Global liquidity is the economy’s oxygen—when there’s plenty, everything breathes easier. But when it’s scarce, well, things can get suffocating fast.

In plain English, global liquidity is how easily money sloshes around the international financial system. Tons of liquidity? Markets go brrr. Tight liquidity? Welcome to the land of higher borrowing costs and nervous investors.

Let’s break down what global liquidity is, why it matters, what it does, and where it’s at.

What Is global liquidity?

Global liquidity basically breaks down into two big buckets:

1. Official liquidity: Cash from by central banks and governments.

2. Private liquidity: Credit created by banks and financial institutions.

Put them together, and you have the oil that keeps the global economic engine from screeching to a halt.

Why Global Liquidity matters for investors

Picture this: When there's lots of money floating around, asset prices often get a boost simply because cash is looking for somewhere—anywhere—to grow. On the flip side, when liquidity shrinks, investors tend to freak out, leading to higher volatility and potentially lower investment returns.

Even beyond market ups and downs, global liquidity spills over into the real economy. It influences interest rates, credit availability, and growth. That’s code for: it impacts corporate earnings, and yes, that’s where your long-term investment returns come from.

What drives global liquidity?

Central bank (monetary) policies

Ever heard that saying, “Don’t fight the Fed”? That’s because central banks like the Federal Reserve, European Central Bank (ECB), and Bank of England have a huge influence on liquidity. When they cut rates or buy bonds, liquidity flows. When they tighten, money gets stingier.

Fiscal policies

Government spending and taxation are another major piece of the puzzle. Spend more, boost the economy (and often liquidity). Spend less...you get the idea.

Risk sentiment

It’s all about vibes. If investors feel good, they throw money at opportunities. If they don’t, they tighten up like your jaw at the dentist.

Impact on different asset classes

Stocks

Stocks love easy money. Cheaper capital means companies can borrow more (and often grow faster). But if central banks slam the brakes on liquidity, watch out for that dreaded “correction” - kind of like what we’re experiencing right now!

Bonds

When liquidity dries up, bond yields rise (prices fall) because borrowing costs go up. Just like they have been; bond yields have dropped since mid-January.

Crypto

Yes, Bitcoin soared past $100,000 at the start of this year—partly because of increase in global liquidity. But since then it’s taken a major dive as global liquidity dried up. What does this chart tell you? Bitcoin tracks liquidity:

Current state of global liquidity (March 2025)

Now for the big reveal—where things stand as of March 2025:

• The U.S. Federal Reserve dropped rates by 0.25% in December 2024 and hinted at two more 0.25% cuts this year.

• JP Morgan also expects up to a 0.50% cut contingent on (what else?) employment and inflation.

• The European Central Bank could cut rates at its first four meetings, dropping deposit rates to 2% by mid-year.

• Bank of England is also eyeing four rate cuts in 2025.

On the flip side, don’t get too comfy. There’s still tension between growth and inflation, which might keep rates higher than you’d like. Also, money is flowing out of China, which could rattle the global economy.

In other words, global liquidity may be on the rise, but keep your seatbelt on in case the ride gets bumpy.

So what?

We need oxygen to live, just like the economy needs liquidity to grow.

Global liquidity fell off a cliff recently, which wasn’t helped by all the political panic around tariffs. But liquidity is back on the climb now, and with it will (**hopefully**) be stocks and other risky investments.

It can take a couple months for liquidity to work its way through the financial system, so hopefully we should see the benefit of rising liquidity soon!

Hold strong.