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Is “liquidity Crisis” An Oxymoron?

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A liquidity issue is where cash is required short term. This is never a crisis since sufficient collateral should be available to allow the entity to borrow. If sufficient collateral isn’t available it is indeed a crisis but now it’s not a liquidity issue but a solvency issue.

We can therefore have either a “liquidity issue” or a “Solvency crisis” never a “Liquidity Crisis”.

(oxymoron = contradictory terms)

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A liquidity issue is where cash is required short term. This is never a crisis since sufficient collateral should be available to allow the entity to borrow. If sufficient collateral isn’t available it is indeed a crisis but now it’s not a liquidity issue but a solvency issue.

We can therefore have either a “liquidity issue” or a “Solvency crisis” never a “Liquidity Crisis”.

(oxymoron = contradictory terms)

Suppose I have no debts, and tons of assets (say gold). But say I need some cash to pay my utility bills and I don't have it. I go to the bank to borrow some money. But they say "We're not lending at the moment because people aren't lending to us (because they / the US / the hedge funds are up shit creek) so I'm sorry old chap you can't have it, even though you're probably good for it."

Then I have a liquidity crisis not a solvency crisis even though there is nothing wrong with my balance sheet.

I think this shows how distrust in the money markets is highly contagious and can end up affecting a broad swathe of organisations regardless of the health of their balance sheets.

Liquidity crises are very real in such a situation.

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Suppose I have no debts, and tons of assets (say gold). But say I need some cash to pay my utility bills and I don't have it. I go to the bank to borrow some money. But they say "We're not lending at the moment because people aren't lending to us (because they / the US / the hedge funds are up shit creek) so I'm sorry old chap you can't have it, even though you're probably good for it."

Then I have a liquidity crisis not a solvency crisis even though there is nothing wrong with my balance sheet.

I think this shows how distrust in the money markets is highly contagious and can end up affecting a broad swathe of organisations regardless of the health of their balance sheets.

Liquidity crises are very real in such a situation.

Yes, but in the current climate everybody is a bit worried that all that gold you have might actually turn out to be wood!

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Yes, but in the current climate everybody is a bit worried that all that gold you have might actually turn out to be wood!

Exactly! So I'm solvent but because of uncertainty + fear, I can't get the liquidity I need.

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I think this shows how distrust in the money markets is highly contagious and can end up affecting a broad swathe of organisations regardless of the health of their balance sheets.

I think part of the worry is not the Balance sheet now but the Balance sheet in one or two years.The assumption is that houses are now a depreciating asset in the short term.

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