Michael Howell discusses the differences between asset-based liquidity metrics and traditional measures like M2, the current state of global liquidity, and the potential implications of a U.S. gold revaluation amidst changing market dynamics.
In a recent discussion on the Bitcoin Layer, Michael Howell of CrossBorder Capital shared his insights on global liquidity and its implications for financial markets. Howell emphasized the importance of understanding liquidity metrics, particularly in the context of a rapidly evolving financial landscape.
Howell began by clarifying the distinction between traditional liquidity measures like M2 and asset-based liquidity metrics. M2 is a liability-based measure that reflects the deposit liabilities of retail banks. In contrast, Howell's Global Liquidity Index is an asset-based measure that focuses on the flows of money through financial markets.
He explained that while M2 may have been a relevant measure decades ago, it has become less effective in today's financialized world where most transactions occur in financial markets rather than the real economy. Howell stated, "M2 is an archaic measure... it doesn't count flows of money that are between financial institutions."
Howell emphasized that understanding credit in the financial system is crucial, as it drives financial asset prices. He noted that many financial institutions now rely on money markets or repo markets for funding rather than retail deposits, further highlighting the limitations of M2 as a liquidity measure.
Howell provided an overview of the current state of global liquidity, noting that liquidity creation has slowed down recently, which he referred to as an "air pocket." He indicated that while there are signs of recovery, the allocation of liquidity to risk assets has shifted, with investors moving away from riskier assets.
He presented a chart illustrating investor risk exposure, showing a decline in risk-seeking behavior among U.S. investors. This trend is reflected in the performance of various asset classes, with cryptocurrencies experiencing significant sell-offs while gold and silver have remained relatively stable.
Howell discussed several factors influencing global liquidity, including:
Howell introduced the idea of revaluing the U.S. gold stock, which has not been adjusted since the early 1970s. He argued that a revaluation could provide a significant liquidity boost to the Treasury General Account, potentially alleviating the need for new coupon issuances and lowering yields.
He drew parallels between current events and historical instances where gold was revalued, suggesting that such a move could help manage the growing debt burden and stabilize the economy.
Howell posited that a gold revaluation could have profound implications for financial markets, particularly for cryptocurrencies. He noted that if the U.S. were to revalue gold, it could lead to a substantial influx of liquidity, benefiting various asset classes.
Michael Howell's insights into global liquidity underscore the complexities of financial markets and the importance of understanding liquidity metrics beyond traditional measures. As the landscape continues to evolve, the potential for a U.S. gold revaluation presents an intriguing possibility for addressing economic challenges and stabilizing financial markets. Howell's work serves as a valuable resource for those seeking to navigate these intricate dynamics in the world of finance.
