Global Liquidity

Liquidity in finance is defined as the relative ease with which an asset can be converted into cash without a significant loss in value.  In broader terms, it refers to both the availability of cash and the ability to sell an asset quickly for cash.  For these purpose, we will look at liquidity through the lens of availability of cash.

Consider the image below from the Bank for International Settlements. Illustrated is the amount of credit outstanding to non-financial borrowers inside the United States (the blue line), credit outstanding to non-bank borrowers outside the United States (solid red line), and estimated to credit to non-financial borrowers outside the United States (red dashed line).

Bank for International Settlements (BIS)

BIS Global liquidity indicators 2001-2019

How did US markets perform during that period, can we see any patterns?

In the image below, we have the Dow Jones Industrial Average (green line), S&P 500 (blue line), and Nasdaq (red line). 

Clearly, the peak in credit in 2007 saw peaks in the market, with both liquidity and markets contracting sharply in 2008-2009.  Liquidity anomalies, where liquidity or cash available in the system, dropped in 2016 and again in 2018, also reflect anomalous market drawdowns during those periods. 

I am left with questions as to the timing of the liquidity contractions, the causes, the motivations, and if there were other factors that contributed to the liquidity contractions and separately, the market contractions.