Interpreting the Global Liquidity Cycle: Where Are We?

Author: hoeem

Compiled by: Saoirse, Foresight News

Wealth that is passed down through generations often emerges during the transition from a tightening cycle to a loosening phase. Therefore, understanding one's position in the liquidity cycle is key to accurately allocating assets. Which stage are we in now? Let me explain in detail...

Why You Must Pay Attention to the Liquidity Cycle (Even If You Hate Macroeconomics)

Central bank liquidity is like the lubricant for the global economic engine:

Injecting too much will cause the market to "run at full speed"; excessive withdrawal will lead to "piston jamming", just like your carefully dressed date suddenly leaving you. The key is: if you can keep up with the rhythm of liquidity, you can anticipate bubbles and crashes in advance.

Four Stages of Liquidity from 2020 to 2025

1. Surge Phase (2020-2021)

The central bank is injecting money like a fire hose on full blast: zero interest rates have been implemented, the scale of quantitative easing (QE) has reached historic records, and $16 trillion in fiscal relief is being poured into the market.

From the background, the global money supply (M2) growth rate is faster than at any time since World War II.

2. Exhaustion Phase (2021-2022)

Interest rates soared by 500 basis points, quantitative tightening (QT) has commenced, and the crisis relief plan has expired.

Visually, the bond market recorded the largest decline in history in 2022 (approximately -17%).

3. Stable Phase (2022-2024)

The policy remains tight, with no new actions.

Decision-makers maintain existing policies to fully utilize them to curb inflation.

4. Preliminary Transition Stage (2024-2025)

Central banks around the world have begun to lower interest rates and ease restrictions. Although rates remain relatively high, a downward trend has started.

Mid-2025 Situation: One foot is still in a stable phase, while the other foot is tentatively stepping into the first stage of a preliminary turning point. Current interest rates are high, and quantitative tightening is still ongoing, but unless a new shock pulls us back into a surge mode, the next step is likely to continue easing.

For more details, see the "Traffic Light Quick Reference Manual" below...

That's right, I asked GPT for help to create a super cool table! The table below allows you to see the situation in these three key years: 2017, 2021, and 2025 at a glance.

Twelve Major Liquidity Leverage Traffic Signal Quick Reference Manual

🔴 Not Activated 🟧 Mildly Activated 🟢 Strongly Activated

🔑 Which one can activate the master switch for the other 11 leverages?

gradual breakdown

On the interest rate front - In 2017, the Federal Reserve raised interest rates, with almost no easing policies globally; in 2021, global emergency interest rate cuts brought rates close to zero; in 2025, to maintain credibility against inflation, interest rates will remain high, but the US and core European countries have planned to implement a slight interest rate cut for the first time by the end of 2025.

Quantitative Easing / Tightening (QE/QT) - In 2017, the Federal Reserve was reducing its balance sheet while other major central banks were still buying bonds; from 2020 to 2021, record-breaking quantitative easing policies were introduced worldwide; by 2025, the policy stance reversed, with the Federal Reserve continuing to implement quantitative tightening, the Bank of Japan still engaging in unlimited bond purchases, and China selectively injecting liquidity.

In simple terms: quantitative easing is like "blood transfusion" to the economy, while quantitative tightening is like "slowly drawing blood."

You need to know when we will enter a quantitative tightening or quantitative easing phase, and what position we are currently in the liquidity cycle...

Mid-2025 Status Dashboard

• In terms of interest rate cuts: the policy interest rate remains high; if progress goes smoothly, the first interest rate cut may occur in the fourth quarter of 2025.
• Quantitative Easing / Tightening (QE/QT): Quantitative Tightening (QT) is still ongoing, and no new Quantitative Easing (QE) policy has been introduced yet, but early stimulus signals have emerged.

signals that need to be focused on

Signal 1: The inflation rate has dropped to 2% and policymakers announce a balanced risk.

• Observational point: The Federal Reserve or the European Central Bank may clearly shift to a neutral tone in their statements.
• Key significance: Clears the last public opinion barrier for interest rate cuts

Signal 2: Quantitative Tightening (QT) Pause (Set the cap at 0 or 100% reinvestment)

• Key Observation: The Federal Reserve Open Market Committee (FOMC) or the European Central Bank (ECB) announces full reinvestment of maturing bonds.
• Key significance: Transition the balance sheet reduction to a neutral state, increasing market liquidity reserves.

Signal 3: The three-month forward rate agreement and overnight index swap spread (FRA-OIS) exceed 25 basis points or the repo rate suddenly spikes.

Observation points: The three-month FRA-OIS spread (Note: The difference between the forward rate agreement (FRA) rate and the overnight index swap (OIS) rate is an important indicator for measuring credit risk and liquidity risk in the financial market.) or the general collateral (GC) repurchase rate has jumped to around 25 basis points.

• Key significance: Indicates pressure on dollar financing, which usually forces central banks to provide liquidity support.

Signal 4: The People's Bank of China (PBoC) has fully lowered the reserve requirement ratio (RRR) by 25 basis points.

• Observation point: The national deposit reserve ratio has fallen below 6.35%.
• Key significance: Injecting 400 billion yuan of base currency often serves as the first domino in the easing policies of emerging markets.

In summary…

We have not yet reached the surge phase.

Therefore, before a significant amount of leverage turns green, the market will continue to experience fluctuations in risk appetite, and will not truly enter a frenzy stage.