Collapse of the `Carry Trade'
Will Blow Out the System
Feb. 26, 2006 (EIRNS)—The following release was issued today by the Lyndon LaRouche Political Action Committee.
On Friday, Feb. 24, the Daily Telegraph published a blunt admission that the entire global financial system is on the verge of disintegration, as the result of the imminent collapse of the yen carry trade. Ambrose Evans-Pritchard penned the Telegraph story, "Global Credit Ocean Dries Up," and quoted from a number of leading financial analysts, who warned that the entire system is jeopardized if Japan goes ahead and raises interest rates, thus shutting down the yen carry trade, which has fueled global hyperinflation and speculative bubbles for the past several years.
As the Telegraph defined it, "The 'carry trade'—as it is known—is a near limitless cash machine for banks and hedge funds. They can borrow at near zero interest rates in Japan, or 1 pc in Switzerland, to relend anywhere in the world that offers higher yields, whether Argentine notes or US mortgage securities." Last week a crisis was triggered when the Fitch rating agency downgraded Iceland's sovereign debt. Interest rates in Iceland are 10.75 pc. The Bank of Japan has announced plans to abandon the zero interest rate policy, as early as next month. This has triggered the panic, cited by Evans-Pritchard.
Evans-Pritchard quoted a number of analysts. David Bloom of HSBC warned, "The carry trade has pervaded every single instrument imaginable, credit spreads, bond spreads; everything is poisoned. It's going to come to an end later this year and it's going to be ugly, even if we haven't reached the shake-out just yet. People have a Panglossian belief in the march of global capitalism but that will change as soon as attention switches back to US financial imbalances."
Stephen Lewis of Monument Securities was quoted: "There are several hundred billion dollars of positions in the carry trade that will be unwound as soon as they become unprofitable. When the Bank of Japan starts tightening we may see some spectacular effects. The world has never been through this before, so there is a high risk of mistakes."
Stephen Roach, chief economist at Morgan Stanley, was even more blunt: "The lure of the carry trade is so compelling, it creates artificial demand for 'carryable' assets that has the potential to turn normal asset price appreciation into bubble-like proportions. History tells us that carry trades end when central bank tightening cycle begins."
LaRouche Says: Let It Happen
Political economist Lyndon LaRouche was far more plain-spoken and blunt. "The yen carry trade is in big trouble. The mere fact that such questions as those reported in the Daily Telegraph are being raised means that the carry trade is about to bite the dust. Iceland and other countries are going to go bankrupt. But the multiplier effect of the blowout of the carry trade is going to mean that the crisis hits with a magnitude far beyond any individual nation or currency. This will bring down the whole post-Bretton Woods floating exchange rate system."
But LaRouche added, "Let it happen. The system is doomed under any circumstances, and we know what must be done to create a new, stable financial system, based on the principles of Franklin Roosevelt's original Bretton Woods System. I am ready with a recipe for precisely how to solve this crisis. Are you?"