Increasing liquidity of accounts without increasing debt.

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kmarinas86's picture
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Increasing liquidity of accounts without increasing debt.

Liquidity is a cruical element of trade. The more people are likely to exchange funds, the more likely they are to trade. A functioning economy thrives on trade of greater goods and services. Thus, a functioning economy requires liquidity.

Issuing credit has been a working means to provide greater liquidity in the economy. With greater liquidity, there is greater flow of funds for what is deposited. If the general liquidity of the economy is reduced, the flow of funds from an account is small relative to what is deposited.

It is possible for the money supply per capita to grow while the real GDP per capita shrinks. In fact, that is what is happening right now in the United States.  Americans are experiencing the negative effects a downward wage-price spiral induced by lower liquidity of accounts. Americans are saving more their money now, yet production is down even as we have excess capacity to produce. If Americans in general are going to continue to save their money in this manner, the only way out of this recession is to use the excess capacity that already exists both in terms of infrastructure and jobs. To deplete that excess capacity will hurt the American job market and put many people into earlier retirement with very little savings. The wages and prices will go downhill without end unless something is done about it.

The sadistic truth is that the current decline in the job market is to due excess jobs for what is being bought, meaning there is more supply of workers than there is demand for workers. The saving behavior says to the workforce, "Mabye we should quit buy your products. This will put you out of work."

Producing less goods and services is more sustainable than producing more, but can a free market actually favor less production? It can!  It can be against the will of a market participant increase one's rate of spending, so to get spending to increase requires other forms of intervention. Increasing capacity to produce is not one of them, since that would create excess labor in that situation. To increase liquidity spending must increase relative to deposits. The downside is that this often involves government intervention. Government usually increases the money supply or increases spending in hope that liquidity will increase.

However, the only way that liquidity will increase through monetary methods would be its effect on people's habits with their funds. This means the velocity of money must increase. The money velocity is the rate at which funds are extracted divided by funds deposited.

The government is now focusing less on direct spending are more on credit in order to defeat the wage spiral. What credit does is increase both the funds deposited and the rate at which they are extracted. However, it does so at the expense of diluting purchasing power and concentrating it towards those who consume more than they produce. Over time, this behavior can characterize a whole nation, leading to a giant national economic debt with many people living on what little savings they have.

One must consider that rate at which funds are depleted relative to the rate which they are spent. Liquidity is higher when the rate at which funds are spent is much higher than the rate at which they are depleted. This means that the cash flow is high relative to the net cash flow. Drops in net cash flow reduce liquidity since they correspond to a reduction of total accounts. The reduced accounts reduces the likelihood of spending from that account for relatively expensive goods and services such as houses and vehicles, a situtation that is characterized by credit crunch. The accounts are reduced as a result of money flowing out. This means, for the amount of trade which exists, much of the money is being lost. One way for it to be lost is interest on the debt. The other way is for domestic currency to be stashed in a foriegn market where that currency is not tied strongly to the foriegn GDP. The problem, it turns out, is the seperation of markets with the currency being accumulated. If every open market system could freely transfrom the hoarded currency into their own currency, then that currency could be spent more readily, to maintain liquidity of retail markets.

The title of the thread is "Increasing liquidity of accounts without increasing debt." The answer is to reduce hoarding of foriegn monies by converting them into the local currency using the exchange rate.

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