[A-List] Beware the Unwinding of the Yen Carry Trade

Todd Boyle tboyle at rosehill.net
Mon Nov 3 10:58:06 MST 2008


Stathis,
In Japan in the early 1990s, neither individual households nor 
companies *needed* any loan, or *wanted* any loan.  What's the use of 
a bank, in such circumstances?   People and companies generally had 
sufficient current net cash flow to carry on, as long as policymakers 
kept the monopolies somewhat in equilibrium-- the perennial task of 
the Japanese government.

The Japanese economy was not so irrational that it had many companies 
systemically in the red.   Other than the finance and property 
bubbles, the rest of the economy did not need bank loans to meet 
current cash deficits.  Japan's dominant corporations furthermore, 
didn't need banks for long-term investments.  They had plenty of 
financial resources to finance needed plant and equipment.  They had 
more capital than the banks!  This is generally true of today's 
dominant transnationals as well.

Of course, in those circumstances, who needs capital, or 
capitalism?   Capitalism is only relevant when there is excess 
returns to capital-- it cannot exist in a steady state economy, 
because supplies of everything have developed to match the 
demands......   Accordingly, liquidity throughout the economy cannot 
be increased by reducing interest rates.  In Japan they had zero 
interest rates (negative interest rates, after inflation) and still, 
nobody wanted to borrow.    The only thing needed is to prevent 
liquidity from being drained, by vandals and pirates etc.

It seems to me, today's situation is like 1971 or the late 1960s, 
really, when US imports of oil were causing such huge balance of 
payments deficits that the US needed to setup the "petrodollar 
recycling" arrangements with the Saudis.  I seem to note, a bit late, 
that this scheme depended on growth in the US-- it was a scheme by 
which prices in excess of costs were  extracted from the US by 
whoever had the oil wells-- a completely absurd situation -- and 
then, all those $trillions were expected to be reinvested in the US 
capital markets.    Now, that's a recipe for disaster, because in a 
reasonably mature economy, neither companies nor households need or 
want that volume of capital investment.  So, it went into collossal 
bubbles, one after another.   The whole scheme is really stupid and 
needs to be reformed.  It's mostly caused by the ridiculous runup in 
oil prices.  Since hydrocarbons have intrinsic economic value in 
excess of cost, the excess gain should be taxed away, and 
redistributed rationally to households and businesses.   Certainly, 
it should not flow to whoever controls the oil wells.   And it 
shouldn't flow to whoever happens to live nearby the oil wells either 
(Be they Alaskan, Iraqi, Texan or anybody else.)

TOdd



At 12:25 PM 10/31/2008, Stathis Stassinos wrote:
>Yoshie, it was fun reading about mrs Watanabe, but what I dont get 
>is how low interest rates will start new bubbles in this enviroment. 
>Our current problem is not about rates, but about fear. Argentinian 
>bonds have 30% return in dollar terms, Islandic rates are 18%, but 
>if you are not sure about getting your money back, 5,6,10 or 15% 
>wont make a difference.
>
>Its the same thing as the libor. Its not about the rate, as about 
>the fear that your counterparty will default and that will trigger 
>your default too. I think that Keynes Liquidity Trap doesnt really 
>care about the rates. It s a situation were nomore credit worhy 
>counterparties exist.
>
>So, do you believe that dollar or yen "curry trade" will resume swiftly?
>Isnt mrs Watanabe suffering from huge losses?
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