As a result, all of this excess liquidity is flowing to the financial sector rather than the real economy.

In Germany, banks earn close to nothing on the hundreds of billions of euros of excess liquidity that they have deposited at the ECB.

If they remove the stimulus too soon by raising taxes, cutting spending, and mopping up the excess liquidity, the economy may fall back into recession and deflation.

Lowering volatility and sopping up excess liquidity can be beneficial, but there are risks here as well regulators can easily overshoot the mark, leaving financial markets with weakened capacity for price discovery and too little liquidity.

The Fed s policy of quantitative easing exacerbates the flow of excess liquidity, which could result in dangerous bubbles in emerging markets.

Instead, excess liquidity and fresh asset bubbles could emerge in the world s financial and housing markets, impeding, if not torpedoing, growth.

China s Excess Capacity Nightmare

So the key emerging issue for policymakers is to decide when to mop up the excess liquidity and normalize policy rates and when to raise taxes and cut government spending (and in which combination).

The QE exit strategy, if the Fed ever summons the courage to pull it off, would do little more than redirect surplus liquidity from higher yielding developing markets back to home markets.

Banks are currently holding more than 700 billion of surplus liquidity at the ECB, earning only one quarter of 1 interest. This assures a large and ready market for the bills at 1 or less.

America s hyper aggressive fiscal response means a faster rise in government debt, while its hyper expansive monetary policy means that an exit strategy to mop up all the excess liquidity will be difficult to execute. Government spending in the US has risen in short order from 18 to 28 of income, while the US Federal Reserve has effectively tripled its balance sheet.

The Liquidity Puzzle

When the economy starts recovering, and banks start lending, will they be able to drain the liquidity smoothly out of the system? Will America face a bout of inflation?

The Liquidity Time Bomb

Is Liquidity Enough?

Confronting the Coming Liquidity Crisis

There are still a few million surplus workers in Central Asia.

Finally, Spaniards could borrow excess German savings and increase consumption and investment.

In normal times, there are valid reasons for paying interest on excess reserves.

NATO has been involved in the destruction of a number of surplus stockpiles.

As a result, China now faces the problem of short term excess capacity.

Investors might choose other places for their excess cash, like banks.

This is slowing the absorption into the economy of the excess resources in the construction industry.

(vi) Proceeds from the sale of surplus property are credited to the miscellaneous income of the respective funds.

The IMF recently established the Short Term Liquidity Facility to help strong performing members facing temporary liquidity problems.

The interest rate on these totally safe and liquid deposits induced the banks to maintain excess reserves at the Fed instead of lending and creating deposits to absorb the increased reserves, as they would have done before 2008.

But the more immediate problem remains deflation, given high unemployment and excess capacity.

Call it information liquidity, akin to financial liquidity.

If you believe that the crisis was caused by a shortage of liquidity, we had plenty of models analyzing liquidity shortages and their effects on financial institutions.

But the new Fed policy of paying interest on excess reserves meant that this increased availability of excess reserves did not lead after 2008 to much faster deposit growth and a much larger stock of money.

China now stands ready to absorb some of that surplus saving to promote a shift toward internal demand.

The only way to sustain economic growth in the face of such an imbalance is to borrow surplus savings from abroad.

Given China s massive stock of surplus labor, this trend will not reverse itself soon.

The link between bond purchases and the money stock depends on the role of commercial banks excess reserves.

Through this control and manipulation of surplus resources, the elite's power continued to grow until about AD 950.

The surplus assets (due to the phasing down or closure of an operation, awaiting redeployment) were not reported.

Then they set the price of liquidity as an administered price in normal times.

But there are two other aspects of liquidity management that deserve attention.

Critics might cite the moral hazard risk generated by liquidity support.

All these non bank institutions are now potentially at risk of a liquidity run.

It taxes liquidity, which many believe is overly abundant.

Liquidity risk is best hedged through diversification across time.

The index includes top 30 companies in terms of Liquidity and activity.

China s excess capacity problem reveals a serious defect in its socialist market economy.

But, by raising the consumption share of its GDP, China will also absorb much of its surplus saving.