In this post, we’ll unpack all you need to know about global liquidity, defining exactly what it is, what drives it, why it matters, how it influences assets and more.
What Is Global Liquidity?
Global liquidity (GL) is defined as the amount of money — both cash and credit — that is available to flow through financial markets.
In other words, how much capital is free to be used in the economy for asset purchases in the financial economy and investment, trade and consumption in the industrial economy.
What Drives Global Liquidity
There are 3 key drivers of global liquidity:
- The size of central bank balance sheets — specifically the Federal Reserve and the People’s Bank of China (PBoC).
- The size of commercial bank balance sheets.
- The size of collateral held by banks that can be easily converted into cash through the repo market.
Other influencing factors include bond volatility, term premium and yields. As treasury prices decrease due to higher yields, the ability to turn collateral into cash decreases, reducing liquidity in the system.
All the money that is anywhere must be deployed somewhere.
Why It Matters
GL directly influences market movements and therefore, by extension, asset prices.
For example, global liquidity has a 97% correlation with the NASDAQ…

…and an 85% correlation with Bitcoin.

So essentially, GL is a leading indicator. In fact, it’s the leading indicator.
Specifically, it leads asset prices by roughly 3-9 months, as illustrated in the chart below that shows the correlation between GL and Bitcoin with a 13-week lag.

The Global Liquidity Cycle
Just like everything else, global liquidity moves in cycles which tend to span 4-6 years, as illustrated in this chart by Cross Boarder Capital.

The GL cycle works through alternating phases of liquidity expansion which is when liquidity increases and liquidity contraction which is when liquidity decreases.
When liquidity increases, there is more capital available for investment which drives asset prices up.
When liquidity decreases, there is less capital available for investment which drives asset prices down.
Global Liquidity & Interest Rates
Interest rates are a weak indicator of financial conditions and capital flows. Global liquidity is a strong indicator of financial conditions and capital flows.
While interest rates do influence liquidity to some degree, the overall trend of GL — whether it’s increasing or decreasing — has a greater impact on asset prices.
This is because, for example, rate cuts, which are typically associated with increased stimulus, can decrease liquidity because cheaper borrowing encourages more debt and refinancing, which ties up cash.
Global Liquidity Sensitivity
Different assets possess different degrees of sensitivity to changes in GL.
Historically, for every 10% move either up or down in GL, commodities tend to move by ~11%, the S&P 500 tends to move by ~13%, gold tends to move by ~15%, and Bitcoin tends to move by ~50%.
Global Liquidity & Financial Stability
Financial stability requires a near-constant ratio between the total stock of debt and the total pool of liquidity of ~2.5:1. In other words, for every $100 of global debt requires roughly $40 of liquidity to refinance it.
Too much debt relative to liquidity leads to financial crises because debts mature and cannot be rolled-over.
Too much liquidity relative to liquidity leads to financial bubbles because of monetary inflation.
In other words, there’s a goldilocks zone. If debt and liquidity are in balance, the economy can grow sustainably without financial crises or bubbles, as illustrated in the chart below.

Summary (TL;DR)
Global liquidity refers to the availability of cash and credit in financial markets.
The main drivers of GL are the size of central bank balance sheets, the size of commercial bank balance sheets and the size of collateral held by banks.
GL operates in alternating cycles of liquidity expansion and liquidity contraction which tend to span 4-6 years. When liquidity increases, there is more capital available for investment which drives asset prices up. When liquidity decreases, there is less capital available for investment which drives asset prices down.
GL is important to understand because it directly influences asset prices.