Sunday, 30 August 2015

Financial Terms

Excess Liquidity.

Cash held by a bank above the usual requirement for that bank.

How did a bank get this much cash? Two reasons.

1) Basel III [or the Third Basel Accord] dictated that banks in the future should keep more stocks of cash to alleviate the issue of not being able to cover all deposits.

2) Quantitative Easing governed by monetary policy has produced so much cash the banks do not know what to do with it.

Why should we be worried about this? Deflation.

If inflation was our current problem then raising interest rates, having cash in the bank would be a good thing, but deflation is top of the pops at the moment and the central banks do not seem to have an instrument to work for them against this trend.

One enduring constant of the world economy since 2008 is the chorus of sober-sounding people declaring that central banks must act responsibly and raise rates. A few years back, rising commodity prices and a flood of money into emerging markets were proof that low rates were dangerously inflationary and must be hiked. Well we are still waiting for this inflation to hit us and it seems a long time coming.

Now we have plunging commodity prices and a flood of money out of emerging markets; clearly, this shows that central banks must do the right thing, and raise rates. But as we have already said, this is not currently possible, so what next?

No comments:

Post a Comment