Is the Government Forcing Money Market Accounts to Buy Government Bonds?

The only way to feed the 18 trillion dollar debt monster is to get people to buy more government bonds.  Well, the Government has figured out a way to do just that.  The SEC last year has introduced new money market reforms that will drastically change the way money markets work.

Money markets are a step up from savings account and represent the cash accounts at mutual fund and brokerage companies.  Currently, there is 4.9 trillion dollars in money market accounts.

The SEC’s “reason” for these new reforms is money market liquidity.  They want to prevent the same situation that happened during the financial crisis when investors pulled money out of money markets or where a “run” occurred on money markets.  So, they are giving mutual fund and brokerage companies the ability to impose restrictions on redemptions or imposing fees on withdrawals if retail money market levels get below a certain point. 

They are also going after the big institutional money market accounts.  They will allow the $1 per share to float.  What does that mean?  Your “safe” money in money markets could be worth less than what you originally put into the account.  Imagine if you put 1000 into a savings account and the next day it was worth $995?

However, there is one type of money market that NONE of these reforms will apply – money market accounts that are backed by US Government Bonds. 

This is how this works.  Companies like Fidelity that dominate the money market business will have to convert all of their money market accounts to Government Backed money markets.  They have to do it because of the implications of these new rules.  There are too many investment managers who use these money markets in trading and cannot afford to have them locked up or have fees applied.

The Government has no intention of paying off the national debt or stop spending money that they don’t have.  They are just going to get creative in finding ways to force people to buy government bonds.  I would predict it is just a matter of time before there is an option for 401 K holders to buy into government bond backed annuities.     

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