In the midst of the current liquidity crunch, a liquidity crisis for many parties, it is hard to remember how only weeks ago the assurance that "abundant liquidity" would keep asset prices rising seemed plausible.

Krishna Guha ("World economy confronted by paradox over liquidity", August 24) points out that "liquidity" is used "to describe several distinct ideas". True. But the real confusion derives from the fact that "liquidity" is a misleading metaphor. This metaphor suggests that there is some "flowing" substance, which could be a "flood", could "slosh around", or could be "pumped" somewhere. But if liquidity were substantive, there could not have been plenty of it a few weeks ago and a shortage now.

No, "liquidity" is a figure of speech, describing the following situation:

• A is ready and able to buy an asset from B on short notice
• At a price B considers reasonable
• Which usually means C has to be willing to lend money to A
• Which means C believes A is solvent and the asset is good collateral
• And if A is a dealer, A and C both have to believe that the asset could be readily sold to D
• Which means they both have to believe that there is an E willing to lend money to D.

In short, liquidity is about group belief in the solvency of counterparties and the reliability of prices, reminding us that "credit" and "credo" have the same root. When no one is sure who is broke, and there is high uncertainty about prices, we will discover that liquidity has vanished, however plentiful it may recently have seemed.

To alter Shakespeare a bit: "Tell me where's Liquidity bred, In the heart or in the head?"

At the end of the boom, in the heart, not the head, unfortunately.

Alex J. Pollock is a resident fellow at AEI.