Ask Money

Where is the money going?

Chris Farrell Oct 30, 2008

Question: If everyone is withdrawing money from stocks, mutual funds, hedge funds and every place where they have money, what are they putting it into? I can’t believe that all the money that has been withdrawn is just lying idlely around. Nobody does that. It has to be invested in something. Jerome, Boiling Springs, PA

Answer: You’re right that money is fleeing out of risky assets like U.S. stocks, emerging market equities, and junk bonds. To give you just one example, investors have pulled some $124 billion out of stock mutual funds year-to date (the data goes through September), according to the Investment Company Institute, the Washington D.C. based trade group for the mutual fund industry. Of course, there are still lots of buyers in the stock market looking for bargains.

Still, many savers are looking for a “safe harbor” for their money. The most popular safe harbors rely on U.S. government backing rather than private sector promises.

Therefore, investment money at home and abroad is pouring into default-free U.S. Treasury securities. Investors are so eager to preserve the value of their money that they’re willing to accept a mere 0.44% yield on a 3-month Treasury bill and only a 3.9% yield on a 10 year Treasury bond. Savers are also seeking safety in banks backed by the FDIC and the comparable federal backstop for credit unions. Savers are putting their money into certificates of deposits, savings accounts, and the like. The money is safe at the federally insured bank or credit union so long as it’s under the $250,000 FDIC limit. (There are a number of ways to increase coverage limits even at the same bank. The FDIC has a clear explanation of its insurance fund at www.fdic.gov. )

One reason the Fed cut its benchmark interest rate to 1% is to encourage both savers and lenders to take on a bit more risk. For savers, the lure of high returns in a low interest rate environment could entice them to snap up quality corporate bonds, good tax exempt bonds and blue chip stocks. For lenders, it boosts confidence that the financial world is not coming to an end and that could lead them to make more loan money available to the average worker.

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