liquidity and deflation
During times of crisis and loss of confidence, people hoard liquid items such as gold, silver, cash and government bonds. These items are of two uses:
- They are non-perishable and hence can be used to transfer wealth into the future.
- They are extremely easy to exchange into other goods.
Hence low bond yields and deflation are consequences of the same phenomenon. As liquidity becomes more desirable, bonds become more expensive in terms of dollars and dollars become more expensive in terms of less liquid items such as cars/houses/food etc.
- They are non-perishable and hence can be used to transfer wealth into the future.
- They are extremely easy to exchange into other goods.
Hence low bond yields and deflation are consequences of the same phenomenon. As liquidity becomes more desirable, bonds become more expensive in terms of dollars and dollars become more expensive in terms of less liquid items such as cars/houses/food etc.
