Correlation is not causation: Intros to statistics often start with random correlations to emphasize that correlation is not causation. Like total arcade revenues and computer science doctorates having a 98.5% correlation in the 2000s. Spurious correlations are far more subtle, linking related factors. A nice chart adds to the confusion. That’s where we are with central bank liquidity right now. The simplest measure of liquidity is bank deposits at the central bank – excess reserves. In the old days, that number was zero. It correlated with nothing. Today, excess reserves are essential for the banking system to function. The correlation of excess reserves since their peak in Dec 2021 to the price of bitcoin is 91%. An optical illusion? It’s 74% from 2014 to 2021. There are plenty of periods where asset prices and liquidity don’t correlate. Bitcoin’s price surge in 2017 occurred when liquidity conditions were tightening; it was also short-lived. US banking fragility in March led to an easing in liquidity conditions and was met with higher crypto asset prices. Still, the correlation is more likely symbolic than causal. As the Fed and ECB approach the wait-and-see stages of interest rate policy this week, it’s the silent tightening of liquidity conditions that are most worthy of attention. Economic activity shows resilience. Financial systems show fragility. Correlation says crypto assets don’t like liquidity tightening – not many assets do. But there’s a big difference from the peak in excess liquidity in Dec 2021 – it was the start of liquidity tightening, and now we’re approaching the end.