Current Event Discussion – Liquidity in the Economy

Introduction

Maintaining liquidity at a healthy level is important for any economy in the world as it affects most sectors of the economy in ensuring that the economy runs smoothly. Most of the economy is governed by a rise or fall in liquidity. A normal liquidity ensures that banks are safer since they can sell their assets easily sell and at a desirable price (Cornett et al., 2011). Liquidity in the thus ensures that there is more money to spend and that people can buy shares and banks convert their assets easily to cash. For an economy to perform healthily, various measures should be put in place to ensure that liquidity is healthy.

Liquidity in the Bond Market

Bond markets have faced little or no liquidity globally. The liquidity in bond markets was affected by the safest bond market, which is facilitated by the United States government that declined on its basis points (Andritzky, 2012). With such a decline in basis points, the investment in the bonds by foreign investors has reduced greatly and thus creating a liquidity risk in the bonds.  Liquidity risk has closely been associated with the bond market especially bonds from the government. The bonds have not been as liquid since they have not readily been sold, and most mutual fund managers are reluctant to take on the bonds due to assets declining in value.  However, there are challenges facing the trade in credit markets there is an increase in trade in the markets (Lin et al., 2011). Concerns in the bond market are geared towards mutual funds the significant withdrawals that will make them more volatile in the bond market.

The reduction in liquidity affects the bond market especially in the United States where many countries buy the treasury bonds. The shrinking assets have negatively affected hedge funds, and, therefore, they stand to gain from the investments. Mutual funds have resorted to more cash at their disposal and assets that can easily be disposed to get the money for their investors. An increased liquidity means that more assets can be sold rapidly with less loss of value. The market, therefore, has ready buyers and sellers that can buy the different assets in the market readily. Therefore, if there is a liquidity risk as evidenced in the bond market, it means that the mutual and hedge funds cannot readily get the money easily.  The decrease in the value of assets poses a liquidity risk especially to banks and both mutual and hedge fund managers.  Market makers and speculators contribute greatly to the liquidity in a market. They usually focus on benefiting from an increase or decrease of prices in the market. Asses with higher liquidity usually have higher prices as compared to those with low liquidity.

Liquidity in Banks

The governments use various measures in dealing with liquidity and making sure that the economy is healthy. Banks, therefore, have to manage their assets and liabilities in such a way that they are not financially ruined should significant withdrawals be made. The liabilities of most banks are the deposits by customers that need to be balanced to prevent any shortfalls when more customers withdraw significant amounts of money. In the stock market, liquidity has a different meaning since liquidity does not only means that some shares can be sold readily but also maintain the price in the market. Examples of liquid shares are Apple and Microsoft. The volume of shares sold governs liquidity of shares in the stock market.

Share with your friends
Order Unique Answer Now

Add a Comment