Saturday, April 4, 2009

>Flash Economics (ECONOMIC RESEARCH)

The reasons why the liquidity is likely to be invested again

Central banks are creating an enormous quantity of liquidity in their drive to support the economy, borrowers, banks, etc. The main question is to ascertain whether, as in Japan, this liquidity will remain unused and the deflationary equilibrium persist, or whether it will be invested again, probably in assets requiring no debt leverage, since the deleveraging is continuing, which also rules out a pick-up in credit.

We see three reasons why there is reason to believe that the liquidity will eventually be invested again:

1. American or European investors (savers) will probably not be prepared to receive a return on their savings (portfolio) that is permanently close to zero;

2. as central banks are also buying private assets, and not only public ones, the result will normally be a rise in the prices of these assets, which may encourage investors to buy them;

3. the surge in monetary bases can lead to a loss of confidence in money, and consequently a flight from money that will encourage savers to buy tangible assets, but not goods (in the hyper inflationary rationale of the past).

To see full report: FLASH ECONOMICS