What is the primary risk associated with high liquidity?

The primary risk associated with high liquidity is the potential loss of capital value over time due to inflation. When assets are highly liquid, they are typically held in forms such as cash or cash-equivalents that do not yield significant returns compared to investments like stocks, bonds, or real estate.

Inflation decreases the purchasing power of money over time, meaning that while the amount of cash remains the same, its real value diminishes. For example, if inflation is at 3% and cash holdings earn no interest, the money effectively loses value each year. Therefore, individuals with a significant amount of their wealth in highly liquid assets may find that their savings are not keeping pace with inflation, ultimately eroding their capital's purchasing power.

In contrast, the other options relate to different financial aspects that are not primarily influenced by liquidity. For example, increased borrowing costs and higher interest rates on loans are generally attributed to the broader economic environment and monetary policy rather than liquidity. Additionally, reduced credit history evaluation pertains more to a person's creditworthiness and borrowing capacity rather than their liquidity status.