Liquidity

Liquidity does not sort assets into two bins, "liquid" and "illiquid"; it ranks them along a continuum from cash itself (already maximally liquid) through assets that take progressively longer, or cost progressively more, to convert into cash without a discount. A listed government bond and an unlisted private loan might both eventually be sold, but at very different speeds and with very different certainty about the price achieved – the difference is one of degree along the same spectrum, not a difference in kind.

An asset's liquidity is a property of the current market and institutional conditions around it, not a permanent label. A bank deposit is ordinarily as liquid as cash – withdrawable on demand – but a bank under stress that restricts withdrawals makes that same deposit markedly less liquid without the deposit itself having changed at all. Liquidity, in other words, can move even while the underlying asset does not.

The same word is applied, by extension, to entities rather than assets: an entity's liquidity is its ability to pay its debts as they fall due. This is related to, but distinct from, the liquidity of any single asset the entity holds – an entity can hold perfectly liquid assets and still face a liquidity problem if its liabilities fall due faster than those assets can be realised and applied against them.