Well, shit.

[maradydd]

By way of ernunnos, the dollar is now the currency of choice for carry trades.

[Poll #1482906]

Comments

[xtopher42.livejournal.com]

I haven't had enough coffee yet this morning to wrap my head around new financial concepts, but I plan on researching this in the very near future.

You are not, historically, very alarmist, so it definitely bears further consideration.

[maradydd.livejournal.com]

In carry trades, traders look for a weak currency with low interest to use for transactions in other currencies. For example, Jacques, who has Euros, buys dollars and uses them as an intermediate currency for doing short-term transactions in pounds, because the low interest rate of the dollar means that he's not taking the interest hit for holding onto Euros, and can take advantage of higher interest rates in other currencies. Everyone wins except the Fed (and, by extension, the US economy).

It has to be a currency that other traders will accept, which is why you don't see carry trades happening in, say, Zimbabwe dollars, but basically the IMF has come right out and admitted that the dollar is now the weakest major currency in the world.

[madbard.livejournal.com]

I don't even know what a carry trade is.

[maradydd.livejournal.com]

I should write up a post explaining this in more detail, but the Garrison Keillor version is that these days, the US is that guy who, when you ask to borrow twenty bucks, says "Oh, sure, pay me back whenever" and doesn't care about interest.

[affabletoaster.livejournal.com]

Tickybox means "I didn't care until about fifteen seconds ago. Now I'm a bit worried. I'll go Google now."

[maradydd.livejournal.com]

In particular, you may wish to look for articles about the yen carry trade, which started back in the '90s when Japan's interest rate was negative (in effect, they were paying people to do business in yen) and recently came to a close when Japan raised its interest rates again. You particularly want to look at the effects on Japan's economy when the yen carry trade ended.

[praecorloth.livejournal.com]

I don't know why this matters, but I'm concerned wherever the dollar shows up.

[maradydd.livejournal.com]

A lot of forex transactions, among other places.

[feonixrift.livejournal.com]

"oops"

[barbarienne.livejournal.com]

I know I should care, but I just don't have it in me to do so. This falls into the same category as natural disasters. I don't have any ability to stop it from happening, which makes my only options (a) leave the place where it will happen, and/or (b) hunker down and prepare.

Much as I might like to do (a), that is unfeasible at this time, and for the foreseeable future. I'm doing (b) the best I can, but living in a bunker mentality is, imho, far worse than sucking up the shit when it goes down.

Shorter version of the above: "It's always something. If it's not one thing, it's another."

[maradydd.livejournal.com]

Sure, there's nothing any of us can do to strengthen the dollar or convince the Fed to raise interest rates on our own, but IMO it's better to know about these things and, as you pointed out, use them to direct one's investment strategies. The absolute worst thing a person can do at this point is sit on dollars. If you're investing at a decent rate of return, that's a good start; note, however, that better rates of return are likely to be found outside the US.

"If you can't beat 'em, join 'em" is actually a viable strategy if you have the time and spare cash to get into forex. I'm thinking about sleeping less and running some simulations to see whether the strategies I've used for options (all with play money, alas) work for forex. Probably won't need the data-mining component, since the forex space is smaller, but I bet the math works the same.

[barbarienne.livejournal.com]

::blinks in confusion:: (Apparently my reading-comprehension circuits are still cold this morning.)

Does that translate into "invest in foreign companies rather than USAian"?

I'm sitting on a modest pile of dollars at the moment because I hope to turn them into a house-purchase in the next 6-to-12 months (sooner if at all possible). I'm reluctant to release those into a market currently teetering in wild fluxes.

My 401(k) and 403(b) accounts are heavily stock-invested, about 40% in foreign stocks.

Idle question considers the wisdom of switching to "drive"

[vatine]

So, at the moment, it's the carry trade that keeps the dollar exchange rate up (in that the carry trade keeps dollars out of FOREX)? The idle question has a second component, if the carry trade stops, what are the chances of a dollar crash before other mechanisms can step in and prop the dollar exchange rate up?

Would setting the standard price of oil in Euros, British Pounds or Swiss Francs change this substantially?

I initially wrote the standard prince of oil, but it was not amusing enough to leave in, although mentioning in an aside seems to have been done.

Re: Idle question considers the wisdom of switching to "drive"

[maradydd.livejournal.com]

"Out of FOREX" is kind of a weird way of putting it, since the whole point of a dollar carry trade is doing your FOREX transactions in dollars instead of euros or NZD or whatever (because in FOREX you're going to have some currency sitting idle for brief periods of time, and you want that to be a low-interest currency). The dollar's actually fallen against most major currencies in the wake of this IMF announcement, but I think you're right that using it as a carry instrument is keeping it from falling farther -- if people are going to buy dollars to use them as a common currency for FOREX transactions, they want those dollars to maintain some buying power from one day to the next.

I don't know if anything can stop a dollar crash when the carry trade ends. That's usually the end state of a carry trade unless something else has happened to prop up the real assets of the issuing country -- domestic asset valuations go straight to hell. (Japan is a valuable case study for this, as their carry trade ended during the real estate bubble.)

I think all that setting the standard price of oil in other, more stable currencies would do is get rid of the illusion that the real price of oil is stable, and none of the major players want that.

Re: Idle question considers the wisdom of switching to "drive"

[vatine]

Well, being part of the carry trade would, sort-of (if I've read and reasoned correctly) that it tends more towards sitting around for MUCH longer than normal FOREX trades.

I have a vague recollection of OPEC discussing setting their barrel prices in Euros, a year or two ago, don't know if anything ever happened about it.

[jrtom.livejournal.com]

Disclaimer: this is the first time I've seen the phrase "carry trade", i.e., I don't know anything about this subject.

That said: the wiki you pointed to indicated that the dollar (and the yen) has been big in this kind of transaction since the 90s. What, exactly, has changed? Not so much yen, more dollar, or something more qualitative?

[feonixrift.livejournal.com]

If I'm reading right, it's largely about the direction of the trade. Acquiring (low interest) yen to fund (higher return) investments in countries like the USA was the Big Thing for a while. Now, unless I misread, they're talking about acquiring (low interest) USA dollars to fund (higher return) non-USA investments.

[maradydd.livejournal.com]

feonixrift got it in one.

[barbarienne.livejournal.com]

I got all of four questions wrong on my SATs, but they were all in the reading comprehension section on a passage about economics. Which is to say, I really need the "For Dummies" translation here.

So, questions from the ignorant:

Is this situation accurately summed up as, "People are borrowing $ from the USA at interest rate X, and then investing this $ in things that give return of rate Y, where Y > X"?

Which leads me to the follow-up question: Why isn't the USA investing in those things directly, and getting back returns of Y?

I think if I can understand the follow-up question here, it might help me understand why this is a big problem.

[xthread.livejournal.com]

Well... it's been looking for a while like Bush and the Bernanke Fed had successfully smashed the Dollar as the Global Reserve Currency. If we've become the primary carry-trade currency, I'm not sure that that's a bad thing. It seems like it would just extend the several percent of interest-free loan we've been getting from the rest of the first world.

[maradydd.livejournal.com]

I don't follow your logic here. The dollar is now in the position that the yen was in for most of the 1990s, back when the Japanese were merrily extending interest-negative loans to anyone who came calling. The only major difference is that the dollar still carries a positive, though small, interest rate.

[xthread.livejournal.com]

Let me start at the top, then.
The USD has been the global reserve currency since Breton Woods collapsed in '72.
The effect of this has been that the US got an ongoing interest-free loan from the rest of the planet to the tune of 2% of US GDP or some such (because people buy dollars to hold as reserves, with no intention of actually circulating them, ever). Once the USD stops being the reserve currency, that interest-free loan goes away, and US interest rates must rise commensurately to adjust. So, until very recently, our domestic cost of borrowing was below what it would have otherwise needed to be.
All this started to change in the last few years, as the Eurozone got its act more together, and as the Euro started to become a more viable reserve currency. Worse yet, with the US Fed making rate decisions based more on US domestic issues, and less on the position of the USD as global reserve currency, foreign central banks have been looking to get out of the business of holding dollar-denominated reserves. They've been motivated to do this for several, fundamentally separate reasons - first, if US domestic politics require that the USD be allowed to fall to prop up US exports, those country's foreign purchasing power will fall through no fault of their own; second, if they need to move their interest rates dramatically out of step with the US, their hands are tied by the relative values of the currencies, and no one likes having to live more austerely because some third party is having a bad day. China has been lamenting this loudly in public for the last several years, because they're badly on the wrong end of If someone owes you several billion dollars, and can't pay, you have a problem.
The upshot of all that is that it's been looking a lot like Bush and Bernanke managed to crash the USD out of being the global reserve currency. We'd been expecting this to happen sometime in the 2020s, anyway, as China came fully online, but having it happen one to two decades sooner is... irksome. And makes me want to throw sharp implements at our erstwhile executives. More than I did already.
However, if the USD has become the preferred carry-trade currency, and that creates an effective floor on the price of USD that is higher than it otherwise would be, I'm not sure that that's a bad thing. Yes, we will still have to deal with what happens when that floor goes away - but, fundamentally, that's a question of will we have a more rational economy, as compared to the rest of the world, or a less rational one, as that day of reckoning rolls around. Right now we're clearly in a run up to looking like a much more European economy, as we have more people who know how to make money doing things that we don't need as much of any more, and not enough people who know how to do the things that we don't have enough people doing.

_{Side observation: Days of Reckoning never actually roll around; when they come to pass, it's with a great thundering of elephant feet and crashing markets, as everyone simultaneously realizes that all of the growth for the last six months to a decade was entirely illusory, and the market retreats simultaneously while everyone regroups, until everyone concludes, nearly as simultaneously, that really things have been undervalued for the last six months... and so on.}

[drcuriosity]

If I understand this correctly, I'm pretty sure the NZ Dollar has been used as a carry trade currency in recent years. Good for a few traders, but the currency speculation certainly didn't help our economy.

Of course, the bitter irony is that our newly-elected Prime Minister, who many people flocked to hoping for tax cuts and fixing the recession we were headed into... is a former forex banker. In fact, used to work for Merill Lynch as their head foreign exchange guy and was a member of the Foreign Exchange Committee for the Federal Reserve Bank of New York. Was rumoured to be making several million a year before he decided he wanted a political career.

Since coming into power, he's told us the country can't afford tax cuts, has dithered on job creation and economic stimulus, and seems intent on cutting down services and selling off assets that the last government bought back, in the hopes of running an "efficient" government shored up by private, largely foreign-owned corporate players. Somehow I don't trust someone who got the nickname "the smiling assassin" from other investment bankers to take good care of my country.

[joedecker.livejournal.com]

I don't know enough about the subject to have a valid opinion on how scary vs. alarmist that other post is, but I do know one thing.

It'd sure explain why one of the smartest financial guys on the planet just paid up to try and purchase a railroad. (Berkshire Hathaway/Warren Buffett are purchasing BNSF.) For what commerce does get moved around the US high fuel prices shift transport from truck to rail, so it's a positive investment, but it is *equally* an investment to be dumping thirty-some billion dollars in USD assets at the same time, it appears.

[siliconshaman.livejournal.com]

I agreed with everything about that, except for the part where the blame was laid on President Obama... this has been a lot longer coming than he's been in office [try about 10 years] and in all honesty, there's damn all he could do about once he was in office.

At moment, we're at the point where we've worked out where the ominous ticking noise is coming from, just about the second or two before it stops.

Am I worried about it? ...yes and no. Yes, insofar as the economy is about to go bye-bye..and no, because I'm kinda braced for impact, just not as well as I'd like.

[viesti.livejournal.com]

I hadn't heard the term before today, since I'm very cynical when it comes to the financial sector/industry and try to avoid anything having to do with it as a result. This is pretty concerning, though.

[maradydd.livejournal.com]

Most people who aren't into forex haven't heard of carry trades. I'm not actually into forex myself, but I learned about them while crashing on the couch of a friend whose boyfriend is an international finance junkie.

They're not something you learn about in high school econ, though they really should be, since they make up a pretty substantial amount of the foreign exchange market.

[aryll.livejournal.com]

That's assuming your high school even teaches economics. Mine didn't and I can't name anyone I know that has ever had an economics class, sadly.

[roadknight.livejournal.com]

When you're setting people up to only be qualified to work at Burger King, there's no reason they need to learn economics.

[roadknight.livejournal.com]

So the question is really whether it's better to get into Forex or oil now...maybe a bit of both ?

Not a surprise

[bc0203.livejournal.com]

This is to be expected when the Federal Reserve lowers the cost of money to near-nothing and then starts printing dollars like gangbusters. The dollar becomes cheap relative to other currencies, and therefore becomes the currency of choice for carry-trades.

I'm much more concerned that the Fed is encouraging banks via regulation to bolster their balance sheets with treasury bills, giving the government yet another place to park their debt. What happens when/if the government defaults on its debt? Doesn't this just compound the problem, creating a house of cards if we have a banking failure?

[rjgrady.livejournal.com]

I think the bottom line is that we are subsidizing the lending of everyone else in the world. It may not be entirely a bad thing, but it's worth examining.

[madeofmeat.livejournal.com]

I feel kind of like I did when the anthrax scare happened. On the edge of the seat, vaguely excited and even gleeful. "This sure is better than nothing happening!"

Once I buy a house, I'll dislike interesting times. Until then, bring 'em on.

I didn't answer your poll because I didn't know if you were talking about before or after I followed links and read comments. I know now, but only because you got all explanatory.