Thursday, February 07, 2008

Liquidity in the economy

Over the last two or so years, we've seen lots of money swirling in the economy with the main impact being inflation of;

  • consumer goods

  • the price of assets such as real estate and stocks

At the NSE, this manifested itself in higher market cap as well as high P/Es for good to very good stocks. A lot of the liquidity came from two sources, namely

  1. Banks throwing money like confetti at borrowers

  2. Diaspora rushing in to invest into the growing economy

The good thing is that with the exception of hot money brought in by foreign stock investors, little of this cash has left the country. Some will hopefully be used to help the displaced. Some will be used to absorb the higher cost of living (mainly supply-driven). The rest is waiting for these two knuckleheads to make peace so we can go on and invest.

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