Who says cash is king?
http://www.marketwatch.com/news/story/story.aspx?guid={56A2CEE5-5A53-4A27-A4BA-585CFBE173A4}&siteid=rss
Here is a money market fund freezing redemptions! You put your money into a money mkt fund supposedly the most liquid and safest vehicle available, and now its frozen and losing money!
Its apparently only the second time ever a money market fund's value had dropped below $1 per unit.
What is happening now is too astounding for words! When even people like Greenspan are calling it a once on a century event, its fairly serious.
From Jim Sinclair:
http://www.jsmineset.com/home.asp
Someone mention this scenario on a US forum I subscribe to.
Possibility of what may/could happen
You are probably aware that a large money market fund company with large holdings in Lehman bonds announced today that the fund that held these bonds will "break the buck"----ie, will have its NAV reduced to $0.97 per share. This results in a loss of 3% for the investors in the MM fund, rather large considering they were probably earning only about 1.5% in the fund itself.
I suspect that many MM fund investors will find this risk/reward ratio intolerable, and their likely move will be into US govt MM funds, ie invested solely in t-bills.
This will begin a quick death spiral. As investors move funds out of their regular MM funds (ie, funds holding debt that is not backed by the US govt), this will require the fund managers to sell assets held by the fund in order to provide cash for the redemptions. As other MM fund managers try to sell the same type of dent instruments, the value of this paper will decline markedly.
As these assets decline in value, other MM funds will be forced to break the buck as well, causing more and more investors to remove their assets from these funds, leading to a "run" on these funds. ---
My sense is that all it will take is for a few more MM funds to announce that there is risk in non-US govt MM funds, and the game will be over in just a few days.
At the same time, short-term US govt debt will be in such high demand that interest rates will be bid down to zero, or perhaps go negative.
(This should be good for gold, but not for much of anyone else. It will be particularly bad for state governments, since they unfortunately can't print money to back their debt.) (It will also be very bad for businesses that rely on relatively low-cost short-term money-market financing.) (It will also probably end up driving up long-term borrowing rates for corporations, and likely for long-term US debt as well.) (I would also not want to be long the GM at this point either.)
I don't foresee any solution other than for the US govt to step in and provide FDIC-type insurance for MM funds as well. The end result is that, like it or not, eventually all of the so-called "toxic" assets will find their way on to the US balance sheet.