Glamor Economics

Chapter 108

Chapter 14 Section 9 What Inflates the Economic Bubble——Liquidity

The "liquidity preference theory" was proposed by the famous economist Keynes.Keynes believed that people's money demand behavior is determined by three motives: transaction motive, precautionary motive and speculative motive.The transaction motive refers to the motivation to hold money for the purpose of purchasing goods and services, the precautionary motive refers to the motivation to hold money in order to prevent accidents, and the speculative motive refers to the motivation to hold money for speculative activities.The money demand determined by the transaction motive and the precautionary motive depends on the income level; the money demand based on the speculative motive depends on the interest rate level.When the interest rate falls to a certain level, people's speculative demand for money will become infinitely elastic, that is, people don't care whether they hold bonds or money.At this time, even if the money supply increases, the interest rate will not fall again.

Keynes' theory had a great inspiration to the world, and there are still many adherents.

Excess liquidity has become an important feature of the Chinese economy and even the global economy.To the world, China is an emerging market, and capital flows to China are profitable.Liquidity is worldwide, and economic globalization is also a reason for excess liquidity. In recent years, US interest rates have been continuously lowered, which is an important reason for global excess liquidity.

When foreign capital flows into a country, the exchange rate of the country's currency rises.If the central bank does not want the exchange rate to rise, it can only exchange the inflowing foreign currency on the basis of the original exchange rate by issuing additional domestic currency, resulting in an increase in foreign exchange reserves and a passive increase in the amount of money, resulting in excess liquidity.The main manifestations of excess liquidity are the excessive increase in the amount of money, the flood of funds in the banking system, and low interest rates.

If control measures are not adopted to recover excess liquidity, the result will either lead to overheating of investment in the real economy and inflation; or promote asset prices such as the property market and stock market to rise, and form bubbles that damage the overall economy; or both will happen at the same time.

The problem of excess liquidity can be solved from three aspects.First, change the structure of credit investment and vigorously develop the credit market for small and medium-sized enterprises and individuals.Second, vigorously develop the capital market and adjust the structure of the financial market.Encourage compliant funds to enter capital markets such as stocks.Finally, encourage and support product innovation in the banking industry, adjust the structure of financial products, and ease liquidity.

In fact, the meaning and function of currency are not difficult to understand, but the law of currency circulation is elusive.It is this methodical and unpredictable circulation of money that makes the economy sometimes prosperous, and other times dead or even close to collapse.Only by understanding "liquidity" can we better understand the laws by which money operates in the economy.

[links to related words]

Liquidity refers to the ease with which a commodity can be traded against other commodities.The measure of ease is how quickly the commodity can be traded with other commodities.When the transaction speed of this commodity and other commodities is accelerated, that is, when it is very easy to realize the transaction, there will be excess liquidity; when the transaction speed of the commodity and other commodities slows down, that is, when it is very difficult to realize the transaction, the liquidity will be There will be deficiencies.

(End of this chapter)