Liquidity Creation and its Potential Problems

Mack Frankfurter’s article entitled “Retrospective: The Mysterious Case of Massive Liquidity” is a small history of how the world has created the current, huge amount of liquidity and the types of problems such liquidity poses. The author compares liquidity to a drug addict, which I assume is meant to convey the seriousness of the situation.

The problem with liquidity is that it is like an addictive drug–initially it produces euphoria which then disappears with increasing tolerance. Once an economy is hooked it needs more and more in order to sustain itself and withdrawal can be difficult. The riddle is whether the central banks have succeeded in breaking the cycle, not the inflationary cycle which in fact it has enthusiastically subsidized, but the deflationary cycle. Has the sheer bulk of global liquidity forestalled the kind of contraction that paralyzed business activity in the Depression and demoralized speculative activity for a generation after that?

I recommend reading this if you’d like to try to gain a better understanding or additional perspective about current economic matters.