Economic cycles are driven by financial flows, namely quantities of savings and credits, and not by high street inflation or interest rates. Their sweeping destructive powers are expressed through Global Liquidity, a $130 trillion pool of footloose cash. Global Liquidity describes the gross flows of credit and international capital feeding through the world’s banking systems and wholesale money markets. The huge jump in the volume of international financial markets since the mid-1980s has been boosted by deregulation, innovation and easy money, with financial globalisation now surpassing the peaks of integration reached before the First World War. Global Liquidity drives these markets: it is often determinant, frequently disruptive and always fast-moving. Barely one fifth of Wall Street’s huge gains over recent decades have come from earnings: rising liquidity and investors’ appetite for riskier financial assets have propelled stock prices higher. Similar experiences are shared worldwide and even in emerging markets, such as India, flat earnings have not deterred waves of foreign money and domestic mutual funds from driving-up stock prices. Now with central banks actively pursuing quantitative easing policies, industrial corporations flush with cash and rising wealth levels among emerging market investors, the liquidity theory of investment has never been more important.
International spill-overs of these rapacious cross-border flows sets off capital wars and exposes the unattractive face of liquidity called ‘risk.’ As the world grows bigger, it becomes ever more volatile. From the early 1960s onwards, the world economy and its financial markets have suffered from three broad types of shocks – labour costs, oil and commodities, and global liquidity. Financial markets spin on fragile axes and the absence of liquidity often provides a warning of upcoming troubles.
Global Liquidity is a much-discussed, but narrowly-researched and vaguely-defined topic. This book deeply explores the subject by clearly defining and measuring liquidity worldwide and by showing its importance for investors. The roles of central banks, shadow banking, the rise of Repo and growth of wholesale money are discussed. Additionally, covering the latest developments in China’s increasingly dominant financial economy, this book will appeal to practitioners, policy-makers, economists and academics, as well as those with a general interest in how financial markets work.
Author(s): Michael J. Howell
Publisher: Palgrave MacMillan
Year: 2020
Language: English
Pages: xxii+304
Preface
Contents
List of Figures
List of Tables
1 Introduction: Capital Wars
Capital Wars: The New Trade Wars
Cross-Border Capital Flaws?
The First Sightings: Salomon Brothers Inc.
Global Liquidity: Endless River or High-Water Mark?
Reference
2 Global Money
How Big Is the Pool of Global Liquidity?
What Is Global Liquidity?
Are Policy-Makers Behind the Curve?
‘New’ Global Liquidity Shocks
How Do the Academics See It?
The Key: Flow of Funds Analysis
More Capital Ideas?
References
3 Synopsis: A Bigger, More Volatile World
The Economic Earthquake
The Financial Accelerator
The Wrong Policy Response?
4 The Liquidity Model
The Flow of Funds Framework
An Alternative Decomposition
5 Real Exchange Adjustment
The Industrial and Financial Circuits of Money
The Exchange Rate Channel
Testing the Model with Data: US Dollar and EM Currencies
References
6 Private Sector (Funding) Liquidity
Funding Liquidity
Intermediation Chains and the Growth of Wholesale Money
Collateral and the Rise of the Repo
The Liquidity Multiplier
Refinancing Risks?
References
7 The Central Banks: Don’t Fight the Fed, Don’t Upset the ECB and Don’t Mess with the PBoC
What Do Central Banks Do?
World Central Bank Money
Digging Deeper into US Federal Reserve Actions
The People’s Bank of China
The European Central Bank (ECB)
References
8 Cross-Border Capital Flows
Dollar Supremacy
Global Value Chains
The Dollar Cycle
Gross Capital Flows
Policy Concerns
Global Financial Centres
The Offshore Swap and Eurodollar Markets
Dollar Risks—A New Triffin Dilemma?
Warning Signs of Future Crises
References
9 China and the Emerging Markets
The Chinese Monetary and Financial System
China’s Financial Immaturity
The Impact of Capital Flows on Emerging Markets
Reference
10 The Liquidity Transmission Mechanism: Understanding Future Macro-valuation Shifts
The Financial Economy Versus the Real Economy
The General Transmission of Liquidity Shocks
The Transmission of Liquidity Shocks to Bonds and Forex Markets
Exchange Rates
Risk Assets
Risk Assets 1: Real Estate
Risk Assets 2: Equities
Asset Allocation
References
11 Financial Crises and Safe Assets
The Financial Cycle
Is Stability Destabilising?
A Worldwide Shortage of ‘Safe’ Assets?
References
12 The Financial Silk Road: Globalisation and the Eastwards Shift of Capital
The Financial Silk Road
Germany Lurches Eastwards
Geopolitical Implications of Shifting Capital
13 Measuring Liquidity: The Global Liquidity Indexes (GLI)
The CrossBorder Capital Global Liquidity Indexes (GLI™)
14 Conclusion: A High-Water Mark?
Peak Liquidity: Will Globalisation Be the First Victim of the Capital Wars?
The Financial Silk Road
The Rise of the Repo
Refinancing Versus New Financing Systems
Coming Decades: The Internationalisation of the Yuan
Reference
Appendix: Inflation, Deflation and Valuations
A Note on Data Sources
Further Reading
References
Index
