David Garcia

Taking a Closer Look at the Global Liquidity Cycles Since 1970 🕵️🗃️ The ebbs and flows of global liquidity are highly significant when it comes to understanding global markets, leading the way they have responded for more than 50 years. Let’s take a closer look at the past 11 global liquidity cycles, the driving factors, and consequences, from 1970 onwards. 🪩 1970s 🪩 📉 A sharp drop in global liquidity triggered a period of economic instability which led to the 🔴 U.S. "Nixon Shock" Inflation Crisis where U.S. President Nixon ended the gold standard, resulting in significant inflation. 📈 Policies to recover resulted in a steady rise in global liquidity which led to the 🟢 Global Commodity Price Boom with prices surging on the back of high demand as the Vietnam war was ending and the drive for economic expansion, urbanisation and infrastructure development increased. 📉 Global liquidity plummeted as governments responded to stubborn inflation, exacerbating economic challenges worldwide which led to the 🔴 Global Oil Price Stagflation Crisis as an OPEC oil embargo caused oil prices to spike during a period of weak economic growth, resulting in stagflation (high inflation combined with economic stagnation). 📈 In an attempt to spark economic recovery and growth to offset the persistent inflation pressures, policies shifted back to provide a significant increase in global liquidity, which led to the 🟢 Global Expansionary Fiscal & Monetary Policy Boom as governments and central banks around the world implemented expansionary policies to combat stagflation. 🕹️ 1980s 🕹️ 📉As the pressure increased to crush inflation more permanently there was a severe contraction in global liquidity, triggering recessions in various countries, which led to the 🔴 U.S. "Volcker Shock" Inflation Crisis as U.S. Federal Reserve Chairman Paul Volcker raised interest rates significantly to control runaway inflation. 📈 With inflation coming under control the focus turned to increasing global liquidity to encourage more robust economic growth, which led to the 🟢 U.S. Tax Cut & Deregulation Boom as tax cuts and deregulation under the Reagan administration stimulated economic activity. 📉 As global liquidity cyclically decreased it highlighted the fragility of economic conditions in emerging markets and the agricultural sector, which led to the 🔴 Latin American Debt Crisis & U.S. Farms Crisis where several Latin American countries defaulted on their debt, while U.S. farmers faced financial distress. 📈 Another surge in global liquidity was then used to drive economic expansion which led to the 🟢 U.S. "Reaganomics" Boom with continued tax cuts, deregulation, and increased defence spending. 📼 1990s 📼 📉 A significant decline in global liquidity led to the 🔴 Japanese Asset Price Bubble Bust as Japan's real estate and stock market bubbles collapsed, contributing to a period of economic stagnation in Japan known as the "Lost Decade." 📈 A substantial rise in global liquidity, spurring economic growth worldwide, led to the 🟢 Globalisation Boom with increased integration of global markets, facilitated by trade liberalisation and technological advancements. 📉 Global liquidity was contracting into the 🔴 U.S. Savings & Loan Crisis where deregulation and risky investment practices resulted in widespread insolvencies of S&L institutions, ultimately costing taxpayers hundreds of billions of dollars in bailout funds. 📈 With global liquidity back on the rise, the 🟢 Emerging Markets Boom was fuelled by significant foreign investment, economic liberalisation, and rapid industrial growth, particularly in Asian and Latin American countries, resulting in robust economic expansion and increased global trade. 📉 A sharp contraction in global liquidity resulted in economic downturns in many affected regions and led to the 🔴 Asian Financial Crisis where several Asian countries were under immense pressure due to currency devaluations and speculative attacks. 📀 2000s 📀 📈 Policy responses to the prior downturn increased global liquidity in the lead up to the 🟢 Dot-com Bubble where there was a speculative frenzy in Internet related technology stocks. 📉 The following decrease in global liquidity to manage the overheated stock market swiftly led to the 🔴 Dot-com Bubble Bust causing a recession in the early 2000s. 📈 Significant increases in global liquidity, driving economic expansion, led to the 🟢 Global Housing Market Boom where low interest rates and easy credit encouraged property speculation in many countries. 📉 A severe contraction in global liquidity, leading to a deep global recession, commenced in the mid 2000s with 🔴 Initial Global Financial Company Collapses followed by the full-fledged Global Financial Crisis and the collapse of major financial institutions due to subprime mortgage defaults. 📈 The U.S. Federal Reserve implemented Quantitative Easing (QE) to inject liquidity into the economy as a response to the Global Financial Crisis which led to the 🟢 U.S. QE 1 Boom and provided significant aid in the economic recovery. 📱 2010s 📱 📉 A reduction in global liquidity after the initial QE injections resulted in economic challenges for the Eurozone and led to the 🔴 Eurozone Banking Crisis where financial instability was experienced in several European banks due to sovereign debt issues. 📈 A sustained increase in global liquidity, in an effort to support prolonged economic growth, led to the 🟢 U.S. QE 2 & QE 3 Boom where continued Quantitative Easing by the U.S. Federal Reserve buoyed markets and the economy. 📉 A temporary dip in global liquidity led to the 🔴 U.S. Repo Crisis where a sudden spike in overnight lending rates in the U.S. repo market caused panic and was quickly addressed by U.S. Federal Reserve interventions. 🔮 2020s 🔮 📈 An unprecedented increase in global liquidity with massive fiscal stimulus and monetary easing in response to the COVID-19 pandemic led to the 🟢 COVID-19 Boom where markets and the economy experienced a rapid rebound after the initial shock collapse. 📉 The ongoing reduction in global liquidity after the COVID-19 injections, continues to create the potential for economic repercussions and led to the 🔴 U.S. Regional Banking Crisis with financial instability in several U.S. regional banks and the possibility of further issues ahead until global liquidity returns to more robust levels. Conclusion The chart illustrates how global liquidity cycles have driven economic booms and crises since 1970. Periods of increased liquidity emerge with accommodative monetary and fiscal policies, technological advancements, and global trade expansion, and lead to economic booms. Conversely, liquidity contractions, triggered by policy tightening after the preceding boom, consistently result in financial crisis. Ultimately each crisis plants the seeds for the next global liquidity driven boom, and so the cycle continues…