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Cheap dollars are sowing the seeds of the next world crisis
After years of selling cheap goods to debt-fuelled Western consumers, China now has $2 trillion dollars of foreign exchange reserves. That's 2,000 billion – a reserve haul no less 25 times bigger than that of the UK.
By Liam Halligan
Published: 6:05PM BST 12 Sep 2009
In a world of systemic instability, reserves mean power. Reserves mean you can defend your currency, stabilise your banking system and boost your economy without resorting to yet more borrowing – or, worse still, the printing press.
More than half of China's reserves are denominated in dollars. So when the dollar falls, China loses serious money. When you're talking about a dollar-reserve number involving 12 zeros, even a modest weakening of the greenback sees China's wealth takes a mighty hit.
In recent years, America has run massive budget and trade deficits, both of which put downward pressure on the dollar – so devaluing China's reserves. Beijing has remained tight-lipped, worried less about diplomatic niceties than the financial implications of voicing its concerns. If the markets thought China would buy less dollar-denominated debt going forward, the US currency would weaken further, compounding Beijing's wealth-loss.
American leaders have relied on this Catch-22 for some time, guffawing that China is in so deep it has no choice but to carry on "sucking-up" US debt. But Beijing's Communist hierarchy is now so worried about America's wildly expansionary monetary policy that it is speaking out, despite the damage that does to the value of China's reserves.
Last weekend, Cheng Siwei, a leading Chinese policy maker, said that his country's leaders were "dismayed" by America's recourse to quantitative easing. "If they keep printing money to buy bonds, it will lead to inflation," he said. "So we'll diversify incremental reserves into euros, yen and other currencies".
This is hugely significant. China is now more worried about America inflating away its debts than about those debts being exposed to currency risk. Economists at Western banks making money from QE still say deflation is more likely than inflation. As this column has long argued, they are talking self-serving tosh.
The entire non-Western world rightly sees serious inflationary pressures down the track in the US, UK and other nations where political cowardice has resulted in irresponsible money printing.
Following Mr Cheng's comments, the dollar fell throughout last week, hitting a 12-month low against the euro. As the dollar's "safe haven" status was questioned, gold surged above $1,000 an ounce to an 18-month high.
The US currency could well keep falling. America's trade deficit grew in July at the fastest rate in almost a decade. Imports exceeded exports by $32bn last month – a gap 16pc wider than the month before. One reason was that as oil prices strengthened, so did the cost of US crude imports.
Oil touched $72 a barrel last week. If the greenback weakens further, prices will keep going up. That's because crude is priced in dollars and global investors will increasingly use commodities as an anti-inflation hedge.
These forces could combine to send the dollar into freefall. US inflation would then soar and interest rates would have to be jacked up. Even if a fast-collapsing dollar is avoided, Fed rates may have to rise quickly if China is serious about dollar-divesting and the US has to sell its debt elsewhere. Under both scenarios, the world's largest economy could get caught in the stagflation trap – recession and high inflation.
Beijing doesn't want the US to stagnate. China has too much to lose. But even if China and US work together to avoid a meltdown, the currency markets could provide one anyway.
The dollar is now being used as a "carry" currency. Traders are using low Fed rates to take out cheap dollar loans, then converting the money into currencies generating higher yields.
"Carrying" credit in this way is currently the source of huge gains. No one knows the true scale, but the world has, of course, been flooded with cheap dollars.
This presents serious systemic danger. A dollar weighed down by Chinese divestment, then suppressed further by carry-trading, could easily spring back. Those who had borrowed in dollars would owe more, while their dollar-funded investments would be worth less. This "unwinding" could send financial shock around the globe.
This is what happened in 1998, when yen carry-trades went wrong, causing the collapse of Long-Term Capital Management and sparking a global slowdown.
So even if the Western world manages to fix its banking system, the Fed's money printing could well be stoking up the next financial crisis. The dollar carry-trade.
======================================================================
Grappig zoiets voorspelde ik al een jaar geleden.... toen de dollar 1,60 stond.
Niet ondenkbaar dat de volgende crisis een valutacrisis gaat worden.
We will see, er zit nog veel pijn in de hypotheekmarkt van de US. Voorlopig zullen ze blijven rondrennen met de reddingboei.
After years of selling cheap goods to debt-fuelled Western consumers, China now has $2 trillion dollars of foreign exchange reserves. That's 2,000 billion – a reserve haul no less 25 times bigger than that of the UK.
By Liam Halligan
Published: 6:05PM BST 12 Sep 2009
In a world of systemic instability, reserves mean power. Reserves mean you can defend your currency, stabilise your banking system and boost your economy without resorting to yet more borrowing – or, worse still, the printing press.
More than half of China's reserves are denominated in dollars. So when the dollar falls, China loses serious money. When you're talking about a dollar-reserve number involving 12 zeros, even a modest weakening of the greenback sees China's wealth takes a mighty hit.
In recent years, America has run massive budget and trade deficits, both of which put downward pressure on the dollar – so devaluing China's reserves. Beijing has remained tight-lipped, worried less about diplomatic niceties than the financial implications of voicing its concerns. If the markets thought China would buy less dollar-denominated debt going forward, the US currency would weaken further, compounding Beijing's wealth-loss.
American leaders have relied on this Catch-22 for some time, guffawing that China is in so deep it has no choice but to carry on "sucking-up" US debt. But Beijing's Communist hierarchy is now so worried about America's wildly expansionary monetary policy that it is speaking out, despite the damage that does to the value of China's reserves.
Last weekend, Cheng Siwei, a leading Chinese policy maker, said that his country's leaders were "dismayed" by America's recourse to quantitative easing. "If they keep printing money to buy bonds, it will lead to inflation," he said. "So we'll diversify incremental reserves into euros, yen and other currencies".
This is hugely significant. China is now more worried about America inflating away its debts than about those debts being exposed to currency risk. Economists at Western banks making money from QE still say deflation is more likely than inflation. As this column has long argued, they are talking self-serving tosh.
The entire non-Western world rightly sees serious inflationary pressures down the track in the US, UK and other nations where political cowardice has resulted in irresponsible money printing.
Following Mr Cheng's comments, the dollar fell throughout last week, hitting a 12-month low against the euro. As the dollar's "safe haven" status was questioned, gold surged above $1,000 an ounce to an 18-month high.
The US currency could well keep falling. America's trade deficit grew in July at the fastest rate in almost a decade. Imports exceeded exports by $32bn last month – a gap 16pc wider than the month before. One reason was that as oil prices strengthened, so did the cost of US crude imports.
Oil touched $72 a barrel last week. If the greenback weakens further, prices will keep going up. That's because crude is priced in dollars and global investors will increasingly use commodities as an anti-inflation hedge.
These forces could combine to send the dollar into freefall. US inflation would then soar and interest rates would have to be jacked up. Even if a fast-collapsing dollar is avoided, Fed rates may have to rise quickly if China is serious about dollar-divesting and the US has to sell its debt elsewhere. Under both scenarios, the world's largest economy could get caught in the stagflation trap – recession and high inflation.
Beijing doesn't want the US to stagnate. China has too much to lose. But even if China and US work together to avoid a meltdown, the currency markets could provide one anyway.
The dollar is now being used as a "carry" currency. Traders are using low Fed rates to take out cheap dollar loans, then converting the money into currencies generating higher yields.
"Carrying" credit in this way is currently the source of huge gains. No one knows the true scale, but the world has, of course, been flooded with cheap dollars.
This presents serious systemic danger. A dollar weighed down by Chinese divestment, then suppressed further by carry-trading, could easily spring back. Those who had borrowed in dollars would owe more, while their dollar-funded investments would be worth less. This "unwinding" could send financial shock around the globe.
This is what happened in 1998, when yen carry-trades went wrong, causing the collapse of Long-Term Capital Management and sparking a global slowdown.
So even if the Western world manages to fix its banking system, the Fed's money printing could well be stoking up the next financial crisis. The dollar carry-trade.
======================================================================
Grappig zoiets voorspelde ik al een jaar geleden.... toen de dollar 1,60 stond.
Niet ondenkbaar dat de volgende crisis een valutacrisis gaat worden.
We will see, er zit nog veel pijn in de hypotheekmarkt van de US. Voorlopig zullen ze blijven rondrennen met de reddingboei.
Tja, die communisten hadden beter wat meer voor zichzelf kunnen produceren: in Yankee dollars kun je niet wonen, kun je niet in rijden of van eten. Maar ja, saamhorigheid en kritiekloos doen wat de leiders willen (dom en arm blijven) heeft ook z'n charme.
[ Bericht 14% gewijzigd door Stoomhamer op 14-09-2009 06:42:47 ]
[ Bericht 14% gewijzigd door Stoomhamer op 14-09-2009 06:42:47 ]
Roubini ziet het ook.
We Are in the Mother of All Carry Trades: Roubini
Most investors follow the same strategy of borrowing in dollars and investing in assets across the world, and there may be a crash in global assets when the greenback's downward trend reverses, Nouriel Roubini, Chairman, RGE Monitor, told CNBC Monday.
"There is a wall of liquidity…chasing assets," Roubini told "Squawk Box."
"Now we are in the mother of all carry trades," he added.
Asset prices have been inflated by the cheap funds but the dollar cannot keep falling forever, and there could be "a market crash all over the world" when the currency's course is reversed.
But this will not happen too soon as the real economy is still very weak and the Federal Reserve is likely to keep interest rates close to 0 percent for longer, Roubini added.
"The reality is that the dollar is the funding currency of the carry trades. Because of that the dollar weakness is going to continue for a while."
He reiterated his view that the recovery is likely to be anaemic, forecasting growth of between 1 percent and 2 percent for the US in the next two years compared with the country's potential for 3 percent annual growth.
Japan and Europe are likely to grow by less than 1 percent, he said.
"The (stock) markets are pricing in a V-shaped recovery," Roubini said. "If the data surprise on the downside then there is going to be a significant correction."
The price of oil may also be among the assets that will fall.
"It seems to me that this rally in oil prices is way ahead of the economy," Roubini said.
More Trouble for Banks
More losses may be ahead for banks, as the residential property sector fell 30 percent and the commercial property sector is 40 percent down in the crisis, he added.
These losses have yet to be recognized both by big financial institutions and by regional banks, according to Roubini.
"Once they are recognised they will be additional losses for the banking system," he said.
Breaking up banks to avoid systemic risk when they fail may be the correct way to deal with the problem of the economy's vulnerability in relation to the financial sector.
"Why don't we go to a system where they're not too big to fail to begin with?"
Now the problem of banks being too big to fail "is even bigger than before and we've done nothing to resolve it," Roubini said, listing the wave of bank mergers caused by the financial crisis.
Room for Monetary Policy Mistake
The price of gold may continue rising but it is not likely to hit $1,500 as gold bulls predict, he said.
There are only two scenarios in which gold would hit that price, one would be world inflation, which is not likely to happen in next 2 years, and the other the risk of a near depression, which has been averted, Roubini said.
He said he was still worried about the possibility of monetary policy mistakes.
"I think there is room for a policy mistake because damned if you do, damned if you don't."
"It's a very narrow path… to lead us out of this mess without making a policy mistake. And I worry about policy mistakes."
We Are in the Mother of All Carry Trades: Roubini
Most investors follow the same strategy of borrowing in dollars and investing in assets across the world, and there may be a crash in global assets when the greenback's downward trend reverses, Nouriel Roubini, Chairman, RGE Monitor, told CNBC Monday.
"There is a wall of liquidity…chasing assets," Roubini told "Squawk Box."
"Now we are in the mother of all carry trades," he added.
Asset prices have been inflated by the cheap funds but the dollar cannot keep falling forever, and there could be "a market crash all over the world" when the currency's course is reversed.
But this will not happen too soon as the real economy is still very weak and the Federal Reserve is likely to keep interest rates close to 0 percent for longer, Roubini added.
"The reality is that the dollar is the funding currency of the carry trades. Because of that the dollar weakness is going to continue for a while."
He reiterated his view that the recovery is likely to be anaemic, forecasting growth of between 1 percent and 2 percent for the US in the next two years compared with the country's potential for 3 percent annual growth.
Japan and Europe are likely to grow by less than 1 percent, he said.
"The (stock) markets are pricing in a V-shaped recovery," Roubini said. "If the data surprise on the downside then there is going to be a significant correction."
The price of oil may also be among the assets that will fall.
"It seems to me that this rally in oil prices is way ahead of the economy," Roubini said.
More Trouble for Banks
More losses may be ahead for banks, as the residential property sector fell 30 percent and the commercial property sector is 40 percent down in the crisis, he added.
These losses have yet to be recognized both by big financial institutions and by regional banks, according to Roubini.
"Once they are recognised they will be additional losses for the banking system," he said.
Breaking up banks to avoid systemic risk when they fail may be the correct way to deal with the problem of the economy's vulnerability in relation to the financial sector.
"Why don't we go to a system where they're not too big to fail to begin with?"
Now the problem of banks being too big to fail "is even bigger than before and we've done nothing to resolve it," Roubini said, listing the wave of bank mergers caused by the financial crisis.
Room for Monetary Policy Mistake
The price of gold may continue rising but it is not likely to hit $1,500 as gold bulls predict, he said.
There are only two scenarios in which gold would hit that price, one would be world inflation, which is not likely to happen in next 2 years, and the other the risk of a near depression, which has been averted, Roubini said.
He said he was still worried about the possibility of monetary policy mistakes.
"I think there is room for a policy mistake because damned if you do, damned if you don't."
"It's a very narrow path… to lead us out of this mess without making a policy mistake. And I worry about policy mistakes."
http://www.cnbc.com/id/15840232?video=1318568800&play=1
The mother of all carry trades faces an inevitable bust, Nouriel Roubini, chairman of RGEMonitor.com, told CNBC.
timeframe (between 6 months and a year)
The mother of all carry trades faces an inevitable bust, Nouriel Roubini, chairman of RGEMonitor.com, told CNBC.
timeframe (between 6 months and a year)
quote:Carry trade: een gevaarlijk spelletje
De Amerikaanse centrale bank handhaaft vooralsnog de rente op het huidige historisch lage niveau. Voorlopig valt dus nog veel geld te verdienen met de zogenoemde dollar carry trade. Maar wat is carry trade precies en wat zijn de risico’s?
Door de zeer lage rente in de Verenigde Staten, is het aantrekkelijk om daar geld te lenen en in een ander land waar de rente hoger is weer te investeren. Dit trucje wordt ook wel carry trade genoemd.
Massaal lenen hedgefondsen geld in het land van de onbegrensde mogelijkheden, om het vervolgens ergens anders weg te zetten.
Slapend rijk
Zolang geld in de VS zo goed als gratis blijft, is het gemakkelijk verdienen met de carry trade. In principe kun je zo slapend rijk worden. Want het verschil tussen de lage Amerikaanse rente en de hoge rente in het land waar je het geld wegzet, bijvoorbeeld Nieuw-Zeeland, steek je in je eigen zak.
Geen wonder dus dat de dollar carry trade heel groot aan het worden is. Exacte getallen zijn niet bekend maar volgens schattingen zou het om duizenden miljarden dollars gaan.
Favoriete bestemmingen
Vooral opkomende economieën zijn een populaire bestemming voor de dollars, volgens Amerika-econoom Philip Marey van de Rabobank.
De rente in Zuid-Afrika is bijvoorbeeld met 7 procent een stuk hoger dan die in de VS. Minder hoog, maar wel gezien als een iets veiligere bestemming voor je geld is Australië. De rente is daar met 3,5 procent nogal altijd relatief hoog. Beide landen zijn hierdoor populair voor partijen die zich bezighouden met carry trade.
Wisselkoersen
Doordat partijen massaal dollars lenen en vervolgens in het buitenland stallen, zorgt de carry trade voor een neerwaartse druk op de waarde van de Amerikaanse munt. Je leent immers in dollars, maar moet die vervolgens weer wisselen in de munt van het land waarin je wilt investeren.
In het land van bestemming wordt de munt juist duurder. Zodoende is de koers van de Australische dollar het afgelopen jaar sterk gestegen.
Dalende dollar
Maar carry trade heeft niet alleen invloed op het land van bestemming en Amerika. De val van de dollar raakt ook andere naties.
Landen die veel reserves in dollars hebben aangelegd, zien de waarde van die reserves in waarde dalen. Bovendien sleept de dollar een hele rits andere valuta mee. Sommige Latijns-Amerikaanse en Aziatische landen hebben hun munt gekoppeld aan de dollar. Een belangrijk voorbeeld hiervan is de Chinese yuan. Het is dan ook niet verrassend dat de dollar onderwerp van gesprek was tijdens het bezoek van de Amerikaanse president Barack Obama aan China, medio november.
Zeepbellen
Carry trade is vooral een erg riskant spelletje. Zolang de rente in de VS laag blijft en de dollar goedkoop, zullen goedkope dollars naar landen met een hogere rente stromen. Door de 'overdosis' aan geld die naar het land met de hoge rente stroomt, zullen daar 'zeepbellen' ontstaan. Aandelen worden overgewaardeerd, maar ook vastgoed kan te veel in waarde stijgen.
De Amerikaanse econoom Nouriel Roubini waarschuwde al voor het ontstaan van zeepbellen door de carry trade. Ook het IMF waarschuwt in een rapport voor het ontstaan van onbalans in de financiele markten door de dollar carry trade.
Hollen naar de uitgang
De zeepbellen die door de carry trade geblazen zijn, zullen vroeg of laat uiteenspatten. Dit kan gebeuren wanneer de rente in de VS verhoogd wordt, en het te duur wordt om dollars te lenen om ergens anders uit te zetten.
Gevolg: speculanten lossen massaal hun schulden in dollars af. Beurzen raken in een vrije val, huizenprijzen imploderen, en ook de munt van landen waar de bubbels zich bevinden, daalt sterk in waarde. Landen waar dollars in tijden van carry trade naar toe gaan, krijgen uiteindelijk een fikse kater van al het geld dat ze overspoelt. Die landen lopen het risico in een diepe economische crisis te komen.
Hoe hard dit de gewone man kan raken, bleek wel toen in 2008 veel IJslanders een hypotheek in Japanse yens hadden afgesloten. De rente in Japan was ontzettend laag en de kroon steeg gestaag in waarde. Helaas kwamen veel van die mensen diep in de problemen toen de waarde van de kroon inklapte en huiseigenaren de maandlasten niet meer op konden brengen.
De waarde van de dollar veert in zo'n situatie op omdat voor het aflossen van de schulden massaal dollars worden gekocht.
Op tijd uitstappen
Voor iedereen die een slaatje wil slaan uit de carry trade is het dus belangrijk om er op tijd weer snel uit te stappen. Dit is echter zeer lastig.
Volgens hoogleraar monetaire economie Casper de Vries is er niet veel aan het plotseling uiteenspatten van zeepbellen door de carry trade te doen. Het is afwachten wanneer de bel barst en dan zorgen dat je geen schulden in dollars hebt.
Waarom zou je in Ijsland je hypotheek op basis van Japanse Yens willen afsluiten (voor eventuele lange termijn)? Dan vraag je toch om problemen? Die spread tussen de 2 rente standen blijft niet continu in stand, en op het moment dat het misgaat zit je echt dik in de shitquote:
Hoe zit het eigenlijk met de grootte van deze carry trade markt?
People once tried to make Chuck Norris toilet paper. He said no because Chuck Norris takes crap from NOBODY!!!!
Megan Fox makes my balls look like vannilla ice cream.
Megan Fox makes my balls look like vannilla ice cream.
Niemand weet exact hoe groot deze is, omdat men geen inzicht heeft in de boeken van andere. Dat het om grote bedragen gaat is wel vrij zeker. de dollar carry trade gaat toch zeker over enkele Triljoenen, aldus analisten. De Yen carry trade is grotendeels ten einde gekomen, omdat de Yen sterker is geworden door de financiele crisis. Voor een groot deel zijn ze overgstapt naar een Dollar carry trade.quote:Op dinsdag 24 november 2009 17:31 schreef sitting_elfling het volgende:
[..]
Waarom zou je in Ijsland je hypotheek op basis van Japanse Yens willen afsluiten (voor eventuele lange termijn)? Dan vraag je toch om problemen? Die spread tussen de 2 rente standen blijft niet continu in stand, en op het moment dat het misgaat zit je echt dik in de shit
Hoe zit het eigenlijk met de grootte van deze carry trade markt?
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