Finance finance everywhere but not a drop to drink

Barry Eichengreen has just rephrased Samuel Taylor Coleridge’s poem on water:

With interest rates at all-time lows and central banks buying everything that moves, the world is awash with credit. Yet, paradoxically, a dangerous shortage of international liquidity is putting the global economy at risk.

“International liquidity” refers to high-quality assets accepted around the world for paying import bills and servicing foreign debts. These are the same assets that central banks use when intervening in foreign-exchange markets. They serve as reliable stores of value for international investors. They provide pricing benchmarks in financial markets. And they are widely accepted as collateral for cross-border loans.

The key difference between these international assets and liquid assets in general, then, is that only the former are accepted in a large number of different countries and regularly used in transactions between them.

The single most important form of international liquidity is, of course, US government bonds, which are held by banks, firms, and other countries’ governments. More generally, international liquidity comprises the liabilities of OECD countries’ central banks (their “high-powered money”), those countries’ AAA-rated and AA-rated central-government bonds, the debt securities of supranational organizations like the World Bank and regional development banks, and gold in official and private hands.

But add them up and you immediately come to a startling conclusion. International liquidity has plummeted from nearly 60% of global GDP in 2009 to barely 30% today. This change is due, equally, to downgrades in the ratings of heavily indebted crisis countries’ government bonds, which make them unattractive for use in international transactions, and the inelasticity of other sources of supply.

Nothing makes sense anymore especially if there is finance written around it..


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