A Lesson on Liquidity, Filmed on a Lake with an Economist

When I tell people I work with Ph.D. economists, some ask, “Are they all really smart?” My answer: Yes, they are very smart.

But the economists break it all down and share their findings and data with businesses, consumers and reporters all over the world … which in turn makes it fascinating.

Liquidity: Think Assets Easily Convertible to Cash

I recently got a chance to head to Creve Coeur Lake with Julian Kozlowski, one of the senior economists at the Federal Reserve Bank of St. Louis.

Julian has a special interest in studying liquidity. In his research, Julian tries to understand how liquidity considerations in financial markets interact with the broader economy, the macroeconomy.

(Like me, you probably know the basic definition of liquidity: the quality that makes an asset easily convertible into cash, with relatively little loss of value in the conversion process.)

Back in the fall, we decided to head to the lake 24 miles northwest of our downtown office and have a more casual conversation while doing what he loves: rowing. I wanted to spend the morning asking this expert about his research passion: liquidity.

I felt it was a fitting topic as I looked out at the glasslike ripples of the lake.

Let’s ride with Julian across the lake and learn about liquidity.

Understanding the Importance of Liquidity

When talking about liquidity on a personal level, Julian offers this example: A small apartment in Manhattan is a more liquid asset than a big farmhouse in Missouri. When either owner wants to sell, the real estate market in New York is likely more conducive to a quicker sale than the market in the rural Midwest.

(Overall, though, real estate is not a highly liquid asset. For your personal finances, it’s important to have a buffer of liquid savings that you can draw upon in an emergency or for an unforeseen expense.)

When it comes to the importance of liquidity in markets, Julian describes in a recent essay how liquidity becomes especially valuable to investors during periods of financial distress. U.S. government bonds are examples of relatively safe and liquid assets, since they can be sold prior to maturity with nearly no discount. After the Great Recession, he notes, an increased desire for government bonds—and liquidity—helped to drive up bond prices and drive down bond yields.

Unusual events like the 2007-09 recession “changed our minds,” he says during the interview, “about the reality and the type of shocks and type of crises that the economy can have in the future.”

In turn, that affects what investors want in their portfolios. “They want more liquid assets,” Julian says.

Several months after we recorded our interview, early 2020 saw investors seeking safety in U.S. government bonds amid the spreading of the new coronavirus and a price war between Saudi Arabia and Russia in the oil market.

Carefully Calibrated Movements

Being in this new environment showed me a different side of an economist. Julian is a native Argentinian who grew up rowing with his family. Now, he belongs to the St. Louis Rowing Club and takes the sport very seriously. I learned a lot about him watching him get outside of the bustle of downtown St. Louis and into the single scull of his boat that windy autumn day.

He was not short on words when it came to sharing the art, endurance and focus needed for this sport that he loves so much. When you start understanding the precision of sculling and the placement needed for your hands, it’s amazing what it takes to propel a watercraft by moving a single, stern-mounted oar from side to side while changing the angle of the blade to generate forward thrust on both strokes.

The macroeconomy is not so different. When the waters get rough, a combination of carefully calibrated movements can help one steer through.

More to Explore

• Timely Topics podcast: How the Great Recession Still Affects People’s Perceptions
• Economic Synopses three-part essay: Is Fear Chilling the Economy?
• On the Economy blog post: The Effect of Tail Risk on Government Bond Liquidity