COMMENT In an interview with the Financial Times, Chuck Prince, chief executive of Citigroup, made this insightful remark: “When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you got to get up and dance. We’re still dancing.” Mr Prince was hinting at a conundrum investors and policymakers face as we float in a sea of liquidity.
Why do our financial institutions hear music in expanding liquidity? One reason is that the concept itself has been liberalised since the second world war. In the postwar years, liquidity was by and large an asset-based concept. For companies, it referred to the size of cash and very liquid assets; the maturity of receivables; the turnover of inventory; and the relationship of these assets to total liabilities. For households, liquidity chiefly meant the maturity of financial assets being held for contingencies along with funds that reliably would be available later in life. Today, companies and households alike often blur the distinction between liquidity and credit availability. It is now commonplace, when envisaging assets present and future, to think in terms of access to liabilities. Money matters but credit counts.
