Money Printer 101: What Do You Mean By Liquidity
Let's start from the beginning...
Dear Fellow Traveler,
“Liquidity is tightening.”
You’ve probably heard that sentence a few times in the last month...
On television... in market notes... on podcasts by people sitting in front of very serious bookshelves.
Those words come out... and people nod like it… explains something.
Most people have no idea what it means.
Some are too polite to ask.
A few confidently misuse the term and get promoted anyway.
To explain it, let’s start with something you know.
Your life.
You have a job (unless you’re a politician with a trust fund).
You have bills...
You probably have at least one payment that hits your account automatically each month, whether you remember it or not. The common ones are mortgage, rent, car, student loan, and that subscription you meant to cancel in 2021.
When things are going well, you don’t think about any of it.
You fix that broken appliance rather than ignore it. You book a flight without checking the price repeatedly. Next month should look roughly like this one.
Nothing magical happened this entire time... You just had “margin.”
You had a quiet confidence that your financial life could absorb a surprise without imploding.
That... right there...
That’s liquidity.
It’s not really cash, or income, or wealth...
It’s the room needed to breathe.
Now flip the situation.
Your hours get cut... Your boss restructures everyone’s bonus pay at the last minute in December… Your rates are reduced.
That same life suddenly feels heavier.
You start postponing things…
That’s liquidity disappearing.
Now, the Textbook Definition
If you look up “liquidity” on Investopedia, you’ll get something like this:
“The ease and speed with which an asset can be converted into cash without materially affecting its price.”
That’s the textbook version. It’s useful because it educates you that cash is more liquid than a house.
It tells you that Apple stock is more liquid than equity in your cousin’s “cat-warshing” business (in Baltimore, people put an “r” in “wash.”)
This definition answers the question: “How easily can I sell this thing right now?”
That way is fine for beginners, but the definition is incomplete.
This textbook definition describes the symptom.
But I’m talking about the cause.
Michael Howell at CrossBorder Capital, who has spent decades mapping global liquidity flows, makes a useful distinction here.
Investopedia describes market liquidity. That tells you how easily a person can trade something. It tells you how deep the market is for a commodity, equity, or product.
It explains how the spread is between buyers and sellers…
But there’s another layer that Howell calls funding liquidity.
This is the financial system's balance sheet capacity.
It’s the ability of banks and investors to roll over debt.
It’s the global flow of credit and savings through and across markets.
And… underline this sentence twice…
That version of liquidity is what really moves markets.
Market liquidity breaks down when there are no buyers, spreads widen, or volume disappears.
But why does that happen? (That’s the thing I’m obsessed with…)
It happens because somewhere upstream, funding liquidity changed. Collateral requirements shifted, borrowing costs jumped, guarantees vanished…
Or the simple, but also complex reason: risk tolerance suddenly collapsed.
What actually moves markets is not whether you can sell an asset.
It’s whether the system will let you borrow against that asset at all.
When you frame your thinking about markets in this manner… as a concept of financing and refinancing… it explains breakdowns in momentum, central bank policy, Treasury rehypothecation, and much more… and how it all impacts equities…
And once you fully see it… You’ll never unsee it ever again.
Where Wall Street Loses People
Wall Street will talk about liquidity as if it’s just a substance. Like oil or water. Or something that can only be measured precisely and released on command.
It isn’t.
Liquidity is not money sitting around.
Liquidity is permission.
It’s permission to borrow… to take risks… and to expand…
If you own a house worth $400,000 and owe the bank $300,000, you have $100,000 in equity.
That’s your cushion and your margin for error… and something from which you can borrow (it’s called a Home Equity Line of Credit (HELOC). In good times, you’ll be able to get access to that credit… and great terms.
But when times are tougher… You might not qualify.
Every company works the same way. Every bank, hedge fund, and government follows the same math…
They just get more zeros and worse consequences when it all goes wrong.
When liquidity is good, that cushion can stretch… and people feel safe borrowing more.
When liquidity is bad, that cushion gets squeezed.
Everyone pulls back at once.
At the most basic, carnal level of finance, markets don’t crash because everyone suddenly becomes pessimistic.
They crash because something that was allowed yesterday is no longer allowed today.
It’s Not Technically ‘Money Printing’
Please understand… when I used the term “Money Printing…”
I’m not talking about the outcome of this picture that gives me the fantods and the heebie-jeebies, all while the internal Windows error sound plays in my head…
No one is literally printing money and tossing it into the economy like parade candy.
If that were the case, Staples would be the most important company on Earth.
What’s actually happening is more boring and more dangerous.
The rules change (usually very fast).
Interest rates move… government guarantees appear or disappear… Assets that were good enough to borrow against suddenly aren’t anymore (think all the houses with equity in them don’t qualify because banks tighten lending standards).
Once those rules change, behavior changes immediately.
This doesn’t happen next quarter or after the next data release…
It all happens immediately… like March 2020… March 2023… August 2024… or April 2025. Fast.
That’s why markets always move before the economy does.
They’re not predicting the future.
They’re reacting to changes in permission and liquidity conditions.
Where Liquidity Actually Comes From
Liquidity shows up when the people in charge loosen the rules…
The Federal Reserve matters because it controls how expensive it is to borrow money.
When borrowing is cheap, and the Fed signals it will catch you if you fall, banks and investors feel safe taking bigger risks.
When borrowing gets expensive and the safety net disappears, everyone gets conservative at the same time.
The government matters because when it spends money, that money has to go somewhere.
How they finance is just as (if not more) important than how much they fund.
Government spending puts dollars and assets into the system… but a focus on funding the government with short-duration Treasuries can fuel leverage, amplify risk, and drive asset prices higher for reasons most people don’t understand.
Where that spending lands matters more than the total amount.
Banks matter because they don’t lend money out of the goodness of their hearts.
They lend when the math works… when the rules allow it, when funding is cheap, and when they’re confident they’ll get paid back.
When any of those things change, lending stops.
And then there’s the part that few people talk about.
The shadow banks.
Here we’re talking about money market funds, hedge funds, pension funds, insurance companies, and foreign governments parking their cash.
These aren’t banks, but they move enormous amounts of money. (Howell estimates the global shadow monetary base at around $109 trillion.)
These shadow banks (outside traditional regulatory oversight) lend to each other overnight, every night, using assets as collateral.
It’s effectively a giant pawn shop for billionaires, except the loan only lasts 24 hours, and then they do it again.
When these players get nervous and pull back, markets feel it fast… this is at the heart of Zoltan Pozsar’s analysis of the 2008 banking crisis, and the work of many other academics and analysts who assess this oft-ignored or misunderstood side of finance.
When this shadow machinery freezes, nothing else matters.
Liquidity Does Not Flow Evenly
I’ve explained that credit and credit creation aren’t distributed evenly (something that should actually be assessed at the tax level).
It never has.
New money enters the system at the top.
It starts with governments and the Fed...
It flows to big banks and Wall Street dealers next. Then it moves into financial markets. Then, eventually, maybe, the real economy where you and I live.
This is why stocks can be soaring while wages stagnate.
They’re not disconnected… they just operate on different clocks.
Stocks sit closest to the spigot.
And the reason is pretty simple…
Stocks aren’t just ownership slips.
They also act as collateral… which is why I’m always watching the FNGD…
When stock prices rise, the people who own them look richer on paper.
That means they can borrow more (which drives margin debt to new records).
More borrowing means more money sloshing around.
And the more money sloshing around, the more risk-taking there becomes…
And this cycle feeds itself.
When stock prices do fall, the whole thing runs in reverse.
This is why liquidity cycles matter more than earnings cycles.
It’s not because profits don’t matter…
It’s because liquidity decides how forgiving the system is while profits play out.
Corporate profits follow liquidity.
And jobs follow profits.
Inflation follows too much or too little money in the system.
Liquidity LIVES upstream of everything.
If you understand how it works (and I hope you do), markets stop feeling random.
You still won’t like everything that happens.
You’ll definitely get annoyed, but you won’t be so confused.
And confusion is expensive.
Liquidity is our starting point…
This week, we’ll explain why momentum, insider buying, policy decisions, and flows follow (one at a time…) Another 101… once a day…
Till tomorrow…
Stay positive,
Garrett
Fantastic breakdown of funding liquidity versus market liquidity. The shadow banking piece is what most people completly miss when they think about market moves. I spent some time years ago analyzing credit flows in 2008 and the overnight repo markets were where eveyrthing actually broke, not the equity side that grabbed headlines. The framing of liquidity as permission rather than just cash is exactly right and explains why tightening cycles hit so fast.
Those who have silver and gold may be able to ride out this idiocy, if the world does not go up in ashes due to the stupidity of a president who doesn't have a brain in his head. "We the People" are just the stooges in this crazy world.