What is "liquidity" as it pertains to finance? - economystified.blogspot.com
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economystified
Jul 12, 2013, 6:27:49 PM7/12/13
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View full post at: http://economystified.blogspot.com/2013/07/liquidity.html
One night, I was out drinking with a few buddies of mine who were not economics majors (I was at the time). I stood up from our table and announced to the gentlemen assembled that I had a "liquidity issue to resolve."
I was looking for the ATM. My friends pointed me towards the bathroom.
True story.
On the surface, it might seem like a kinda boring, technical concept. But once you understand it, you'll see it actually comes up all the time - in a many ways, our entire financial system revolves around it!
Think of money as something that either can be in a "solid" or a "liquid" state. "Liquid" money is money that can be sloshed around RIGHT NOW. It's cash in hand.
"Solid" money has to be made "liquid" before it can change hands - before it can "flow". Solid money can be stuff like checking accounts or credit cards, but could also be real estate, or a car, or a stock share, or other sellable asset - something that can be taken to market, sold, and converted to liquid, flowable cash.
A debt owed to you is also "solid" money. If I write you an IOU for $50, yes, you could say that you have $50 more to your name. But you can't use that money until I make good on the loan, and convert your IOU from a solid to a liquid.
Continue reading at: http://economystified.blogspot.com/2013/07/liquidity.html
One night, I was out drinking with a few buddies of mine who were not economics majors (I was at the time). I stood up from our table and announced to the gentlemen assembled that I had a "liquidity issue to resolve."
I was looking for the ATM. My friends pointed me towards the bathroom.
True story.
On the surface, it might seem like a kinda boring, technical concept. But once you understand it, you'll see it actually comes up all the time - in a many ways, our entire financial system revolves around it!
Think of money as something that either can be in a "solid" or a "liquid" state. "Liquid" money is money that can be sloshed around RIGHT NOW. It's cash in hand.
"Solid" money has to be made "liquid" before it can change hands - before it can "flow". Solid money can be stuff like checking accounts or credit cards, but could also be real estate, or a car, or a stock share, or other sellable asset - something that can be taken to market, sold, and converted to liquid, flowable cash.
A debt owed to you is also "solid" money. If I write you an IOU for $50, yes, you could say that you have $50 more to your name. But you can't use that money until I make good on the loan, and convert your IOU from a solid to a liquid.
Continue reading at: http://economystified.blogspot.com/2013/07/liquidity.html
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