The Pressure to Create Cash Substitutes

Treasuries are not money-like financial assets, but the market based credit system is the financial infrastructure that uses safe and liquid assets like Treasuries as raw material to produce money-like financial claims, i.e. shadow money. The ratio of Treasuries useable by money dealers, i.e. securities dealers or money market mutual funds, to demand for money-like financial claims by institutional investors is a statistically and economically significant determinant of spreads in both money and bond markets beyond conventional determinants. The ratio measures the pressure on the financial system to provide additional safe collateral to back money-like claims or, if that is not possible, to issue unsecured short-term liabilities. Money demand by institutional investors is an indirect source of demand for safe debt securities as collateral for shadow money, distinct from demand for safe debt securities as long term investments. The empirical findings are useful to assess financial stability.