Definition: Liquidity is a financial term that means the amount of capital, or money, that is available for investment.
High liquidity means there is a lot of money because interest rates are low, and so capital is easily available. However, a liquidity glut can develop if there is really too much money looking for too few investments. This is usually a precursor to a recession, as more of this capital becomes invested in bad ventures. As the ventures go defunct and don't pay out their promised return, investors are left holding worthless assets. Often a panic can ensue, resulting in a withdrawal of investment money. This is what happened during the 2007 Banking Liquidity Crisis.
Constrained liquidity means that there is not a lot of money around, and that banks and other lenders are hesitant about making loans. It is usually a result of high interest rates.
Also Known As: money supply, M1, M2, M3, capital
Examples: Low Treasury bond yields have contributed to liquidity in the U.S. economy.
