Declining Global Liquidity: Good or Bad?

According to the MSCI All-Country World Equity Index, Global stock prices have risen by 85 percent. After the pandemic-induced devastation of 2020, the economy is expanding, but inflation levels are still high. Some economists believe that continuing to print money at the same pace as last year would do more harm than good.

After a year of ground-breaking emergency loans, the world’s major central banks are starting to ease off another help accelerator, forcing economies and the financial sector to walk with a cane on their own.

According to Steve Donzé, senior macro strategist at Pictet Asset Management, overall liquidity through central banks and private financial institutions in the United States, China, the eurozone, Japan, and the United Kingdom hit 28.8% of GDP in 2020.

He claims that China is the most powerful pull, saying that liquidity losses have been cut in half since the peak last year.

Last month, the Bank of Canada began reducing monetary easing and hinted that interest rates would increase this year or next, while the Bank of England reduced money printing this month. At the end of the year, the Federal Reserve will begin to eliminate stimulus.

In other words, the expansion of liquidity – the term for all of the money spent by central banks, private lenders, and governments – has reached a nadir and is beginning to grow.

The global supply of money has fallen to 24% from a peak of 26% last year, but it is still well above the 10% level seen before the pandemic.

Government spending was another major sticking point, but when the lock-downs end, so do disaster relief services for workers and companies.

Any central bank strengthening could be countered by US President Joe Biden’s stimulus plans, which if approved, could amount to more than 15% of GDP. According to JPMorgan strategist Nikolaos Panigirtzoglou, all commonly used metrics of “excess liquidity” are improving in 2020, despite the fact that the situation is still extremely loose. The housing market could be on fire due to excess cash flow, according to Cross-Border Capital’s statistical review of data from the Bank of International Settlements; property costs are rising at a six-month annualized rate of more than 10%.

Source: Reuters