A Perfect Storm for a Liquidity Crisis?
Commentary
Efforts to curb inflation by central banks, particularly the Federal Reserve (Fed), may well trigger a liquidity crisis in the markets.
That’s the assessment of University of Bath researchers, which claims that excessive anti-inflationary policies could create a money shortage within this calendar year. Moreover, it shows that central banks can be a destabilizing factor as well as a stabilizing force in the economy with both inflationary and deflationary policies.
A Prime Example: 2008-09 and Beyond
For example, the Bath study determined that during the financial crisis of 2008-09, central banks’ policies created more uncertainty in the markets, not less. That increase in uncertainty sparked market volatility, which, in turn, spooked investors. The fearful investing environment of that time made investors more conservative. As a result, money flowed out of the markets and into lower-risk areas, which made the markets even more unstable and ill-liquid….