What is "the liquidity illusion"

Question

I came across this visual, but it's a bit complicated, I haven't been able to make sense of it.

In so many words, the way I read it is: if defaults pile up, the market is spooked, spreads increase and assets lose value as everyone wants cash out, which strains liquidity.

Question

How am I supposed to infer there is a liquidity illusion from the graph, have I overlooked something? It seems to me not so illusory, but I'm sure the people at Deutsche Bank are more clever than me, so I'm giving them the benefit of the doubt.

Answer 1

The "illusion" is the assumption that these vicious cycles can't happen, that liquidity is guaranteed by the large number and sophistication of market participants. They are warning people who focus on the current high level of liquidity that it could disappear suddenly if conditions change.