What is monetary liquidity?
When interest rates are low to a certain extent, everyone in the entire economy expects interest rates to rise, so everyone wants to hold money rather than bonds, and the speculative demand for money will tend to infinity. If the central bank continues to increase The money supply will be absorbed by people’s infinite speculative money demand, so that the interest rate will no longer fall. This extreme situation is the so-called “liquidity trap”.
Excess monetary liquidity means that the amount of money far exceeds the demand for money, and too much money chases fewer commodities. At the same time, under the condition of a sharp increase in the amount of money, money funds must be separated from the actual production system in order to pursue high profits, and frantically operate bulk commodities. .
For financial markets, liquidity has a broader meaning: for central banks, it refers to the management of the issuance of “base currency” and market liquidity, and excess liquidity refers to the excessive issuance of base currency that exceeds the physical The carrying capacity of the economy; for commercial banks, it refers to the proportion of deposits greater than loans. If deposits are far greater than loans, it means excess liquidity; for enterprises and investors, liquidity refers to the proportion of book assets. Liquidity, all assets that are easy to liquidate are liquid assets, and the so-called excess liquidity usually refers to the excess of realizable assets.
Currency Liquidity Indicator
The money liquidity ratio M1/M2 is a structural indicator about money demand (or money supply), and its role is to examine the coordination relationship between M1 and M2. This structural indicator has appeared frequently in my country’s quarterly monetary policy implementation reports and many research reports on monetary policy in recent years. It is an important reference indicator for the implementation of monetary policy. The monetary liquidity ratio M1/M2 reflects the different motives of enterprises and residents for currency demand, which is in line with the changes in residents’ asset structure and the degree of economic marketization, and is affected by many factors. From the long-term trend, my country’s monetary liquidity ratio M1/M2 dropped sharply from 1978 to 1995, but my country’s M1/M2 has remained basically stable since 1996, which mainly reflects the fact that around 1996, my country’s M1/M2 remained stable. Differences in monetization speed and money demand characteristics. However, along with the long-term trend of currency liquidity changes, there are also its cyclical fluctuations, which are mainly affected by economic fluctuations, inflation, and interest rate changes. Because when the economic growth rate accelerates, the inflation rate rises, and consumption and investment expenditures are relatively strong, the demand of individuals and enterprises for transaction media or payment methods will increase, so micro-subjects tend to hold more liquid assets. Currency, namely Ml, then the monetary liquidity indicator M1/M2 will increase; in addition, assuming other conditions remain unchanged, when interest rates fall, the opportunity cost of holding cash and demand deposits will decrease, which will lead to residents and enterprises. Holding more cash and demand deposits, resulting in an increase in MI/M2.
MO, MI, M2 are categories of money supply. At this stage, my country also divides the money supply into three levels, the meanings of which are:
MO: cash in circulation, that is, cash circulating outside the banking system; Ml: money supply in a narrow sense, that is, MO + demand deposits of enterprises and institutions;
.M2: Broad money supply, namely M1 + fixed deposits of enterprises and institutions + savings deposits of residents. Among these three levels, MO is closely related to consumption changes and is the most active currency;
M1 reflects the changes in household and enterprise funds, and is a leading indicator of economic cycle fluctuations, and its liquidity is second only to MO; M2 has weak liquidity, but reflects changes in social aggregate demand and future inflationary pressures, commonly referred to as The money supply mainly refers to M2.
People generally divide the money supply into different levels to measure, analyze and regulate according to the size of liquidity. In practice, different countries have different definitions of MO, M1, and M2, but they are all divided according to the size of liquidity. MO has the strongest liquidity, followed by M1, and M2 has the worst liquidity.