The mother of all carry trades

With the US Federal Reserve’s surprise shift to Quantitative Easing today (surprise in terms of timing), the prospects look even better for anyone brave enough to do massive borrowing in dollars and invest in higher yielding assets elsewhere.  For example, the government debt of Europe’s more fragile sovereign borrowers, like Ireland, Greece, and Italy.  The Fed’s actions today signal another sustained push down on borrowing costs, and, critically, that there will be dollar depreciation (as already happened today once the significance of the QE announcement became clear).  When Irish PM Brian Cowen told Barack Obama “It is my firm conviction that America’s leadership – your leadership – will be at the heart of the global renaissance “, did he have in mind that the US might be the backdoor lender to his fiscally embarrassed administration?

4 thoughts on “The mother of all carry trades

  1. Hi there,

    I think you have put your finger right on the button here. While I am completely supportive of Bernanke’s action here (all the alternatives are worse), I think this is the Achilles heal, not insofar as European carry goes, since that is comparatively tame, but emerging market carry, when things take off one day or another.

    I am convinced that the recovery, when it finally does come, will start in places like Brazil and India, and there is very juicy carry to be had there once risk sentiment settles (and of course there can be no recovery without an increase in risk sentiment.

    So the danger is that Bernanke can end up (like the Swiss and the Japanese before him) simply pumping money into attractive emerging market expansions, while the price level and consumption remain firmly nailed to the floor back home. So, the car can take off at high speed up the motorway, with poor Ben running frantically alongside screaming “but I’ve got my hand jammed in the door”!

  2. I believe secondary market purchases but I am not sure.

    The primary purchases might sound too much like “printing money”.

  3. Hi,

    “The primary purchases might sound too much like “printing money”.”

    Yep, well this is what we want I think, at least this is what those of us who want to steer expectations in an inflationary direction want, the psychological impact. They are near, but they are not quite there yet.

    You have, I imagine, seen the latest Krugman piece on his blog. Qualitative easing is what it is, that is, it is fiscal and not simply monetary.

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