US interest rates -- new carry trade??

[grapejelly]

Are US interest rates falling so low in order to stimulate huge borrowing at 2% and reinvesting overseas at 5% or 6%?

Would this benefit the FIRE economy?

[c1ue]

It could, but the question is how currency depreciation plays into it.

With Japan, you have a government geared toward keeping the yen weaker than it should be. This significantly reduces the risk in the underlying Japanese economy otherwise possibly gearing up and making the yen stronger - thus killing your margin.

The US currency depreciation should theoretically make a carry trade safer - however - both the outside economies and the dollar itself are unstable enough that there is a lot of currency risk.

Since you're only gaining 3% or 4% a year best case before fees, even without leverage you can get hurt very badly by short term 5% or 10% spikes in dollar vs. your target currency.

[Starving Steve]

It could, but the question is how currency depreciation plays into it.

With Japan, you have a government geared toward keeping the yen weaker than it should be. This significantly reduces the risk in the underlying Japanese economy otherwise possibly gearing up and making the yen stronger - thus killing your margin.

The US currency depreciation should theoretically make a carry trade safer - however - both the outside economies and the dollar itself are unstable enough that there is a lot of currency risk.

Since you're only gaining 3% or 4% a year best case before fees, even without leverage you can get hurt very badly by short term 5% or 10% spikes in dollar vs. your target currency.

The fees, commissions, and the currency conversion spreads are the kicker. This makes carry-trade all but impossible for the Joe Six-packs like me. It is really an insider's game; you have to be a banker to do it.

And this sounds familiar, doesn't it? One has to be an insider in the banks to get away with murder like the carry-trade. For the insiders, it is a no-brainer because they can profit without all of the outrageous costs and the baggage that is thrown at the public. (They don't want the public in this game.)

Just think of currency reporting requirements that the public in the U.S. is burdened with, for example. Every time you send a cheque or wire money into or out of the U.S, you have to report it to the U.S. Treasury or to U.S. Customs. But you can be sure that the banks and brokerage companies don't do this reporting EXCEPT to report on their clients. The Joe Six-Packs get turned into the govn't, but the bankers and brokers do NOT. ( Lovely, isn't it? And you ask why I hate the Republicans? )

And the other issue is why are we being FORCED to take risks to-day on our savings in order to get a measily 3% or 4% rate of return on our capital? And this is a scandel, i.e, being forced to take risks and look for schemes like a carry-trade venture just to stay even with inflation.

The bottom-line is that it is time for the Federal Reserve Bank, and the world's other central banks, to be abolished because they demonstably serve no useful purpose--- except to create corruption, misery, and havoc in the world's economy.

What purpose is served by lowering interest rates to 1 or 2% and leaving them there for months or years? And in the most egregous case, what purpose has the Bank of Japan served in leaving its interest rates at 1/2% for decades?

Whatever kind of economics is being taught in the world's universities to-day, it is a lie.

[c1ue]

Steve,

The real reasons why the investment banks can get away with are pretty straightforward:

1) They're not betting their own money.

2) Related to above, they employ both direct leverage and 'shadow' leverage - shadow leverage being the effective leverage when you're borrowing against your credit rating as opposed to your assets, vs. direct leverage of derivatives et al.

The fees are not as much of a factor as you might think; while it does make entry/exit much cheaper, on the other hand we're not talking about trading positions but taking advantage of an interest rate differential.

[Starving Steve]

It is a NO-BRAINER to take U.S. dollars now and to buy New Zealand's bonds and take a 7.5% APY. But the problem is the public is locked-out of doing this.

And then try to get into this action--- SELLING DOLLARS AND BUYING KIWIS--- and you get the outrageous bank spreads thrown at you on buying NZ dollars and then the barrage of reporting requirements as if you may be a money launderer.

Then you have to be a so-called "registered buyer" of NZ bonds in NZ, whatever that means? Then some bonds require residency in NZ, which seems to rub me the wrong way because I am a free-trade type of liberal, NOT a nationalist of any country.

Somehow, I do recall a similar situation back in the early 1980s when I asked my broker to allow me to please do the NO-BRAINER commodities play: to allow me to sell Mexican pesos short and do it with my own savings. And my broker said to me that Mexican pesos and Brazilian cruzeros and Argentine pesos were NOT on the commodities exchange in Chicago, and they would be too difficult for the public to sell.

You see, when you turn 60, you get the bitter experience of how rigged these commodities markets are. The no-brainer trades are not allowed, and a gammit of losers (for which they take outrageous commissions and spreads ) are what you are roped into.

Oh, and how I do remember the sugar that I bought at 4cents per pound, and it went DOWN! Then came the 3cent sugar, and it went down. Then the $5 silver, and it went down. Then the record low wheat, and it went down--- to a new record low! And one couldn't take delivery because you needed a vacant grain elevator, etc.

Oh well, "Sixty isn't old, IF YOU ARE A TREE." ( I wear that button on my hat, and the kids in the public schools in California just love it. ) :)