Post by unlawflcombatnt on Jun 21, 2007 3:44:22 GMT -6
Below are excerpts from an article describing the Yen carry trade by Dan Amoss. It's titled Yen Carry Trade Explained
"At the epicenter of the international lending system lies the Japanese Yen carry trade. The “liquidity” you often hear about emanates from a central bank that thinks its economy will spiral into a depression if it weren’t for near-zero interest rates. Since the highly productive Japanese economy doesn’t need all this free credit, it gets lent overseas, adding fuel to asset bubbles around the world. In his latest morning briefing, economist Ed Yardeni provides a step-by-step example of how this process often unfolds....
The epicenter of global liquidity is the Bank of Japan, which left its official rate unchanged at 0.5% at its latest policy meeting on June 14-15. This near-zero interest rate feeds carry trades around the world. It allows prime brokers in New York and London to borrow money at less than 1%. After they wrap the funds with derivatives to insure against BoJ tightening and currency risk, the money costs them maybe 2%-3%. They lend it at maybe 5% to hedge funds and private equity firms, who use it to buy companies on a highly leveraged basis. Everyone gets rich. Of course, the Japanese themselves are world-class carry traders as they invest funds borrowed at home overseas at higher yields.”...
But everyone does not get rich in the long run because an economy driven by credit cycles is not healthy. Rather than fulfill worker shortages in industries like oilfield engineering and mining, youngsters become drawn to finance. Sure, finance and credit is vital to any advanced economy. But beyond a certain point, it can become parasitic. If we all go into the business of lending each other money, we have every reason to expect continued bottlenecks in the supply chain of goods and services that have increased in price the most in recent years. Also, Wall Street moguls provide populist politicians with ideal scapegoats when class warfare will inevitably rear its ugly head in the next election cycle."
The entire article can be found at:
agorafinancial.com/economics&politics.php
"At the epicenter of the international lending system lies the Japanese Yen carry trade. The “liquidity” you often hear about emanates from a central bank that thinks its economy will spiral into a depression if it weren’t for near-zero interest rates. Since the highly productive Japanese economy doesn’t need all this free credit, it gets lent overseas, adding fuel to asset bubbles around the world. In his latest morning briefing, economist Ed Yardeni provides a step-by-step example of how this process often unfolds....
The epicenter of global liquidity is the Bank of Japan, which left its official rate unchanged at 0.5% at its latest policy meeting on June 14-15. This near-zero interest rate feeds carry trades around the world. It allows prime brokers in New York and London to borrow money at less than 1%. After they wrap the funds with derivatives to insure against BoJ tightening and currency risk, the money costs them maybe 2%-3%. They lend it at maybe 5% to hedge funds and private equity firms, who use it to buy companies on a highly leveraged basis. Everyone gets rich. Of course, the Japanese themselves are world-class carry traders as they invest funds borrowed at home overseas at higher yields.”...
But everyone does not get rich in the long run because an economy driven by credit cycles is not healthy. Rather than fulfill worker shortages in industries like oilfield engineering and mining, youngsters become drawn to finance. Sure, finance and credit is vital to any advanced economy. But beyond a certain point, it can become parasitic. If we all go into the business of lending each other money, we have every reason to expect continued bottlenecks in the supply chain of goods and services that have increased in price the most in recent years. Also, Wall Street moguls provide populist politicians with ideal scapegoats when class warfare will inevitably rear its ugly head in the next election cycle."
The entire article can be found at:
agorafinancial.com/economics&politics.php