According to the Compact Oxford English Dictionary online, liquidity is:
1. the availability of liquid assets to a market or company, 2. liquid assets
Regarding cash flow, according to Oxford: "liquidity is the total amount of money passing into and out of a business, especially as affecting liquidity."
Because of the globalization of financial, as well as most other markets, today's economy is much more of a truly global system; an event anywhere in the chain of connectivity might have effects at some other point or points throughout the network.
Following cause and effect, always a complicated business, a negative event in say the US housing market could trigger a company in France to lower profit expectations, or, worse yet in terms of markets, report that there are no reliable indicators of financial health because events along the lines of connectivity are uncertain.
Given an already volatile, and therefore vulnerable, world market, such an event could trigger a mass sell off, in say stock in the French Ccompany, requiring available assets (i.e. cash) to satisfy the market obligations.
However, if there is no cash to make the payment, what to do?
Well, one could do nothing as might be expected from a laissez-faire purist who believes that capital adjustment according to the invisible hand would sel-correct and essentially rid the markets of overvalued or worthless financial arrangements.
Surprisingly, that was not President Bush's response. Instead, he cited liquidity in the markets as a source of concern.
Another issue, however, facing global markets has been the question of currency valuation and exchange rates. China has been floating the dollar for much of Bush's term, if not longer.
So what?
Today, the Federal Reserve Bank increased liquidity in the markets not once, but thrice. Why is that significant and what does it mean for the average consumer?
First, the increase in liquidity means the government is issuing more paper money which will provide more liquidity, but also drive down the value of the dollar affecting other currencies.
Second, by driving down the value of the dollar, money is worth less and therefore concern about inflationary pressures creep up. If the so-called "sound economy" is predicated on consumer behavior and activity, a dollar worth more means people willl be able to buy less, possibly far less.
Hence, the market's keen interest in whether the Federal Reserve will cut interest rates at its next meeting.
