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.