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Still Think That Money Market Fund Is “Cash”?

by John Rubino on July 21, 2012 · 40 comments

When investors decide to close out their riskier positions and move into “cash”, they don’t actually go to the bank and get a stack of twenties. Most just sell their stocks and let their broker sweep the proceeds into a money market fund which, they assume, is the same thing as cash because it holds high-quality short-term commercial paper that almost never defaults.

That pleasant assumption breaks down as soon as you look at a typical money market fund’s holdings and see that it owns, among other disturbing things, a lot of European bank debt.

But at least you can get your money out with a mouse click, right?

Well, maybe not. Apparently the Fed, cognizant of the potential weakness of the money fund system, is considering withdrawal limits:

Fed Eyes Limiting Money-Market Fund Withdrawals
NEW YORK–The Federal Reserve Bank of New York said it supports limiting some types of money-market fund withdrawals in a bid to protect those funds from suffering the equivalent of a bank run.

The recommendations came from a staff report released Thursday. New York Fed President William Dudley in a press release accompanying the document said he “strongly” endorses the ideas put forth by authors Patrick McCabe, Marco Cipriani, Michael Holscher and Antoine Martin.

“Further reform of money funds is essential for our nation’s financial stability,” Mr. Dudley said.

The analysts propose that money-market funds could be strengthened if they were to have a “minimum balance at risk.” As envisaged by the authors, this balance “would be a small fraction of each shareholder’s recent balances that would be set aside in the event that they withdrew from the fund,” the press release said.

While regular transactions would be allowed as they are now, this special minimum balance would be locked up for 30 days. “The delay would ensure that redeeming investors remain partially invested in the fund long enough to share in any imminent portfolio losses or costs arising from their redemptions,” the bank explained.

The idea advanced in the New York Fed paper seeks to force investors to be more mindful of what they are doing with money-market fund investments. Many perceive the funds to be a very safe and liquid place to park funds. But that notion was tested during the 2008 financial crisis, and some have worried that in the current environment, money-market funds could be a prime conduit for importing Europe’s ongoing financial crisis to the U.S.

Money-market funds currently hold some $2.7 trillion in assets, according to the paper. They own, as of late 2011, around 40% of all dollar-denominated commercial paper, the New York Fed said.

The report provides fodder for Securities and Exchange Commission Chairman Mary Schapiro as she inches her divided agency toward a vote as early as this summer on a proposal to strengthen money-fund regulations. SEC officials described the New York Fed paper as a “blueprint” for the changes Ms. Schapiro would like to make.

Ms. Schapiro, joined by Federal Reserve and Treasury Department officials, sees money funds as one of the weakest links in the financial system despite reforms adopted two years ago to make the industry more resilient to widespread redemptions. Fund firms and other experts say the cash-like investments rarely run into serious trouble.

To publicly float her proposals, Ms. Schapiro needs “yes” votes from two of her four fellow commissioners. For months, three of the commissioners have said they don’t believe there is sufficient evidence additional money-fund overhauls are needed, effectively blocking the proposals’ advancement.

A number of Fed officials have been anxious about money-market funds for some time. Central bankers see the funds as a prime source of risk in large part because their structure is such that when trouble, or the fear of trouble, arises, investors have every incentive to withdraw all their funds. That can create the equivalent of a bank run.

In congressional testimony Wednesday, Fed Chairman Ben Bernanke said money-market funds are currently a potential source of financial-market instability. He expressed his support of regulators’ attempts to lower the source of risk posed by money funds.

Some thoughts
In a healthy society lots of things can be legitimately seen as risk-free, starting with a sound currency and moving through the financial instruments based on that currency and administered by well-capitalized and sensibly-regulated banks.

In an unhealthy society fewer and fewer things are risk-free. The banks can no longer be trusted to survive, governments run out of money, and even the currency stops functioning as a store of value.

Currency risk and market instability go hand-in-hand, with each amplifying the volatility of the other. So along with inflation-induced booms and busts comes an increase in the incidence of capital controls, where panicked governments limit citizens’ and foreign investors’ ability to move wealth around. The Fed’s proposed money market fund rules are both a perfect example of this and a sign of things to come. Once the crisis really gets going, expect controls to be imposed on bank accounts and international funds transfers initially, and from there who knows. Maybe IRAs and 401(K)s?

If history is any guide, by the end of this process gold will be the only remaining risk-free asset, and its value in debased fiat currency terms will be astronomical.

  • Doug

    Scary. Realistically, I can’t imagine that the government will let gold owners profit from correctly betting against our reckless government and federal reserve. It would be a perfect scapegoat to blame when things go south, and punish the “evil speculators” with very high tax rates on sales. I do wonder, naively probably, if silver sales will survive confiscatory tax rates. Specifically, silver bars that will be needed in production against the backdrop of declining supply moreso than silver coins that can be viewed as investments or “insurance” and be treated similarly to gold?

    • Agent P

      This is why the smaller denominations – although ghastly pricier, are a better bet for exchange in an environment of Authoritarianism.

      • Doug

        If it comes to barter, absolutely. As for conversion to dollars for purchasing items, my fear is that there will be high taxes on ANY sales of gold or silver regardless of the size of denominations. It will take a SHTF scenario for PMs to skyrocket, and that same crisis scenario will lead to a desperate gubment who can blame PM holders for the problems THEY (gubment and fed) created by diluting the dollar. This would distract attention by the sheeple from the gubment and fed who are really at fault, while at the same time confiscate the wealth of those of us who knew what was coming and prepared accordingly. Fear of reprisal may deter both non reporting of such sales, and barter depending on the level of enforcement that is mustered.

        • mangrove

          Your concerns and speculation are well warranted. I share them. This is a war, after all, between the most powerful bankers in the world (arguably, the people in charge) and gold/silver, the only forms of money out of their complete control, recognized globally. It would be very naive of us to assume they’ll not put up a big, nasty fight when the shit really starts to fly. They’ll want to conquer gold/silver, the ultimate jackpot, will they not? And you can be sure they’ve got plans, at the very least. That’s why it’s best not to put all your eggs in one basket, and find other hard assets to invest in as well.

  • Tom

    If money market accounts are at risk of bank runs and capital controls then what does that imply for unallocated gold funds like GLD? There’s little gold there. I think it’s fair to assume the rich and connected will be forewarned of any “emergency” just like Hank Paulson warned Goldman Sachs and major traders in 2008. They’ll stash their wealth. At least in a savings account our money is insured but who knows about its purchasing power. When this thing goes, and it won’t be too long, only gold and silver will be left standing. I hope my allocated IRA gold funds survive.

    • Gerry

      Tom,

      GLD is a joke. I bought into Sprott physical gold and silver funds run out of Canada (U.S. does not control them). I also hold gold and silver bullion where I can get to it. eventually there will be a “run” on GLD and phony funds like it and the the price of the “real” thing will go very high.

  • Agent P

    Let your imagination run wild for a moment – because as corruption, greed & graft run wild, so too does the predilection of government to ‘Control’ run wild right along side. As rights and freedoms to control your finances begin to face draconian measures imposed to ‘keep you safe’, so will similar measures be imposed in and on areas of life that have little to do with banking or finance. To this end, I highly recommend a piece written by Doug Casey a few months back entitled: ‘The ascendence of Sociopaths in U.S. governance’.

  • http://www.pocketinfo.net Robert

    Can anyone explain to me why the herd mentality seems to buy metals in an upward market yet when the likes of silver and gold is comparatively low investors keep away from it. I’ve visited a few pawnbrokers and many invested in silver in this upward trend and got ‘burned’ albeit temporarily. Ive told them silver should easily regain its ground when the markets properly unravel.

  • bob D

    #2 of today july 20, 12

    for the readers of “Dollar Collapse” and who live and will stay in Russia as their home, they should call upon Putin to open up his banking system to them so they can use his central-bank-sysem as the backbone of USSR

    if he does open this system only to Rus Citizens who live in Rus, then they will be able to be self sufficient and thereby help to build Russia into a mega profit maker :: profits shared equally by all Soviet

    the first best use of said central bank system is to use its powers to nationalize all entities, all all all, located and operated solely in Russia, same when Putin has time to tinker with his USSR as a greater outskirts metropolis of Moscow hence of Russia

    as he nationalizes entities who op for profit, they will provide max employment of those who wish to work, at a livable wage plus bonus plus perks, where all who work in that entity take the same wage, etc as above, all the time, no big shots allowed as to wages and perks, big shots get to have the fun of their game on a big scale and to the max bene of Russia, as said above

    as he continues the flow of nationalizing, he will need a work force made up of all Russian Citizens who live in Russia, man woman and child from age 10-70, all paid the same, etc, as above, thus has fathful workers for entities and for military etc —- as needed called into military, clean up the mess, then go back home and live off the confiscations and etc, retireing at age 70 or older if desired taking same wages etc, above, as before retirement,

    as these system organize their selves, Putin then has time to build a greater Russia and a greater USSR, easy stuff for him so long as the soviet are faithful and helpful to and for him

    in his central bank systems, the only base currency is the Ruble (Russian), upon which all within the USSR domain shall convert, so as to make this Ruble the strength of the nation worldwide, all FX (Foreign exchange) at Ruble equals Yuan all others are a lesser amt e.g. one Ruble equals 2 english pounds and
    $2 USA, so as to keep the power of currency, by centrall systems, in hands of Russians who live in Russia all the time

    i thought you might like these facts —— enjoy

  • bob D

    i note you publ my #2, next above, of today but omit my #1 ::

    there are many ways to look at editorial omissions, one way is that
    the editor wishes to stop the flow of thought and comments, not
    realizing the writer who is so blocked will go to another forum where
    he may speak freely and that editor will endorse his right to free speech
    etc etc etc

    o well, i thot this forum had merit, but as above i see the editor believes
    in stopping flow of thought thus making his forum worthless

    cheers

  • bob D

    1) i had forgotten that your forum is Moscow and vicinity thus awakening and
    certainly up to y1990 did not have any opportunity to think freely, to speak freely, etc, but, no excuse from 1990 except for lagging insight

    2) above i mentioned Rus total nationalization ::
    A. this of course leads to full employment, no unemployed, no handouts
    for not working, no soup kitchens, etc
    B. the other nicety is each nationalized entity is operated so profit is shared with govt, the need for taxing reduces automatically – soon rich and poor have the same asset positions because the nationalized automatically make it so
    C. at full nationalization there is no tax,
    if any then the boss of each entity must be replaced with a guy with a
    brain,,,,,,,
    1. to arrange accounting of any entity is automatic, however when
    the entity is a nationalized entity, the pro rata amount to the govt
    is adjusted down so less, thus when Rus-USSR are fully
    nationalized there is no tax, the govt merely takes its fair share of
    profit, so as to expand into a maximum productivity and maximum
    military strength feared by all others
    D. Putin is one of the few people who can do this effectively and
    efficiently and to quickest maximum

  • bob D

    above are 2 comments by me, you should feel free to reproduce either both on future publications and on any sister publications, etc etc,
    i.e. if you think the core
    of the spew is of interest to Russians who live in Russia, especially the younger, e.g. teenagers, as they strive to know what they need to know so as to make their self all it is and at maximum

    i see the value of full and absolute nationalization as a fair to the Soviet
    means of equal distribution of wealth, each should have the same wealth so as to have the same opportunities :: the only way to make Mother Russia become what it is and must become to survive

  • bob D

    at the least, the Editor of this publication ought to write a tome
    describing Putin as the long awaited Leader who can best make
    use of Russia and its dormant wealth ….

  • bob D

    why does this forum publish any of John Rubino?????

    e.g. this above article by
    him is short of the mark, he merely touts what is to his personal advantage as
    he always does,

    he is sort of a ego-maniac i.e. one who can not see beyond his nose as he sees himself as the center of the universe and as the only one of worth (all others are pawns)

    this is not to say he is not a good writer but is to say he is not good for Russians to read because they might start to think as he does which is suicide

    in any event, other than me, all published on your forum ought be by Russians who are real Russians who were born and always will have lived in Russia

    • paper is poverty

      You seem to be laboring under a misapprehension. The editor of Dollar Collapse — i.e. John Rubino — lives in Moscow, Idaho, not Moscow, Russia.

      Greetings from the other side of the Cold War.

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  • Thomas

    With the Fed and Treasury running out of gas, and the executive branch only familiar with the Keynesian control manual, Americans can rest easy knowing that America will come in for a soft landing. Or we might if we had a place to land. We traded in real and honest capitalism for fiat ‘money’ which the Keynesians suggested was fool proof. Milton Friedman called this decades ago. He suggessted that politicians could not keep their hands out of a ‘fiat money’ cookie far. That the potential for money mischief would likely leave us in a crashed economy. As he further noted, not one nation which used fiat money ever lasted long. Individuals must realize that the government that drove us here are completely lost. Do not expect them to undo the trap they themselves will also find theirselves in. But do prepare to survive the worst economic disaster in world history. Never has a nation left its people so vulnerable to total destruction. A declining economy will increase deflationary pressures. And the response to that will be more response from the Fed/Treasurey rather than markets. Inflation will have to be implemented to temper deflation. The tendency to oversteer will overwhelm the economy and the crash will take place as if in slow motion right before our collective eyes.
    Rather than stop the bleeding (Massive spending & regulatory cuts) government insists on maintaining its authority to snuff out the embers of productivity. You need to consider how you’ll survive in Sherwood Forest. The government is ‘the rich’ and we are the poor.

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  • http://www.goldsilverbullion.com David W. Young

    Bank runs are inevitable in the U.S., in addition to money market runs, as the Loss of Confidence in the Financial System goes into worp speed mode. Contagion from the European Collapse is well underway. Keeping large cash balances within the U.S. banking system is like sitting on the railroad tracks, you are going to get hit eventually. Not only are you paid nothing for this privilege of taking unprecedented risk, remember Uncle Sam, the insurer of such accounts is technically bankrupt, but the reality of Bank Holidays may not be too far down the road. Keep at least 3 month’s worth of living expenses in cash buried in your backyard with a Mossberg 500 parked inside. I have found that when risky cash is burning a hole in my pocket, regardless of what the technies are saying about the Precious Metals charts, I convert wasting cash in Dollars into Gold and Silver. When the Government tries to penalize its citizens for being smarter than the masses and doing the prudent thing, that is when a true revolution will emerge in this country. Have allocated bullion accounts overseas as well that are audited regularly; I’ll bet Mitt Romney does and he seems to be a fairly bright guy. BE PREPARED IS THE BOY SCOUT MOTTO. Sage of Wexford, once Congress starts buying bullion, don’t expect many punitive measures for bullionholders after that.

  • http://www.top7cashforgold.com Jessica

    Well all of the references to Keynesian economics is right on point…as is that Freedman predicted this long long ago. Our inability to move away from systems proven to be incorrect will certainly lead to huge devastation. However, whether we get far as that is highly unlikely. We need to remember that we also have mechanisms (safeguards) for change. In the event of the above-mentioned downward spiral, the Fed itself will change, personnel will change. The same beliefs will be discarded and new ones implemented. Whether this will be enough is uncertain, but lets not jump to conclusions that depend on thousands of variables just yet.

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  • Bruce C.

    This is a good example of how problems like these will always be framed: The rights of individuals have to be compromised to protect “everyone else”. Of course, all “they” really care about is protecting the system – the banking/financial system – and not the victims of an “irrational herd mentality”.

    It will be very interesting to see how people react to such controls. Will they accept that collectivist point of view? If so, will they do it unknowingly or willingly?

    I submit acceptance might occur for both reasons. The fiat money system is deceptively complex and enigmatic. Inherently worthless money (i.e., printed paper) seems simple enough to understand and reject until one realizes that all money has value only to the extent that others agree. That is still the wonder of the US dollar, et al, and, ironically, that is also the dilemma of gold right now. Only relatively few understand its uniqueness so it is given relatively limited value over all. That will change as an increasing number people are swindled in a world of smoke and mirrors.

  • Fire in the Darkness

    Johnny, all it takes is for someone to yell “FIRE!” and everyone will be running for the exits. Running for their lives. Just one word.

    • Toni

      Try yelling “BITCOIN”. See what happens…

  • Tony D

    And “Fire !” can have many different meanings and contexts !

    I’m growing tired of the PM shills telling me my silver is about to skyrocket “next week” , having done so for the past 18 months. Think I’ll limit my reading to intelligent sites like this one and the Burning Platform. Too many shills…. and I need to rest. Anyone else getting “Armageddon fatigue” ?
    My outburst may be a sign the end is near ??

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  • Jay Remoek

    The Fiscal Times

    10 Overpaid Public College Presidents

    E. Gordon Gee, $1,992,221

    Ohio State University
    Base salary: $814,157
    Bonus pay: $296,786 (plus $881,278 set aside for deferred compensation)
    Perks: Car, house, $50,400 pension contribution from the state or university
    Tenure: 2007–Present
    In-state tuition and fees: $9,735

  • michaelnz
  • Dan

    so they want all of us to take on a shared responsibility for loss for the very cash we have entrusted them with? sounds like the judge ordering the rape victim to use protection so that the rapist won’t contract anything.

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  • Neo1

    A Bankers defeatism nightmare, Being forced to Return to Real Money=United States Note=Lawful Money, remove the elastic money from the system, and pay off the national debt.. The real reason you pay tribute, an income tax, is for the privilege of using a private currency. Also known As A: Federal Reserve Note, Demand from your bank or brokerage, lawful money and the tax goes away, with a tax exemption on lawful money, all of your money is yours. Use the Remedy within the Federal Reserve Act. http://savingtosuitorsclub.net/ Stop being a Slave!!!!!! This is Tax Free Money!!!!!!!! For the short version see http://www.stormthunder.com
    Republic vs CORP: http://www.USAvsUS.info
    Search: the communist takeover of america—the 45 declared goals
    Search: The united states isn’t a country—it’s a corporation by lisa guliani
    http://www.blacklistednews.com/Federal_Reserve_Banking_System_/19014/0/0/0/Y/M.html

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  • Jim

    As the European debt crisis spirals out of control JP Morgan Chase and Goldman Sachs last week withdrew their interest from euro zone money markets. They know.

  • Donald

    John,
    Not sure if it’s your site, but AVG popped up the following alert when I accessed your page:
    File name: 149.47.142.185/Home/index.php
    Threat name: Exploit Blackhole Exploit Kit (type 2312)
    .
    Probably nothing, but thought I would let you know.

  • Dave

    How about a new article? This thing has been up there for a while now.

    Anyone who was going to read it, has.

  • http://newgoldinvestments.com Alison Macdonald

    Dave you’re wrong – through what can only be described as unforgivable tardiness I hadn’t read it yet – and now I have.

    I don’t think ANYONE can see just how bad things could get. I’ve just got back from a stay in Greece and it is so much worse than the press is suggesting.

    While I haven’t ordered my zombie-apocalypse shelter just yet I know a good number of rational people collecting substantial quantities of small bullion coin and stashing them at numerous wilderness locations. I wish I was joking…

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  • jon

    It’s amazing to me this is even an issue. The reason why there is so much money in money funds is because of the ease of access. If you changed the rules on withdraws, most investors would stop putting there money into those type of accounts. The idea that the government see access to your own money as a problem is the real problem. Here’s an idea, how about making sure banks are more safe, instead of limiting people’s access to there own money.

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