Forward Guidance

The Great Liquidity Debate | Michael Howell & Andy Constan

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Jul 27, 2023
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INSIGHT

Liquidity Is Balance-Sheet Capacity

  • Michael Howell defines liquidity as global financial balance-sheet capacity, not M1/M2 or just Fed reserves.
  • He measures money flow through central banks, conventional banks and shadow banks to assess ability to roll over debt.
INSIGHT

Liquidity As Risk Absorption

  • Andy Constan frames liquidity as the world's capacity to absorb risk, connecting liquidity composition directly to asset prices.
  • He emphasizes asset composition and risk-bearing capacity, not just central-bank balance sheets.
INSIGHT

Beware Level Correlations With Markets

  • Andy warns simple charts correlating Fed balance-sheet levels to the S&P 500 are misleading due to level vs change correlations and cointegration.
  • He argues correlations of changes are essentially zero and causal links are weak.
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