What does "flight to quality" imply to the markets?

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When the flight to quality begins in earnest, people will be buying US T-bills/bonds and investing in money market funds. Both US and foreign investors. What does this imply for US markets, interest rates, bank runs, etc?


-- Bob Watson (janebob99@aol.com), August 26, 1999


Gary North's Surviving All 3 Stages of a Complete Flight to Cash, which was written last Fall, addresses this. Here is a link to his previous "Reality Check" newsletters, with issue #32 being the relevant one.


-- Jack (jsprat@eld.net), August 26, 1999.

Until it has already happened, you get to write your own scenario, kick the tires, and see if it looks plausible. Then you get to publish it, and everybody else tells you what they like and dislike about it.

So lets say you start it off with the idea that people will move assets from somewhere to US T-bills/bonds and MMMFs. That would tend to lower interest rates of those entities.

Meanwhile, just where is the somewhere from whence assests are being moved? If equity markets, then stock prices decline, and so forth and so on.

You get to work out the effects on foreign exchange rates. :-)


-- Jerry B (skeptic76@erols.com), August 26, 1999.

In the extreme case:

1) Interest rates for "quality" bonds and similar instruments will plummet. Interest rates for "junk" bonds ans similar instruments will soar.

2) Liquidity will exist for quality bonds...and probably not for other investments (You won't be able to even sell your other stuff).

-- Mad Monk (madmonk@hawaiian.net), August 27, 1999.

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