I have this (totally unprofessional and mostly unverified) theory about liquidity in general: that it's a conduit and amplifier for many things, but chief amongst them is exploitation.
Highly liquid markets mean that value of one kind can be translated into value of another kind easily. Every time money changes hands, there's an almost unavoidable difference in the pricing each party does for the transaction (an example is the company of migrant workers offering to mow your lawn; each dollar is likely worth more to them than to you, so you can play with the margins to save a buck and they'll probably still take it). This leads to an asymmetry that creates an imbalanced power dynamic.
Put another way, liquidity allows the projection of this power imbalance. For each dollar you have, you can externalize so much of your costs. This is something you almost don't have to decide to do; because markets represent aggregated pricing power, you can take advantage of it simply by buying goods or services.
If you aggregate this projection over a large and highly liquid market, what you have is a massive shifting of externalized costs from the haves to the have nots. Insert picture of a fish eating a fish eating a fish here.
From this perspective, it seems as though the system as a whole is given to a collapsing instability, from first principles. I believe that what we've seen in terms of periodic financial crisis is an expression of this system being propped up by the actors at the "heavy end", despite it's inherent tendency towards catastrophic failure.
Which is why I'm always a little curious when folks start talking about credit collapsing like it would be the worst thing in the world - a global cooling of liquidity could very well be the thing that saves us, by cajoling the system into playing fair at scale.
I've lived through two. I was working as a roofer through one and a bartender in the next, and honest, didn't notice much of a difference other than middle class folks freaking out about their mortgages and wall street screaming for the government to bail them out.
I am willing to bet this next one will be no different. Also, almost by definition, a recession is a depression that almost happened but didn't. Had we allowed the larger banks to fail and large-cap liquidity to cool, we wouldn't be back in this place with banks playing cowboy with people's deposits.
Not really. The ‘have not’s’ go from having an under the table job that lets them eat decent and have a roof over their head (even if they don’t own it), to homelessness or death. Or someone already homeless to just be, well, dead, as more predators are coming out and support options dry up.
The have’s can generally insulate somewhat against the worst case scenario - even bankruptcy for instance will protect a primary residence, car, and other things necessary to work and earn income.
The more you have, the more you can prevent the worst outcomes, and the more you can leverage what you have to take advantage of favorable long term conditions because you don’t have a gun against your head.
They haves by definition may lose more net worth in absolute terms (someone with $10 in the bank can’t lose $10 million by definition), but that doesn’t mean they’re at the most risk of the biggest real losses. Things like marriages, health, life, wealth (in a life altering way), etc.
Even if musk loses 10’s of billions, he’ll still be wealthier than all but a small handful of people in the world for instance, and won’t likely have any meaningful change in his day to day or long term circumstances.
Highly liquid markets mean that value of one kind can be translated into value of another kind easily. Every time money changes hands, there's an almost unavoidable difference in the pricing each party does for the transaction (an example is the company of migrant workers offering to mow your lawn; each dollar is likely worth more to them than to you, so you can play with the margins to save a buck and they'll probably still take it). This leads to an asymmetry that creates an imbalanced power dynamic.
Put another way, liquidity allows the projection of this power imbalance. For each dollar you have, you can externalize so much of your costs. This is something you almost don't have to decide to do; because markets represent aggregated pricing power, you can take advantage of it simply by buying goods or services.
If you aggregate this projection over a large and highly liquid market, what you have is a massive shifting of externalized costs from the haves to the have nots. Insert picture of a fish eating a fish eating a fish here.
From this perspective, it seems as though the system as a whole is given to a collapsing instability, from first principles. I believe that what we've seen in terms of periodic financial crisis is an expression of this system being propped up by the actors at the "heavy end", despite it's inherent tendency towards catastrophic failure.
Which is why I'm always a little curious when folks start talking about credit collapsing like it would be the worst thing in the world - a global cooling of liquidity could very well be the thing that saves us, by cajoling the system into playing fair at scale.