A “liquidity gap” is basically the difference between our liquid assets (i.e. cash or things that can quickly be converted to cash) and our liabilities.
For example, if a person owes $120,000 in student loans but has $600,000 in the bank, their liquidity gap is positive: they owe a lot less than they have. (Which kind of makes us wonder why they haven’t just paid off the loan already, but that’s none of our business.) On the flip side, if we owe $120,000 and don’t have any liquid assets, our liquidity gap is negative: we owe more than we’ve got on hand to pay it off.
It’s not just individuals who should mind the liquidity gap, though. For example, if banks don’t have enough cash on hand to fund their customers’ requests, whether we’re talking loans or ATM withdrawals, they have a liquidity gap. And if an organization takes out a loan to, say, fund the development of a new product line, and then that product ends up being super lame and they can’t sell it, they might find themselves in a negative liquidity gap.
Speaking of banks and loans, though, if we apply for a loan and have a significant negative liquidity gap that doesn’t show any signs of shrinking soon, we might end up paying a higher interest rate on what we borrow, since the bank might be a little skeptical that we’ll be able to pay them back.
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Finance: What is a Liquid Market?17 Views
Finance allah shmoop What is liquid market Well it's one
that trades Ah lot High volume Lots of buyers Lots
of sellers Liquid lots of cash sloshing this way In
that way Go this way and that Did you ever
see a liquid market go this way and that That
little song Did you ever see a lassie Never mind
All right Weir Liquid markets Good Well because they implied
there's Lots of cash ready willing and able to be
put to work And that's usually a sign of a
healthy risk seeking active market versus risk averse one which
is you know hiding Ah liquid market means that investors
want to put their cash toe work that they have
actually saved cash along the way and or that they
have relatively easy access to credit And you can think
about it from the perspective of your kindly loving realtor
who wants a world where lots of people are buying
homes But in orderto have that happen you have to
have lots of people who are also selling homes at
the same time Otherwise prices just go higher and higher
with no supply to meet demand And at the end
of the day in real estate and it's in the
stock market while the most important thing yes that the
brokers get pays So that's a liquid market one that
trades a lot like it's Wet trading back and for
sloshing around not ice Where everything's you know all jammed 00:01:22.109 --> [endTime] up No needs heat or an animal or something
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