There are many definitions of cash, and investors perceive there are different forms of cash that are relatively the same or that are interchangeable. I think not. Cash's critical characteristics are that it serves as a store of value and has instant liquidity, the ability to be immediately available as a medium of exchange.
The change in money market regulation and the stretch for yields has muddled the definition of cash or money; consequently, investors are going to be in for a surprise if there is a economic or market slowdown. Cash will not be cash. The definitions will be stretched and broken.
The change in money market regulation and the stretch for yields has muddled the definition of cash or money; consequently, investors are going to be in for a surprise if there is a economic or market slowdown. Cash will not be cash. The definitions will be stretched and broken.
From an institutional perspective, cash is not legal tender but any short term instrument that can be exchanged in the market immediately at a par value. There have been long debates on what is money and those are going to have to be resurrected with money funds having to have a floating NAV.
Cash is not a good store of value because inflation is eroded value. Real rates are negative, so investors push the boundaries for what is money. Riskier investments are used as money to maintain the store of value. The issue is further exacerbated because of the new money market rules. A floating NAV may be a good thing, but it also means that money funds will no longer meet the definition of money. Similarly, the use of gates or redemption restrictions on money funds means that investors will not have immediacy. Money funds in this new world, again, cannot be viewed as money.
The gap between old forms of money will increase and become more volatile. Under this environment there will be a shortage of safe assets or money if there is another financial crisis. This may create a number of unintended consequences.Short-term investing in financial products will be disrupted and the interest rate differentials in near-money will widen. It is not clear that this is the result policy-makers want during the next financial upheaval.
Cash is not a good store of value because inflation is eroded value. Real rates are negative, so investors push the boundaries for what is money. Riskier investments are used as money to maintain the store of value. The issue is further exacerbated because of the new money market rules. A floating NAV may be a good thing, but it also means that money funds will no longer meet the definition of money. Similarly, the use of gates or redemption restrictions on money funds means that investors will not have immediacy. Money funds in this new world, again, cannot be viewed as money.
The gap between old forms of money will increase and become more volatile. Under this environment there will be a shortage of safe assets or money if there is another financial crisis. This may create a number of unintended consequences.Short-term investing in financial products will be disrupted and the interest rate differentials in near-money will widen. It is not clear that this is the result policy-makers want during the next financial upheaval.
1 comment:
One thing I have often said of cash, and even regular savings, is that unless it earns interest in some way...especially higher than the rate of inflation, it loses value. I am glad I am not alone in my thinking, but wish more people understood this very basic concept.
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