Liquidity

The ease with which one can buy or sell an asset. So a US T-Bill is very liquid — you can buy or sell any number in the blink of an eye; a power station in the lawless mountainous badlands of central Asia is very illiquid — it make take three years of due diligence, all kinds of legal, regulatory and accounting engineering, and a few bags of cash in brown paper bags to gentlemen in Kalashnikov-equipped Hiluxes.

Illiquidity

Liquidity is really a function of the ease with which demand and supply can be matched. It will always be a job with big, complex, privately held assets, but even with usually liquid assets (like listed equities) it can suddenly disappear. This could happen:

• When the issuer is in trouble. Then, all the world’s a seller, and no-one is buying. Hence: liquidity zero. Sellers are stuck with assets they don’t want.
• When the market is in trouble: In 2007 the credit crunch was caused by reliable investors suddenly deserting the commercial paper market to conserve their own cash reserves because of their own funding concerns, rather than anything specific to the assets they were buying. Thus the old saw: “don't use short-term assets (like commercial paper) to fund long-term liabilities (like mortgages)”.

See also

• Liquidity period
• Illiquidity