Tuesday, March 13, 2007

. Buttonwood. "We all fall down", The Economist

Buttonwood reflects on the recent market turmoil and notes: "There is a healthy debate about how to measure this liquidity, or indeed whether the term has any real meaning" (*). It then cites JPMorgan estimates:

... most people agree that the savings surpluses in Asia and the oil exporters have played an important part in fuelling financial markets. JPMorgan estimates that global liquidity increased by $3.9 trillion between 2002 and 2006, of which around 50% came from Asia and 40% from the oil producers. The bulk of this money went at first into risk-free assets such as Treasury bills and bonds. That drove down the yield on such assets. So other investors were then naturally tempted to look elsewhere for higher returns.

Our own Dollar Liquidity Index yields a much lower figure: about $1.3 trillion between 2002 and 2006. JPMorgan must be considering US bond purchases not only by central banks, but by other official sources and by private investors as well.

(*) See also, by The Economist, "Liquidity, liquidity everywhere".

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