What is liquidity?

The first post in this blog series spoke of the trend of many governments to put a “squeeze” on struggling economies instead of pumping liquidity and giving them a chance to strive towards recovery.

Before moving on and looking at various governments measures in relation to liquidity, I will briefly look at the elements up for discussion here.

Firstly, the idea of liquidity, relates to the ability and the ease at which an asset can be converted into cash. A previous economics and intrinsic valuations lecturer of mine, Tom Power (DIT), drilled the notion that “Cash is King” into my head throughout my undergraduate degree. And now looking at the global economy over the last 5 years and the lack of cash circulating, I can clearly see his viewpoint.

This lack of liquidity, brings us on to explain austerity. Austerity measures are usually taken by governments when they fail in their abilities to honour debt liabilities. This widely topical process can involve a various range of measures to cut budget deficits, including, tax increases, reduction in social welfare payments, reduced spending etc. The overall aims of these measures are clearly visible and understandable in most cases; the problems arise with their associated negative externalities.

This week saw the Greek parliament approved a set of austerity measures to avoid a disastrous default and secure a second bailout from the EU and IMF. In my next post  I will consider some of the negative externalities associated with this bill that sets out to make cuts of €3.3bn in wages, pensions and job cuts for 2012 alone.