LIQUIDITY TALK. TONY JACKSON & THE "IT'S DIFFERENT THIS TIME" CROWD
[Latest Global Dollar Liquidity Measure: +14.16% annual growth rate; latest Endogenous Liquidity Index: +8.6%]

I just came across this charming piece by the FT's Tony Jackson (I wish I could write with such wit). Mr. Jackson blasts the "it's different this time" crowd, whose members he duly labels IDTTs. According to Mr. Jackson, IDTTs are active in at least four fronts: corporate profits, global liquidity, commodity prices, and the UK housing market. The article provides an excellent opportunity to briefly assess some aspects of the current liquidity cycle.

When it comes to "Chinese savings, the yen carry trade, the surge in petrodollars and so on", Mr. Jackson tells readers that "most of those seem cyclical to me, or at least finite". Absolutely right! As a matter of fact, we are about to "celebrate" the tenth anniversary of the onset of the Asian currency crisis, when our Dollar Global Liquidity measure all but collapsed. In September 1998, at the end of the crisis, the stock of dollar-denominated bonds held by foreign central banks was declining by a staggering 12.6%!

In one respect, though, I have to disagree with Mr. Jackson when it comes to "Chinese savings". There is an element of IDTT in the current flow of global capital to the U.S.: the Dollar Global Liquidity measure is about to enter the 55th month in a row with a growth rate of 10% or more. This had never happened before. I wish I could say otherwise —I don't consider myself a member of the IDTT crowd— but that's what the numbers tell.

And then there's the issue of derivatives. Mr. Jackson takes a narrow one-to-one view. Yes, derivatives are a zero-sum game: you lose money/I make money. But consider the macro-economic impact of CDS. G7 central bankers, and even the IMF, agree on this point: credit risk is diversified as never before. Thanks at least in part to risk transfer markets, business cycles have become smoother. As the (very cautious) Bank of England recently put it, "less volatile collateral values promote steady credit, investment and growth rates". And this, ladies and gentlemen, is the very definition of ... liquidity!