The Government Approved Carry Trade and Free Money

By Greg Hunter’s USAWatchdog.com  

Mixed in with all the happy talk about better than expected jobless claims and high productivity numbers was this story.  (CNNMoney.com) – “The Federal Reserve kept its key interest rate near zero once again Wednesday.”   I think this was the biggest story of the week and here’s why.  The Fed gave a signal to Wall Street that free money was going to be available for many months to come.  In a statement, the Fed said the current economic conditions are “… likely to warrant exceptionally low levels of the federal funds rate for an extended period.”  To any Wall Street Banker participating in the “new dollar carry trade” it was an “all clear” signal.

(The simple definition of a carry trade is to borrow money at a low rate ( in this case near zero percent for dollars) and invest it elsewhere at a higher rate of return.  In order for this to be profitable, rates for the borrowed money have to stay stable and low.)

The Fed might as well have said, “Get your free money here and invest it anyway you like for a guaranteed return.”  The Fed’s action is, at the very least, a tacit if not an outright approval of this kind of dollar damaging speculation.  This weakens the currency and can cause prices to rise.    By the Fed saying the phrase “extended period,” as it has said in the past, it is telling speculators that making this trade is going to be a sure thing for a long time.  The dollar carry trade will likely mean billions of dollars of profits to Wall Street banks, which are now acting more like hedge funds than lending institutions.  Welcome back to the casino mentality.

Nouriel Roubini, NYU Economics Professor, says this is the “mother of all carry trades.”  The professor also says, “… But one day this bubble will burst, leading to the biggest co-ordinated asset bust ever…”  You may check out what Dr. Roubini had to say about this recently on CNBC in the video below.  Please keep in mind he gave fair warning about the current financial crisis long before it happened.

We live in a world where reckless speculators are encouraged and rewarded.  It is also a place where savers are disparaged and punished.  Savings is the bedrock of capital formation which is a key component of capitalism.  Look at Warren Buffet.  He just acquired a railroad for more than 30 billion dollars.  He didn’t do that with a good credit rating.  Buffet bought it with cold hard cash!   But who needs that when you have a printing press and zero percent interest rates that are abused by the privileged few.

 

Comments
  1. George

    Greg,
    If I thought that our government had a master plan where they could force up the value of the U$D at will, I’d be OK with this. Being able to drive the U$D up quickly could wipe out the speculators and take a lot of money out the system. However, we, the people of the great country of America, are not governed by the best and the brightest [nor would most of the lemmings…ah, citizens, vote for the best if they were on the ballot because they are not pretty enough or they can’t turn a phrase or lie like the politicians]; we are governed by a group of people whose only concern is their power and money.
    The politicians are allowing this FREE MONEY so Goldman Sachs, BOA, CitiBank and Chase can make easy money knowing they will get their share. When these companies can borrow at ZERO, make a highly LEVERAGED bet [no risk to them as the taxpayer will pay for any mistakes] and turn a tidy profit; why would they make a loan? This exposes as a lie the premise that our leaders bailed out these behemoths so the banks could lend us money. If this was remotely true, would they have allowed Citi to fail? You know Citi; a company that actually lends money so small businesses can carry on commerce.
    It is apparent that Obama and his crew are looking after their Wall Street patrons while Middle America Main Street puts “Out of Business” or “Bankruptcy Liquidation Auction” signs up. If you do not understand or believe this, please read the so called “Stimulus” Bill.
    And what is sad is thinking citizens know what the Whitehouse is doing, even though the mainstream media spins it out of kilter, if they report it at all. Even most of the lemmings know it. The Whitehouse is not deterred by the fact they are destroying the US economy, the U$D and our children’s futures. The Whitehouse and Congress do not care what the little people know or think; the Whitehouse and Congress are pushing through what benefits them and the citizens and country be damned.

    • Greg

      Tunney,
      Well said my friend, Well said!!! Thank you for your well thought out comment!
      Greg

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