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These days, when people talk about margin debt -- loans that investors have taken out from their brokers using shares they own as collateral -- mostly they just talk about how damn high it is.

It's an important point to make. Even though margin has come down from the all-time record levels of March, with debit balances on margin at $233.4 billion at the end of October, the situation is still precarious. Should stocks decline seriously, brokerages will worry about protecting the money they've lent out. That could force another round of margin calls, which require borrowers to immediately put up additional cash. If the borrower cannot, the stock put up as collateral gets sold. It can, as it has several times already this year, make for an ugly market.

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But the other part of the margin story is that margin debt is declining -- it's down about 20% from March. One of the things that margin does is accelerate moves in the market in either direction. When the level of margin swells, as it did late last year and early this year, the market is getting a huge dose of liquidity. Usually that makes for a higher stock market. And when margin goes down, that liquidity is being taken away.

Chicken and Egg Margin debt growth (left scale) vs. monthly fund inflows, in millions of dollars

Source: NYSE, Investment Company Institute.

Now, we can come up with all kinds of righteous reasons that margin, which over the long term tends to trend up, has come down. Overmargined investors being shown, by the margin clerk, just where their arrogance has led them -- or overmargined investors finding religion.

But there are other reasons for margin not growing like it was earlier in the year. First, margin debt tends to move with the market in a chicken-and-egg fashion that always gets people arguing. (Is it the new cash that made the market go higher, or is it the higher market that attracted the new cash?) Second, margin debt is a lot like all the other kinds of debt: When the economic environment gets rougher, it's going to contract. When the Fed was tightening in the mid-'90s, for example, margin contracted significantly, bottoming out in February 1995 -- the same month as the Fed's last rate hike in that series.

Margin, then, tells us not just how enthused or unenthused investors are, but something about the kind of capital constraints they're facing. When margin contracts, it indicates that people are feeling pinched, and that there is not as much money in general coming into the market.

So where does the money go? There's the gas tank. There's higher interest-rate payments. Also, there probably isn't as much free cash, or liquidity, available for investors or anyone else.

"The best overall liquidity indicator is the yield curve, which is still inverted," says Bill Sterling, chief investment officer of Trilogy Advisors, a New York-based money manager. "There's also the quality spread -- the gap between triple-B corporate bond yields and the Treasury yields. When that's wide, it's indicative of financial strain. As it turns out, that spread is as high as it's been in years.

Finally, there's uncertainty about what's to come and that may be prompting people to put more of their investment dollars where those dollars are safe. Banc of America Securities chief economist Mickey Levy notes that with the S&P 500 down over the last 12 months, the two-year Treasury note's 5.85% return doesn't look so bad.

"Earlier this year, people would have laughed at you for mentioning it," he says. "But now maybe it's more attractive."