Drowning in a sea of liquidity.
“In a solvency crisis, companies can’t survive no matter how much they can borrow: they need more revenue. The Fed can’t solve that.”
—Greg Ip, @WSJ https://t.co/QehaXr9wdC— Daniel Lacalle (@dlacalle_IA) May 2, 2020
Is the economy facing a liquidity crisis, or a solvency crisis? The distinction will determine how important the Federal Reserve is to returning the economy to health.
In a liquidity crisis, otherwise healthy firms collapse because they can’t access credit. The Fed can resolve such a crisis because it can print and lend unlimited amounts of money. In a solvency crisis, companies can’t survive no matter how much they can borrow: they need more revenue. The Fed can’t solve that.
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Investors don't realise this is a solvency issue and not a liquidity issue. This is a slow march of deflation to the bottom. https://t.co/HtqXKDngo9
— Stare Decisis (@MsResJudicata) May 2, 2020
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