[mo_42]

I don’t fully understand the point the author is trying to make. I appreciate that there are boom and bust cycles for some sorts of assetes

I would have liked to author to talk more about wording. What is actually liquidity? Today’s money appears in many gradual forms of moneyness.

Also is there anything like "excessive money"? Where does it come from? Central banks don’t just print money. They trade it for usually governmental bonds.

If other than central banks have excessive liquidity they may trade it for other assets. This means they need to find a counter party that has the reverse situation. So overall the economy cannot have excessive money.

[imtringued]

>If other than central banks have excessive liquidity they may trade it for other assets. This means they need to find a counter party that has the reverse situation. So overall the economy cannot have excessive money.

But you are assuming that there is no zero lower bound. If there is an excess of liquidity like there being an excess of trash then people would expect to get paid to get rid of it and the market would just find a garbage collection fee for this excess liquidity. But if there is a zero lower bound, then the people with the excess liquidity have no incentive to dispose of it. Instead, they would just keep accumulating more and more liquidity indefinitely as the market tells (or rather is forbidden to tell) them there is no excess liquidity.

I mean, take this example. The interest rate in the market is 3% and the interest set by the central bank is 5%. People will accumulate more liquidity than is optimal. There will be an excess of liquidity. It doesn't matter what the absolute numbers are. They can be -3% and 0% and you run into the same problem.

If excess liquidity is a form of economic pollution like CO2 is, then you would expect to pay for this pollution. But since the government doesn't charge a pollution tax, people will overproduce both CO2 and excess liquidity.

[snake_doc]

Your example doesn’t make any sense. The entire reason for the US Fed’s interest rate is to dictate the lower nominal bound of market returns in global capital markets. The FedFunds rate is the risk free rate, thus the market rate of return cannot be lower than this rate. Ie. The public equity market will return risk free rate + market risk premium.

A better explanation would be:

A pension funds needs to achieve long term nominal returns of 5% to meet liabilities.

Fed funds rate is suddenly set to 0%, and treasury curve peaks at 2%.

Market risk premium is 5% for public equities.

Market risk premium is 10 % for private equities.

To reach target returns while anticipating volatilities, it must allocate capital towards both public and private equities. This is the “sloshing”. Simple mathematics.

Side note: any retail investor can access the risk-free rate (very close to it, minus transaction costs/expenses) through large money market funds. ie. https://investor.vanguard.com/investment-products/mutual-fun...