Blogs | Scam Diego
Dollar "Carry Trade" Creates Global Asset Bubble That Will Burst
By Don Bauder | Posted November 2, 2009, 12:29 p.m.
New York University economist Nouriel Roubini, who predicted the current woes, says that borrowing cheap dollars has created a massive, global asset bubble that will burst in ignominy -- although he doesn't know when. It's a column in the Nov. 1 Financial Times of London. I have commented on this blog that big financial institutions are borrowing dollars at near-zero rates and speculating in global markets, creating bubbles in many economies, including the U.S., rather than lending the money. The process is called the "carry trade," and was once mainly a yen phenomenon. Now gamblers are doing it with dollars, thanks to extremely low rates and the Federal Reserve's policy of buying paper to keep long rates lower. Roubini takes it a step further: he says that speculators are shorting the dollar (betting it will go down), and as the dollar plunges, are effectively borrowing at NEGATIVE yearly rates of 10% to 20%. This dollar carry trade forces other countries to lower their rates artificially, too. Hence the global asset bubble keep expanding exponentially. "The longer and bigger the carry trade and the larger the asset bubble, the bigger will be the ensuing asset bubble crash. The [Federal Reserve] and other policymakers seem unaware of the monster bubble they are creating."
Institutions engaging in the dollar carry trade include U.S. banks, particularly ones that used to be called investment banks. They are borrowing at zero or sub-zero rates and gambling with the money knowing that if their bets don't pay off, the government will save them. Hence, they are not lending the money to needy individuals and companies. Today (Nov. 2), Nobel Prize-winning economist Joseph Stiglitz said the banks should have been nationalized to guarantee that they would lend the money given to the by government. That appears to be an extreme solution, but policymakers must realize that the banks are recapitalizing by gambling with very cheap money, and their refusal to make an adequate number of loans is hurting the economy deeply.
Roubini takes it a step further: he says that speculators are shorting the dollar (betting it will go down)
====================
Smart man!
The dollar's value is getting close to the value of toilet paper.
By SurfPuppy619 1:41 p.m., Nov 2, 2009 > Report it
Response to post #1: One reason the dollar is going down is that the U.S. is printing so many of them, and will have to print more because of these monstrous deficits. However, a bet against the dollar is no sure thing, because the other countries are doing poorly, too; their currencies are shaky, particularly as they engage in competitive money printing to combat us. My own best guess is that the dollar will go down in a sawtooth pattern, but as Roubini notes, it could rebound sharply, and that will cause havoc in U.S. asset prices. Notice in recent weeks that as the dollar goes down, stock market and commodities prices go up. This is because we are riding an asset bubble floating on excess liquidity. It is interesting to see that the talking heads on TV are missing what is happening completely. They keep yapping about a great turnaround in the U.S. economy. The turnaround is quite weak. What's fueling this are the extremely low interest rates and the carry trade based on the buck. It can't help but end badly. But nobody wants to say it or hear it. Roubini says the Fed and U.S. policymakers don't even know the inevitable consequences of their actions. Best, Don Bauder
By dbauder 2:07 p.m., Nov 2, 2009 > Report it
The treasury can only print more money if China is willing to buy more-if China stops buying we have to stop the deficit spending.
If China were smart they would stop buying our debt-because they're assiting with the destruction of OUR country by allowing us to spend beyond our means, and IF we go down they will lose everything invested.
.
.
Roubini says the Fed and U.S. policymakers don't even know the inevitable consequences of their actions. Best, Don Bauder
====================
Of course they don't understand, or don't want to undertsand.
These are the same idiots that allowed us to go into a real estate bubble the likes of which no one had ever seen before.
As long as Washington insiders, and their buddies, are above water they don't care.
By SurfPuppy619 3 p.m., Nov 2, 2009 > Report it
Response to post #4: A lot of policymakers want the Fed to be the primary regulator of banks. But the Fed completely -- and I mean completely -- missed the economic storm that was gathering. It did not realize that U.S. consumers were vastly overleveraged, and that our consumption was propping up China and the rest of the world -- and what the consequences of that could be. It didn't understand the danger or essential fraudulence of derivatives; it wanted to keep them basically unregulated. It ignored the housing and stock market bubbles. It didn't realize, or seem to care, that people were being lured into buying homes they couldn't afford by crooks in the mortgage industry. It didn't see that lenders didn't give a hoot whether borrowers could pay their mortgages, since they were being bundled up and sold to Wall Street, which resold them to naive institutions. The Fed did not understand that the securitization of those mortgages would lead us off a cliff once the borrowers realized they could not meet the demands of exotic mortgages. The Fed did not see that the rating agencies had a gross conflict of interest (they were being paid by the institutions they rated), and that their ratings were phony as a three dollar bill. And the Fed should be the man regulator of financial institutions?
By dbauder 5 p.m., Nov 2, 2009 > Report it
Well said.
By SurfPuppy619 5:52 p.m., Nov 2, 2009 > Report it
Response to post #5: I could have made the list longer. Best, Don Bauder
By dbauder 8:10 p.m., Nov 2, 2009 > Report it
The treasury can only print more money if China is willing to buy more-if China stops buying we have to stop the deficit spending.
========
The Treasury is not dependent on China to fund deficit spending. The Federal Reserve is funding the government deficit primarliy by printing money, and using this money to buy Treasury bonds which the Federal Reserve owns. The fact is, this type of deficit spending can continue almost indefinitely.
By Burwell 8:28 p.m., Nov 2, 2009 > Report it
Response to post #7: You will get a lot of arguments about how long the current level of deficit spending can go on. There is no doubt that a federal deficit has become a permanent part of government finance (in foreign countries, too), but at some point does the game come to an inglorious end? Indeed, does chronic dollar weakness suggest that it is ending now? Hard to say. We are the world's central currency. Will we remain so? Good question. Best, Don Bauder
By dbauder 6:35 a.m., Nov 3, 2009 > Report it