Hayek or even Rothbard. TGGP linked to an article claiming that the creation of liquidity leads to malinvestment.<br /><br />My understanding of Hayek is that an excess supply of money leads to malinvestment. Mises is a bit ambiguous, but can be read in the same way. Rothbard explicitly claims that any increase in the quantity of money not backed by gold leads to malinvestment. <br /><br />One of my long time "responses" to Rothbard's theory about fractional reserve banking and fraud is that a reductio. Why not overnight deposits? Where is the cut off? Monthly? Quarterly? What?<br /><br />That some Rothbardians would begin to complain that any liquidity creation generates malinvestment should have been no surprise.Bill Woolseyhttps://www.blogger.com/profile/06330232724290161369noreply@blogger.comtag:blogger.com,1999:blog-8897997766931633186.post-32999236439055817132010-03-23T12:11:38.568-04:002010-03-23T12:11:38.568-04:00Correction:
I wrote: "My objection is that f...Correction:<br /><br />I wrote: "My objection is that fractional reserve banking need not create an excess demand for money."<br /><br />I meant: "My objection is that fractional reserve banking need not create an excess SUPPLY OF money."Lee Kellynoreply@blogger.comtag:blogger.com,1999:blog-8897997766931633186.post-91847508382032955742010-03-23T12:10:03.117-04:002010-03-23T12:10:03.117-04:00Bill,
Although I am more familiar with the argume...Bill,<br /><br />Although I am more familiar with the arguments of Hayek and Mises than Rothbard, I believe you are misrepresenting the Austrian critique of fractional reserve banking.<br /><br />The argument is that fractional reserve banking creates an excess supply of money (i.e. a deficient demand for money). Moreover, the purchasing power is spent on producers' goods without a corresponding decline in demand for consumers' goods. Fractional reserve banking enables new investments to be embarked upon without being "backed" by additional savings. When the price of consumers' goods begin to rise, it becomes impossible to complete the new investments with the available resources, and a slew of malinvestments--spurred by the money creation of fractional reserve banks--are exposed.<br /><br />My objection is that fractional reserve banking need not create an excess demand for money. On the contrary, it seems to me that fractional reserve banking may facilitate changes in the structure of production better than inflation or deflation.<br /><br />However, in my opinion, one concession to the Austrian critique is valid: a shift from a 100% reserve banking system to fractional reserves may have a propensity to create malinvesmtnet. That said, this disturbance to the price system would cease once the new (larger) money supply is established.Lee Kellyhttp://www.criticalrationalism.netnoreply@blogger.comtag:blogger.com,1999:blog-8897997766931633186.post-8066703091230411832010-03-22T23:05:03.557-04:002010-03-22T23:05:03.557-04:00An example of such Austrians who declare that even...An example of such Austrians who declare that even 100% reserves is not enough <a href="http://blog.mises.org/11630/libertarian-papers-vol-2-2010-arts-1-4-moundsville-reconsidered-austrian-business-cycle-theory-and-100-percent-reserves-block-on-roads-block-on-van-dun/" rel="nofollow">here</a>.TGGPhttps://www.blogger.com/profile/11017651009634767649noreply@blogger.comtag:blogger.com,1999:blog-8897997766931633186.post-87753744563102212812010-03-22T16:39:31.695-04:002010-03-22T16:39:31.695-04:00Very illuminating; you are a philosopher among eco...Very illuminating; you are a philosopher among economists. I take it that you see *no* tendency for the *creation of liquidity* to lead to *malinvestment*.<br /><br />I do think it is slightly odd to define 'liquidity risk' so that it depends on the probability that the owner of the debt instrument will want to sell it before maturity. The very same instrument in the hands of one owner (who, say, was very unlikely to want to sell) would impose quite a different "liquidity risk" from what it would impose on a different owner (who, say, was very likely to want to sell). 'Liquidity risk' sounds to me like something that should be intrinsic to the debt instrument itself, thus being the same for any holder. (Of course, this is no more than a verbal quibble.)Anonymousnoreply@blogger.com