Near Money: Easily Convertible Assets

A detailed overview of near money, including examples like government securities, bank time deposits, money market fund shares, and bonds close to redemption date.

Near money refers to financial assets that are not cash but can quickly be converted into cash with minimal loss of value. These assets are highly liquid and serve as a stabilizing force in an economy by ensuring that funds can be quickly accessed when needed.

Examples of Near Money

Government Securities

Government securities, such as Treasury bills and short-term government bonds, are highly liquid and considered near money because they are backed by the government and can be sold quickly in financial markets.

Bank Time Deposits

Bank time deposits, commonly known as certificates of deposit (CDs), are deposits in a bank that earn interest over a specified period. Although not immediately accessible like a regular savings account, they can be converted into cash upon maturity or through early withdrawal (often with a penalty).

Money Market Fund Shares

Money market funds invest in short-term, high-quality investments issued by government and corporate entities. These shares are considered near money because they can be redeemed for cash quickly, often within a business day.

Bonds Close to Redemption Date

Bonds nearing their redemption or maturity date are also classified as near money. As their maturity approaches, the price volatility decreases, making them almost equivalent to cash in terms of liquidity.

Applicability of Near Money

Near money assets play a crucial role in both personal finance and macroeconomics:

• Personal Finance: They provide individuals and businesses with a safe, liquid investment that can be used as an emergency reserve.
• Macroeconomics: They help maintain liquidity in the financial system, enabling quick adjustments in monetary supply and demand.

Historical Context

The concept of near money became particularly significant during periods of economic distress, such as the Great Depression and the Financial Crisis of 2008. During these times, the ability to convert assets into cash quickly was vital for maintaining economic stability.

Comparisons and Related Terms

• Cash: The most liquid asset, cash is readily available for transactions.
• M1 and M2 Money Supply: In economic terms, near money is often included in the broader classifications of money supply, specifically M2, which encompasses M1 (cash and checking deposits) along with near money assets.

FAQs

What distinguishes near money from actual money?

Near money is not readily available for immediate transactions like cash. However, it can be converted to cash with minimal delay and loss in value.

Are stocks considered near money?

No, stocks are not typically considered near money because their value can fluctuate significantly, and they might take time to sell, especially in a volatile market.

How are near money assets taxed?

The taxation of near money assets can vary. For example, interest earned on time deposits is taxable, and any capital gains from the sale of government securities or bonds may also be subject to taxes.

References

1. Mishkin, F. S. (2007). The Economics of Money, Banking, and Financial Markets. Pearson.
2. Mankiw, N. G. (2016). Principles of Macroeconomics. Cengage Learning.
3. Federal Reserve. Money Stock Measures. Link

Summary

Near money refers to liquid assets that can be quickly and easily converted into cash, playing a vital role in maintaining liquidity in both personal finance and the broader economy. Recognizing examples such as government securities, bank time deposits, money market funds, and near-maturing bonds can help individuals and businesses manage their finances more effectively.