Carry trade: Those in charge for the last recession are at it again

Classical Greek tragedies culminated always in a disaster. The authors’ mindsets were the determining factors. Similarly, at the present time, our political and financial leaders appear to be preordained to steer us again into a disaster.

If we believe that the current recession is ending, a questionable assumption at best, it still is appropriate to consider what will happen next. Most likely, there will be a new bubble in assets, stocks, bonds, commodities and house prices. That is the result of interest rates standing at only 0.25 per cent and a U.S. dollar declining relative to almost all other currencies.

Nowadays stock markets are buoyant, having risen to heights totally unrealistic given economic fundamentals. The cheap U.S. dollar and low borrowing costs are the culprits.

Following the recent financial meltdown, financial leaders set interest rates at absurdly low levels, and they have been maintained there. This will entail the next financial crisis, as surely as night follows day.

Investors and speculators, therefore, have been able to borrow the devalued U.S. dollar and pay only zero-like interest rates. Then, with those temporarily acquired funds, for which the interest rate is only 0.25 per cent, they can place those funds in the safest, risk-free, short-term U.S. Treasuries, that pay 3.25 per cent, thus guaranteeing a three per cent, totally secure return. This is known as “carry trade.”

The more speculatively inclined, reaching for more than a secure three per cent return, have bought equities, corporate bonds, commodities such as gold and/or packages of risky mortgages, driving up the price of those assets into a bubble-like realm, as occurred two or three years ago. The price of those assets bears little relationship to economic growth prospects.

All this goes a long way to explain the resurgence in the stock market and real estate. Furthermore, banks and brokerage firms are also engaging in this manoeuvre. It is no surprise then that some institutions are reporting huge profits from what they euphemistically call their trading accounts.

Instead of the usual banking functions, numbers are engaging in this kind of nonsense.

What has happened is that our paper-asset economy once again will be driven to another financial collapse as tensions and distortions mount.

What is so startling, however, is this is exactly what was taking place just a few years ago and brought about the devastating “Great Recession.” Apparently, no lessons have been learned.

The same people responsible for this mess over the preceding couple of years, now are in charge of our financial policies. Like the authors of the Greek tragedies, their mindset seems set on an old, fixed course.

What a pity.

Bruce Whitestone

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