HomeBullion & Precious MetalsWhen Is A Dollar Not Worth A Dollar?

When Is A Dollar Not Worth A Dollar?

By Patrick A. Heller
Commentary on Precious Metals Prepared for CoinWeek.com

Question:  When is a dollar not worth a dollar?

Answer:  When the US government says so.

Money market funds were developed in the 1970s as a way for investors to park short-term money in assets that generally provided higher returns than interest-bearing savings accounts.  They have become so popular that total investments in money market funds have grown to $2.9 trillion, of which most comes from institutions making investments.

Under the Federal Investment Company Act, these funds are restricted to investments in high-quality, short-term debt securities.  The goal of these funds is to maintain a stable share value, usually $1.00.  The typical investor experience is that they are able at any time to redeem 100% of their investment plus the yield that was earned during the time of the investment.

cracked_dollarTo accomplish this stability, the money market funds maintain the value of their shares within 0.5% of the share value.  However, at the height of the Great Recession in 2008, the Reserve Primary Fund “broke the buck” by repricing is shares below the previously stable $1.00 price.

Within a week of that event, 14% of all money market funds were withdrawn from the industry out of fear that other funds would also reduce their share values.  The crisis was halted only after the US Treasury provided a government guarantee of share price stability.

On June 5, the Securities and Exchange Commission (SEC) unanimously proposed new regulations for a 90-day comment period.  The proposal actually offers three alternative sets of regulations.  To read the SEC new release about these proposed regulations, go to http://www.sec.gov/news/press/2013/2013-101.htm.

Under the first alternative, prime institutional money market funds would be required to sell and redeem shares at a floating Net Asset Value rather than maintaining a stable share price.  These funds would be required to quote prices to the nearest 1/100th of one percent.  As an example, a fund with a current share value of $1.0000 would be required to adjust prices to the fourth decimal point.

This proposal would only affect the largest money market funds.  Exempt from this regulation would be any fund that either 1) held at least 80% of its assets in cash, government securities, or repurchase agreements collateralized with government securities, or 2) would be classified as a retail (versus institutional) money market fund because it limited shareholder redemptions to no more than $1 million per business day.

The second alternative proposal would affect any money market fund (other than those classified as government money market funds) if its highly liquid assets fell below 15% of total fund assets.  Should this occur, the money market fund could impose a redemption fee as much as 2% of the amount redeemed.  Further, any fund where highly liquid assets fell below 15% of total fund assets could completely suspend any redemptions for up to 30 days.  No money market fund would be allowed to suspend redemptions for more than 30 days within a 90-day period.

As the third alternative, the SEC is considering implementing both alternative proposals.

An adoption of any of these changes would change the nature of money market funds, destroying the reason they are so popular with investors.  Worst would be the implementation of all these proposals.  Instead of being able to redeem 100% of an investor’s principal upon demand, the proposals just about guarantee that investors will get back less than 100% of their principal and that they may have to wait as long as 30 days to redeem their investment.

If any of these proposals are adopted, and I predict that at least some of them will, then the paper assets called money market funds will lose value as investments.  In this instance, not only is it something that might occur, it could be very well forced into reality by the US government.  This is an example of the risk of falling paper asset values against which the ownership of physical gold and silver would protect investors.

Since I regularly have warned about such paper losses coming to pass, I suppose I could say “I told you so.”  But I don’t mean to rub it in.  Besides, the financial pain inflicted on investors by the US government will be sufficient punishment.


Patrick A. Heller was honored with the American Numismatic Association 2012 Harry J. Forman Numismatic Dealer of the Year Award.  He owns Liberty Coin Service in Lansing, Michigan and writes Liberty’s Outlook, a monthly newsletter on rare coins and precious metals subjects.  Past newsletter issues can be viewed at http://www.libertycoinservice.com.  Other commentaries are available at Numismaster (under “News & Articles) .  His award-winning radio show “Things You ‘Know’ That Just Aren’t So, And Important News You Need To Know” can be heard at 8:45 AM Wednesday and Friday mornings on 1320-AM WILS in Lansing (which streams live and becomes part of the audio and text archives posted at http://www.1320wils.com

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