For non-financial corporations (half of gross domestic product)... the share of liquid cash flow allocated to illiquid long-term fixed asset investment...fell to 79 per cent [1H '10], its lowest reading in the 58 years for which data are available.
The corresponding surge in the proportion of liquid assets following the Lehman bankruptcy was the most rapid in postwar history, amounting to a rise of nearly $400bn. By mid-2010 total liquid assets had risen to $1,800bn, the highest share of total assets in nearly a half century.
In such an environment, the equity premium (the excess return that equity produces over the risk-free rate) has become exceptionally elevated. As estimated by JPMorgan, it is currently “at a 50-year high”.
American households have shifted their cash flows from illiquid real estate and consumer durables to paying down mortgages and consumer debt. Commercial banks are exhibiting a similar reduced tolerance towards risk on partially illiquid lending. A trillion dollars of excess reserves remains parked, largely immobile, at Federal Reserve banks yielding only 25 basis points with little evidence of banks seeking higher returns through increased lending.