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Liquidity is essentially the capability to transact, and it is true that a single class of one undated credit instrument will be more liquid than a myriad fragmented classes of dated debt instruments with different dates and rates.

But liquidity is not per se a reason to transact.

The reason why people may get shot of Greenbacks in favour of bonds or other asset classes - or just 'stuff', thereby causing inflation - is that Greenbacks carry:

(a) no right to income; and

(b) no right to anything with a use value.

What has happened at the moment is essentially that T-Bills at the Zero Bound are functionally equivalent to greenbacks.

So the huge amounts of QE dollars (Fed greenback clones) are going to investors who are using them to purchase of any financial asset other than T-Bills and thereby create parallel bubbles all over the place (eg WTI and S&P correlation).

Where they are not going is to people who will use them to buy stuff - investors have all the stuff they need, thank you.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Sun Jun 6th, 2010 at 01:10:34 PM EST
[ Parent ]
But the Fed pays interest on excessive bank reserves. So even QE dollars may carry a right to income.
by generic on Sun Jun 6th, 2010 at 01:16:49 PM EST
[ Parent ]
I think it's fair to say that the dollars don't, but the clearing banks' relationships with the Fed do - at least for the time being.

"The future is already here -- it's just not very evenly distributed" William Gibson
by ChrisCook (cojockathotmaildotcom) on Sun Jun 6th, 2010 at 01:23:14 PM EST
[ Parent ]

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