How come bread is more liquid than beer when it is comes under solids according to 6th grade physics? Well, this is possible in finance, under the topic liquidity!!
A businessman committed suicide because of stock market crash leading to overload of debts and loans. The responsibility to repay the debts fell on his son, Shahrukh's head. Shahrukh was hoping to settle all the debts by the left over assets in their business - huge crates of beer and a few loaves of bread. Now, after the stock market crash, no one had enough money to buy beer in the market, which was costing 200 bucks. But they could buy bread which sold only for 20 bucks. So Shahrukh could make money only through selling breads as he could not sell any beer. Only bread yielded money and not beer, though he had lots of beer crates to settle all his debts. So, here we can say bread is more liquid than beer.
Liquidity, at its simplest and best definition is - the probability that an asset can be converted into an expected amount of value within an expected amount of time without making any losses. If beer can be traded within the time Shahrukh expected and at the price he expected, it would have been more liquid. But now, all Shahrukh could do is to drink a few bottles of beer now and then to forget the pain of debts.
Note that both time and value are important in defining liquidity. Many banks crashed in the sub-prime crisis because they couldnot convert their assets into liquid cash whenever they wanted. One hilarious quote to be mentioned here is George W. Bush's serious statement on liquidity in the markets in 2008 - "This thaw -- took a while to thaw, it's going to take a while to unthaw." It was also quoted that the sub-prime crisis was worse than divorce for traders because, you lost more than half of your wealth and still couldn't get rid off his wife!!!
A bank account holder goes to an ATM and it says "insufficient funds". He starts wondering if its his funds or the banks funds that is insufficient. Imagine the height of liquid crisis that when robbers go to rob a bank and they find nothing in the bank's vault. Robbers will be cursing the bank for poor liquidity management!
One good thing about this crisis is that the bankers when questioned about this credit crunch, they dont ask back - "which flavour is that candy-bar?"
We have another simpler definition for liquidity for those die-hard accounting fans -"Liquidity is when you look at your retirement funds and wet your pants."
A businessman committed suicide because of stock market crash leading to overload of debts and loans. The responsibility to repay the debts fell on his son, Shahrukh's head. Shahrukh was hoping to settle all the debts by the left over assets in their business - huge crates of beer and a few loaves of bread. Now, after the stock market crash, no one had enough money to buy beer in the market, which was costing 200 bucks. But they could buy bread which sold only for 20 bucks. So Shahrukh could make money only through selling breads as he could not sell any beer. Only bread yielded money and not beer, though he had lots of beer crates to settle all his debts. So, here we can say bread is more liquid than beer.
Liquidity, at its simplest and best definition is - the probability that an asset can be converted into an expected amount of value within an expected amount of time without making any losses. If beer can be traded within the time Shahrukh expected and at the price he expected, it would have been more liquid. But now, all Shahrukh could do is to drink a few bottles of beer now and then to forget the pain of debts.Note that both time and value are important in defining liquidity. Many banks crashed in the sub-prime crisis because they couldnot convert their assets into liquid cash whenever they wanted. One hilarious quote to be mentioned here is George W. Bush's serious statement on liquidity in the markets in 2008 - "This thaw -- took a while to thaw, it's going to take a while to unthaw." It was also quoted that the sub-prime crisis was worse than divorce for traders because, you lost more than half of your wealth and still couldn't get rid off his wife!!!
A bank account holder goes to an ATM and it says "insufficient funds". He starts wondering if its his funds or the banks funds that is insufficient. Imagine the height of liquid crisis that when robbers go to rob a bank and they find nothing in the bank's vault. Robbers will be cursing the bank for poor liquidity management! One good thing about this crisis is that the bankers when questioned about this credit crunch, they dont ask back - "which flavour is that candy-bar?"
We have another simpler definition for liquidity for those die-hard accounting fans -"Liquidity is when you look at your retirement funds and wet your pants."
You may be interested to see this link:
ReplyDeleteRBI's comic series to explain banking :)
http://www.rbi.org.in/commonman/English/Scripts/BasicBanking.aspx
hmm...good going keep RBI spirit alive:)
ReplyDeleteoh.. is it.. I didn't know that.. nice work
ReplyDeletenice article...simplest way of explaining liquidity..."robbers cursing the bank for poor liquidity" - nice punch :)
ReplyDeletegud n logical this tym...btw example of bread is makes it easier to undrstand d concept.
ReplyDeletelooking frwrd to article on" ways of getting stipend for fooling govt n gaining self popularity."