I heard something the other day that has me worried. Economic policy is confusing to me, so I find it hard to believe much of anything, but here it is...

The problem would be if some money market went belly up, (breaking the dollar I think it's called) the uncertainty in the financial markets would trigger the liquidation of ALL money markets, and thus, a meltdown of banks that are having problems already.....

How likely is such a scenario?

PS: why do I have to dig for a new f-ing password everytime I want to leave a comment on this blog?

For what it's worth, I think it's highly unlikely.

There are a ton of money market funds out there. They're like mutual funds for people who want to invest in cash rather than stocks. The idea is that each share is always worth at least $1. That's not guaranteed, but it's been a promise so well kept by the industry that it's assumed to be a guaranty. If a share were to ever be worth less than $1 that would be "breaking the buck." People would be very angry, of course. They invested with the hopes of getting a good interest rate at near miniscule risk.

Now some of those funds have invested in mortgages, but not to any great extent. But let's say that one money market fund, out of all the money market funds out there, failed. Yes, other people would get scared. But they'd probably think before they all took their money out at once. Most money market funds are sound.

antonsemrad ...

There's a confusion of terms here.

"Money markets" are places where very short term short term debt instruments are bought and sold ... mostly unsecured 3 month and 6 month promissory notes from corporations ... with a major customer a a variety of mutual fund specializing in offering higher yields than bank accounts, in return for the additional restrictions required to allow them to operate. People speculating in various markets will "park their money" over short periods in these kinds of funds, hence "money markets".

I believe what you are thinking of are foreign exchange markets. These are markets where one country's money is swapped for another. At most one of those are actually used on the street outside the exchange to buy a cup of coffee, so one or both of those are "foreign exchange".

If the US dollar melts down on foreign exchange markets, that will cause a lot of turmoil in foreign exchange markets. and in lots of financial markets. However, at the moment, the Bank of China (and the central banks of a range of other countries) is buying a lot of US government securities in order to make sure that the Chinese currency trades at a very steep discount ... a side effect of this policy is that it tends to prop up the value of the US dollar.