What does “excess liquidity sloshing around the financial system” mean?
Here&#x27;s a mental model I find helpful for understanding <i>current</i> circumstances:<p>&quot;Quantitative easing&quot; means issuing new money -- a government obligation that pays no interest -- to purchase treasury (and agency) bonds -- government obligations that pay interest. Until very recently, for good reasons (a global financial crisis, a global pandemic), the Fed and other central banks around the world have been engaged in quantitative easing at an unprecedented scale, replacing government-issued financial instruments that pay interest (bonds) with government-issued financial instruments that pay no interest (money). The result has been an unprecedented increase in <i>private cash balances</i> -- what many call &quot;liquidity sloshing around.&quot;<p>Last year, some central banks started doing <i>the opposite</i>, &quot;quantitative tightening,&quot; i.e., selling  previously purchased bonds (or letting them mature), removing liquidity  (government-issued money) from financial markets and replacing it, directly or indirectly, with financial instruments that pay interest (government&#x2F;agency-issued bonds). The result has been a gradual decrease in <i>private cash balances</i> -- one could call it &quot;liquidity evaporating.&quot;<p>For example, you can see the value of the financial instruments the Fed owns (i.e., it has purchased them in the past and continues to hold them) here:<p><a href="https:&#x2F;&#x2F;www.federalreserve.gov&#x2F;monetarypolicy&#x2F;bst_recenttrends.htm" rel="nofollow">https:&#x2F;&#x2F;www.federalreserve.gov&#x2F;monetarypolicy&#x2F;bst_recenttren...</a><p>--<p>PS. I&#x27;m talking only about readily observable facts, not about &quot;excess liquidity&quot; in the abstract sense, e.g., as described by economists who call themselves Keynesians.