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The part that I don't get is why the money is sloshing.

Edit:

That is to say, why is the liquidity moving from place to place.

To follow the analogy, If I put water in a bucket, it levels relatively quickly. Why does the liquidity "slosh" around for years.

The rationale that seems most reasonable to me is decades of low interest rates.

Interest rates are essentially an indication of how expensive money is. When interest rates are low, money is "cheap".

Outside of the FED purchasing bonds, Banks giving loans is another way to "print money". So when interest rates are low, more people and businesses take out loans, and as a consequence there is more money circulating, "sloshing around", in the economy.

There are other factors at work though, outside of interest rates, that can cause wealth to pool.

Various forces since the mid-1990s in the United States, mostly related to the tax and regulatory environment of corporate compensation packages (i.e. paying senior employees in stock, etc), have caused net wealth transfers to the upper classes. The wealth gains those classes have achieved also causes them to have excess wealth that wants to go somewhere.

That's the part I do get. The part I dont get is why it moves from place to place.

yCombLinks 1215 days ago

Let's say the average cost of the stock market is $1 for every $2 of expected income. People say "Oh, that's cheap, stocks are a good idea to buy". Everyone starts buying stocks, and the prices rise. Eventually stocks are $1 for every $10 of expected income. People say "Oh, stocks are not going to go up much more, they're expensive. Hrm, Real estate is only $1 for every $2 of expected income. Let's move there". People move there money into Real estate. Or bitcoin. Or Bonds. Etc.

Because, due to inflation, it evaporates sitting still.

So anyone with a lot of money laying around knows they need to put it to work, so that it evaporates more slowly than it grows (due to investment returns).

And the best places to put your excess wealth are often constantly changing, so the money moves around following what everyone perceives to be the best places to put it to get the highest return.

This is actually one of the reasons central banks try to keep positive inflation, because it encourages people to put their money to work rather than just keepping it in a savings account providing no value.

When people are putting their money to work, human flourishing is increased. More jobs, more restaurants, more research, more activity, etc.

thanks for trying to help, but I feed like you just described normal investment.

Does Excess liquidity "move" any different than normal liquidity?

My understanding is that the difference is that excess liquidity is excessive because it it is greater than available positive growth investments to lock it up.

Maybe you are right and the movement from sector to sector is simply herd mentality and trend following, but I would intuitively expect that process to reach equilibrium faster

medvezhenok 1215 days ago

The shorthand that I have seen is that every actor in financial markets has a preference for cash/stocks/bonds/real estate/other things; the market equilibrium is when all of those preferences are satisfied. There can be dislocations to these preferences which cause "sloshing".

As an example - consider the sale of an owned house, where the buyer takes out a mortgage. The owner who sold now has cash, and the buyer has a liability (mortgage), meaning he has need for cash in the future. This type of mismatch can create excess liquidity (now, at the sale point), and the cash keeps moving until someone who needs to pay off a loan acquires it (cash gets "destroyed" when paying off asset-backed loans from the bank). In the meantime, that cash can go towards bidding up financial assets (until it finds the marginal need to service debt obligations)

This comment is the best explanation: https://news.ycombinator.com/item?id=34858813

Also this article could be helpful: https://www.philosophicaleconomics.com/2013/08/the-great-rot...

When there's less excess it doesn't "slosh", which is to say investments cause less damage because supply and demand reach equilibrium without as much disruption.

The metaphor is supposed to conjure an image of liquid smashing into something, as the money does when there's too much of it and it all tries to go to the same place.

I think the focus should be on the volume not the motion.

Investment moving from place to place is natural. Too much is disruptive.

passion__desire 1215 days ago

In shipping industry, to avoid sloshing which could destablize the oil containers, you compartmentalize.

hungryforcodes 1215 days ago

I guess in personal finance it could be the same :)

Which just means maintaining a balanced asset portfolio and not chasing every hot asset unless you are intentionally trying to ride a pump and dump wave.

mcntsh 1215 days ago

It really sparks optimism when the economic system you live in considers people and businesses having lots of wealth as a bad thing.

It's not the economic system "considering" excess wealth as a bad thing.

It's just an unfortunate natural consequence of how people spend money when they have a lot of it, and of how businesses react when their products or services are in demand.

There's no natural law, or tenet of capitalism, that says people acquiring lots of money is a bad thing.

There's only our historical observations that

- When lots of people have extra money to spend, they spend or invest it.

- When lots of money is being spent or invested prices rise.

Keeping those two forces in balance is the challenge, and the function of regulation, or FED policy, etc, etc.