The money market is an investing concept. It refers to a collection of financial instruments with high liquidity and a short investment life. Some of these tools include certificates of deposit and U.S. Treasury Bills. However, the money market can become glutted by a number of contributing factors.
As history shows, a good economy can lead to a glut in financial markets. After World War II, average Americans--perhaps for the first time--had both credit and spare money to invest. Most average Americans did not know how to invest money and opted for safe options like government-backed bills and CD investments. Because the investments were relatively safe and they operated off of a short term of time, the market became glutted with investors. This surplus caused rates to go down, prompted by a good economy.
Just as a booming economy brings new investors into the money market, so too can a shrinking economy. Business owners and more experienced investors during the most recent recession in America (during the 2006-2009 years notably) invested in the money market. The reason: the money market is relatively safe, compared to other, riskier investments. International investors caught off guard by the mortgage collapse (those who had been complaining that U.S. Treasury Bills did not provide a high enough rate of return) suddenly were clamoring to invest in the safer, but less profitable, money market.
When new types of tools are created, it gives a new "in" for many people to invest in the money market. For instance, most college students won't invest in CDs or T bills, but they might get a money market checking account. Businesses that have a small surplus of money might not want to throw it into a long-term investment, but switching to a business savings account or interest-earning checking account may be an option. The more accessible the money market is to investors, then the more likely it is that a surplus will result.
- business charts with us money image by Andrew Brown from Fotolia.com