Money, inflation and liquidity
Why money loses value, what the central bank rate is, and why everyone keeps talking about liquidity.
Money is not wealth. It's a convenient way to agree on prices and carry value through time. As long as it's printed responsibly, anyway.
Inflation in plain words
Inflation is when there's more money in the system but the same amount of goods. Money cheapens. What cost 100 yesterday costs 110 today, and your salary is still 100.
Term
Inflation
The loss of purchasing power of money over time.
Central bank rate
When inflation accelerates, the central bank raises rates. Loans get more expensive, spending hurts, the economy cools. When the economy crashes — the opposite: rates get cut and money floods in.
Remember
High rate = expensive money = markets nervous. Low rate = cheap money = markets rally (often irrationally).
Liquidity
Term
Liquidity
How much free money is moving through the system and how easily an asset becomes cash without losing price.
- Lots of liquidity → all assets pump, even trash.
- Low liquidity → only strong stories survive, the rest gets dumped.
- Liquidity matters more than news. News is the trigger; liquidity is the fuel.
«Don't fight the Fed.»
— An old trader's commandment
Nice. One lesson closer to understanding why the market keeps losing its mind.