Skip to comments.US no longer insures your money-market fund, but thatís good news
Posted on 09/27/2009 10:10:27 AM PDT by STARWISE
US no longer insures your money-market fund, but thats good news
Withdrawing federal insurance is part of a broader exit strategy from the government's emergency supports for the economy, expected to gather steam this year.
Savers take note: Your money-market fund is no longer insured by the US Treasury.
These mutual funds, which earn interest for millions of Americans in brokerage or 401(k) accounts, rarely run into financial trouble. Almost always, they are able to maintain a reliable value of $1 per share. Almost is the key word, though.
Last year, one of the original money-market funds, the Reserve Primary Fund, broke the buck because some of it had investments issued by a certain firm called Lehman Brothers. When that Wall Street giant collapsed, Reserves share price fell a bit below a dollar.
In the panicked climate of last fall, concern about a broader run by money-market depositors caused the Treasury to step in with an unusual guarantee.
The guarantees come to a stop Friday, however.
The program helped achieve that end. But the fact that it was needed means policymakers need to think about how to best avoid a repeat in the future.
For now, policymakers appear confident that the absence of federal insurance wont cause investors to flee the funds for safer bank savings accounts and the like. Many investors are shifting out of money funds simply because the interest rates are so low (nearly zero now) and the stock market has had growing appeal.
(Excerpt) Read more at features.csmonitor.com ...
Bank money market deposit accounts are still covered by the FDIC up to $250,000.
September 20, 2008
Hoping to stem a mass exodus from money market mutual funds, the Treasury Department said Friday that it will guarantee most money funds for one year.
They certainly are, to my understanding. The money market insurance has lapsed.
But this should sit us up.
My biggest concern is that when this DOES hit, it will be virtually overnight. Maybe a half a week.
Agreed expect a massive dump that leaves the unexpecting nitwit holding the bag. History shows that when the BIG BOYS feel they have driven the stocks up enough, they will sell off en mass and take their profits earned from when they bought during the lows. That’s what the latest RUN UP since March has been all about.
Chart for Dow Jones Industrial Average (^DJI)
To avoid taxes next year, they will sell off before Dec. 31, ESPECIALLY with Obama likely to MASSIVELY increase taxes in 2010 for those making over $250K per year. The economy will be VERY slow January-March 2010 leading into the next wave of foreclosures. Expect the big sell off to begin when the Forecasts start coming in of a poor Christmas buying season. The BDI is very telling of the 2009 Christmas buying season!
Baltic Exchange Dry Index (BDI) Recent, exponential average in red.
Lastly, Interest Rates MUST go up VERY SOON to entice buyers of US Treasury (UST) notes. Given the degree of “intermediation” by the Federal Reserve in the issuance of US Treasuries hitting a record in Q2, Federal Research System Open Market Account (SOMA) purchasing accounts for just under 50 percent of all net UST issuance “absorption”. This is a startling number, as the Fed’s SOMA purchases of $164 billion in Q2 Treasury notes dwarf the combined foreign/household UST purchases of $101 billion and $29 billion, respectively, over the same time period.
In fact, the Fed’s SOMA purchases was a greater factor in UST demand than all three traditional players combined: Foreigners, Households and Primary Dealers, which amounted to a $158 billion in net Q2 purchases. This dramatic imbalance puts a lot of question marks over how the upcoming hundreds of billions in incremental Treasury purchases will be soaked up to pay for the decrease of tax revenues and increase in treasury spending. China is reportedly and understandably losing interest in buying into America’s future.
Just throw in a mini-calamity, such as a run on US banks precipitated by:
- domestic terrorist attacks
- attacks on Iraqi nuclear sites causing a HUGE spike in oil prices
- an extremely harsh US winter with slow-to-respond international grain imports
- Swine Flu mutation, etc
... and easy to see that we are very, VERY near a TIPPING POINT.
Go here for accompanying diagrams of explanation
That was my first "WHAT???"
Now we know what you are doing there. LOL!
The ‘gulps’ are increasing every day.
Stay safe .. and we know Who is in
charge .. HUGS.
Won't higher interest rates force QE, esp. in light of declining tax revenues? With increased interest rates, the cost of servicing the debt will grow exponentially and where's the money going to come from except just printing it?
Also won't higher interest rates dampen economic recovery?
Treasury and Fed seem to be trying to run out the clock, with fingers crossed that the economy will grow enough to get us out of this debt hole, but there are few signs this is happening and if it is happening, it's at a snail's pace.
The list, ping
Does this include money market cash held by trading companies and brokers like Scottrade?
My CD’s are now earning 1.9% interest. I am thinking of taking the money and putting it in jars in the backyard.
It just ticks me off that banks can use my money for 1.9%
I would think it applies to all money market funds ..
if they’re so labeled and hold cash, earning interest.
Withdrawing federal insurance is part of a broader exit strategy from the government's emergency supports for the economy
Whoops, and thanks STARWISE.
OMG! This is terrible! The Fed now owns $17 billion less in Treasuries than they did 2 years ago.
Yes...I get clients (I work in a bank branch) constantly confused by this.
Well...you can also borrow it cheap.
Because much of their balance sheet is junk securities instead.
This bit of news sent shivers down my spine because I just deposited a significant chunk of money in a Citibank money market account. I imagine there may be lot of folks like myself wondering if this is going to put their money market bank accounts at risk. Found the following which assuaged my fears.
OK. But we should be realistic about the value of FDIC coverage in the real world. Next year bank failure losses are going to total many times that of the FDIC funds. At what point does the "insurance" become as worthless as the deposits it is insuring?
"Full faith and credit of the United States government". Nice sounding statement. Just what tangible assets are backing up any of this stuff?
I have a question for anyone in this thread that would like to respond.
If devaluing currency (the $) erases some of the government issued debt, what happens to my mortgage debt?
For example, suppose I have a $600 monthly payment on a $90K mortgage. Suppose I have $60K in savings accounts. The US devalues the dollar by 2/3. Does that mean my savings are now $20K, but my mortgage balance remains at $90K and my payment remains at $600? In that case I’d effectively have my debt tripled with the stroke of a pen.
If, big if, I retain an income. Wages can't go up without a paycheck.
Then Federal government MUST be destroyed...
Bank money market accounts are usually FDIC insured. Money market mutual funds are no longer insured...
Sort of...but assuming you didn’t spend your savings, you’d still have 60k even if worth less...but the 90k you owe on the mortgage would also be “less” money in value.
Not saying it would be GOOD, but still...
Your $200,000 house is now worth $600,000.
bump to read later
True. But the practical reality is that unless I sell it, that "value" is of no value. And unless I have an income, I can't make the monthly payment with the cheaper dollars.
No matter how we try, we just can't make feces smell like perfume.
Decades ago (1970's, I think) there was a comic strip that I've always remembered. A man and a woman are in a living room, and the man says "When I was a kid, I dreamed of living in a $100,000 house" the next block in the comic is from outside and we see that the man is living in a very small, very drab house, in the middle of a crowded and bland subdivision. And the man says "And I finally do!"
The dollar figures, of course, are far out of date, but when I was a young teenager, that cartoon was the single biggest thing that made me realize what inflation really meant.
Inflation is bad, but can be used to an individual’s advantage IF (big IF) they are employed and their salary follows the increase in prices.
You ended with cash of $60,000 and home equity of $510,000. Your net worth of $570,000 is equivalent to $190,000 before the inflation. It's true that you would have to sell the house (or take out a HELOC) to tap the equity.
Feces does not smell like perfume.
Thanks for the ping!
Actually, there are no assets securing "full faith and credit" obligations (if that were the case, they would be a "mortgage" or "secured" obligations).
"Full faith and credit" securities are "General Obligation" securities and their holders look to the government's power to tax.
As a aside, a friend whose father owned a large pig operation would comment to visitors (when they realized how strong and repugnant was the odor of the farm)...
"In case you are wondering about that smell...that's the smell of profit!"
Yep. My point. Faith...in government. I'd put more faith in a hooker.
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