Many commentators believe that the way Central Banks fundamentally function changed in Oct 2008, as the US Federal Reserve flooded the markets with liquidity to save its economy from a severe collapse, post the demise of Lehman.
Decimal Point has developed a measurement of Global Liquidity by collating data from various central banks around the world called the DPA Global Liquidity Index (DPA-GLI). Presently DPA-GLI goes back seven years since 2004 and covers nearly 75% of global GDP. The chart below shows the movement of the Index for last six years.
The chart above shows that the surge in global liquidity started in earnest in 2005, and has continued till date (December 2010). The events of Oct 2008 are just a change of slope of an ever rising storm of global liquidity.
It is interesting to note that the global GDP for comparable countries in our database has increased by a mere 43% in nominal terms in the 2004-2010 period, while the DPA Global Liquidity Index has moved up by a factor of three during the same period. What’s more interesting is that the speed of expansion in DPA-GLI indicates that liquidity is expanding at a fast pace in the last few months. It is interesting to note how this great expansion has affected global asset values, and commodity prices.