Starting from the T-table: Unpacking the first principles of US dollar liquidity and global asset pricing

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I'm very glad to collaborate with Wallstreetcn for this course. Many people present here are both members of our GMF and users of Wallstreetcn, so today we have old friends and many new friends. Today is a full day course, I hope everyone can relax a bit, and don’t feel too much pressure. It happens to be the weekend, so if you have any questions, or anything you’d like to talk about, feel free to come to me during the break or after class to chat.

However, I need to say in advance—the overall theme today will be quite hardcore, even somewhat abstract in certain sections. So before we officially start, there are a few things I'd like to clarify.

First, the content of this course represents only my personal views, summarizing my previous research, and may not fully match objective facts. I’ll try to keep it close to objectivity, but there will certainly be a lot of subjective interpretation. Especially with liquidity research, this field itself has no endpoint—whether it's academic frontiers or market strategies, it keeps pushing its boundaries. So this course is more like a starting point for us to learn and advance our understanding together. Over the next decades, the importance of liquidity in the global financial system will most likely only increase.

Second, this course will focus heavily on “what” and “why”, emphasizing mechanisms, concepts and theory, and relatively less on “what to do.” Especially in the first half, you may feel as if you’re attending a university lecture. If you’re used to market views or research focused on conclusions, you might find it a bit hard to adjust at first, so let’s set this expectation in advance.

Third, I’ll try to make the content as interesting as possible, but since we’re talking about dollar liquidity, some parts will inevitably be a bit dry. I’ve also considered ways to keep everyone from zoning out through a whole day. One approach is that I’ll intersperse some questions; you can sketch, calculate, or think about them yourself on paper. So I suggest bringing paper and pen for stronger engagement.

Fourth, I’ll try to make abstract issues clear, but from experience, later on, you might forget parts of the earlier content, and some confusion may arise. So I’ll use plenty of examples and keep repeating key concepts to help deepen your understanding.

Lastly, I want to say, please lower your expectations a little. It's unlikely that you’ll fully digest such a complex system as liquidity from just one day of lessons. The more realistic goal is to absorb some useful insights and frameworks for yourself; in that case, the course has already been valuable.

Next, let’s start with the most basic analytical framework. Whether we analyze dollar liquidity or the broader monetary banking system, we use a core tool—the T table, which is the balance sheet framework.

This tool is useful because, once you’re used to drawing T tables, many concepts that are easily confused when expressed in words, data, or even formulas become very clear. Later, we'll touch on many specific dollar market cases, and with this framework, understanding them becomes much easier. So first, we'll spend a bit of time to clarify this framework. It's actually very simple itself, but once you’re used to it, you’ll slowly realize its power.

The T table is essentially the balance sheet: left side is assets, right side is liabilities and equity.

For example, let's look at the simplest four-sector structure. Upper left is central bank, upper right is bank sector, lower left is government, lower right is household sector. These four entities basically depict the core structure of an economy relating to liquidity.

First, central bank. If we abstract it as a central bank of an emerging market country, its asset side typically has three common assets: first is gold, second is dollar assets, third is domestic government bonds. Suppose the central bank holds 200 of gold, 100 of dollars, and 100 of government bonds, then its total assets are 400.

This leads to the first basic rule of the T table: assets must equal liabilities. That is, the asset and liability sides must always be equal, and changes must be equally synchronized. This is true for any entity. So if the central bank has assets of 400, its liabilities must also be 400.

Where does this 400 in liabilities come from? It can be simply divided into two parts: 100 in statutory reserves, and 300 in fiscal deposits. Reserves are easy to understand: commercial banks keep part of their liquidity as reserves in central bank accounts, shown on the T table as the central bank's liability. Whether the Fed or other central banks, reserves are always one of the most important items on the liability side.

The second important item is fiscal deposits. The central bank is not only “the bank’s bank”, but also a key custodian of government funds, so a lot of government funds are deposited on the central bank's liability side.

Now, the banking sector. The asset side of banks also has an item called reserves, here, 100. This 100 matches the central bank’s liability side—the same funds.

This brings up the T table’s second feature: asset endogeneity. Any entity’s liabilities necessarily correspond to another entity’s assets. For example, central bank reserve liabilities correspond to banks' assets; central bank fiscal deposit liabilities correspond to government assets. Similarly, government-issued 200 in government bonds are the government’s liabilities, corresponding to household and central bank assets.

So, when we adjust one entity’s assets or liabilities in the T table, we must adjust other entities synchronously to keep the whole system balanced—this is essentially a “global equilibrium” constraint.

But the reverse is not always true—not all assets necessarily correspond to another entity’s liabilities. For example, gold, land, crypto assets, etc., are not liabilities of any organization. In academia, these are called external assets.

This leads us to the third feature: equity is linked to external assets.

In this simplified model, for example, the government has equity of 100, household sector has equity of 600. Adding up the equity of all sectors, you’ll find it equals the total value of all external assets in the economy, e.g., gold, foreign exchange, land etc.

The reason is simple: if you consolidate all entities' balance sheets, all “mutual asset-liability” items offset each other, leaving only external assets and their corresponding equity.

So, from this perspective, the entire economy’s equity is essentially a mapping to external assets.

This is the core tool we’ll use in our liquidity analysis—the T table framework, and its three basic features.

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