Liquidity: Difference between revisions

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.

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<ref>although the assets they were buying, notionally AAA rated [[asset-backed securities|asset-backed]] [[commercial paper]], were pants, and many of the CP buyers knew this, having structured them themselves</ref>. Thus the old saw: “don't use short-term assets (like commercial paper) to fund long-term liabilities (like mortgages)”.