Well, actually they are two words but the meaning I want to explain to you comes into existing by combining the two.
(Currency) Carry trade= The practice of borrowing cheap money from countries where interest rates are low, converting it to another currency and buying high interest assets.
Example= A trader borrows a 1000 yen, converts it to dollars and buys US Government bonds which pay out a 4.5% interest.
This is a great way of making money out of nothing because no actual labour has to be done to make or grow something which you have to sell. You just borrow money do the trade and watch the money roll in. What is even better is that you can leverage it so even if you only leverage it by what used to be normal and prudent banking practices 10:1 you still end up with 45% profit but of course when Alan Greenspan in 2002 told the too big too fail banks that there were no more restrictions and it was OK to leverage to whatever level you felt comfortable with the sky was the limit and there are banks that leverage happily to 60:1 so that is a whopping 270% profit.
So how big is this market? According to Max Keiser in 2007, taking Iceland as an example of the interest high countries just before it went belly up, there were at the time $ 3 TRILLION worth of carry trade transactions made every day.
So it could be argued that this kind of trading is hugely successful and it is….. for the 1% as it creates money out of thin air at an alarming rate devaluing the currency the 99% rely on to be stable in order to keep our purchasing power. That is one problem and it’s a big one.
You see the 1% doesn’t care about the value of money for the rest of us because they can always print more and their income goes up connected to the money supply while ours doesn’t even keep up with the inflation we know about.
This is why apartments in New York now cost a $100 million, paintings $ 60 million and food way more than you can afford.
So you ask is this always going to continue and where can I jump in on the Carry trade?
Well… before you become a currency trader and yes, John Key was involved in this trade he worked as the Global head of Forex at Merrill Lynch and the European head of Bonds and Derivatives, here is something you should be aware off.
Carry trading only works if your source of cheap money stays constant. If the interest rate of your source money goes up you either have less profit or you loose massively.
With 3 trillion and quite possibly trillions more these days in (computerised) Carry trade on a daily basis and with Spanish, Italian and Greek bonds commanding huge interests it is clear to see why the 1% does not want it to stop. Not only that, but with all these trillions leveraged anywhere between 10 to 80 times it is clear to see why the 1% can not afford to stop!
If they did the whole Ponsi scheme would come crashing down around their heads in a fashion unseen ever before in the history of mankind, leaving the Dutch tulip mania and other speculative disasters behind it like a nano sized speck of dust.
In order to keep the profits rolling in the system has to have access to cheap money. It should there for come as no surprise that interest rates such as the LIBOR which is after all the rate at which banks can borrow from each other are being manipulated to almost zero.
What does this mean for us, the 99%?
Here are some of the consequences:
- Our savings do not collect interest meaning we are not rewarded for thrift or living within our means while we are being punished for running up debt because we are charged high interest rates.
- The bonds the speculators buy with their cheap currency carry an interest rate which has to be earned with hard slog in economies where all the earl producing jobs have been outsourced to China.
- We are forced to endure austerity in order for our leaders to keep up the interest they have promised the people who buy the bonds they issue.
- Our Hospitals, Schools, Infrastructure, Resources, Commodities are closed down, privatised and pilfered (bought with money that will be worth nothing in the future)
New Zealand bonds command a whopping 8.42% interest on its June 2012/2017 five year bonds. That is money you and I have to cough up to pay to investors who speculate in the carry trade borrowing money from Japan and the US in order to make money out of nothing.
I for one hope the LIBOR scam explodes and the too-big-too-fails collapse before these are due because to go the path Ireland and Greece are forced to go is not my idea of living life to the fullest.