Speculators Create Liquidity

Liquidity, in law, is the ease with which an asset can be converted to cash. Real estate is considered an illiquid asset; it can take months to sell a plot of land. An interest in a privately owned company may be liquid or may not -- the question is very context specific. But a stock in a publicly owned and exchange traded company is very liquid -- it can be turned into cash by a call to one's broker.

This is distinct from, although, closely related to, the sense that the word "liquidity" has among economists or in the world of finance. In those worlds it is a market not an asset as such that has liquidity, And the liquidity is in essence the volume of activity.

It is a good thing that markets are liquid (in the finance sense), because it renders the assets involved liquid (in the lawyers' sense) and, all other things equal, one would rather have a liquid asset than an illiquid one.

In discussions of corporate management and accounting, "liquidity" has another sense. It is the ability of an enterprise to pay off its due or soon-to-be-due debts with its current assets. Obviously the accounts receivable office at the firm's counter-parties want cash. They don't want, say, office furniture. So if you don't have cash on hand you (dear CFO) better have highly liquid assets on hand.

All of these related meanings contribute to the significance of the common saying, "speculators provide liquidity."

Consider the corn market. It consists of farmers who have raised corn; commercial buyers who want corn to sell into the retail market; exchanges that mediate the relationship between them. Those are the most obvious participants, anyway. But the corn market also includes a healthy heaping of speculators, betting on the rise or fall they expect on the prices of corn and other commodities.

What good do the speculators do? Well ... they supply liquidity. They make the market deeper, and thus make it easier for the other parties to conduct deals, and even to continue managing liquid enterprises.

Speculation. It's a good thing.

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