A Yen for Destruction

The Yen carry trade has been the prop for the bubble, but is a disaster. Cheap Japanese
Yen at zero interest rate is used to buy other currencies and speculate around the world. Now the end is neigh!!! The financial apocalypse is here, unless we get a New Bretton Woods, like Franklin Roosevelt did in the 1940s.

Of course, if we were directing cheap credit to big infrastructure projects to create millions of jobs, that's a whole 'nother story. That's the good stuff.


May 23 - U.S. ECONOMIST WARNS, CLOSE THE YEN CARRY
TRADE BEFORE IT'S TOO LATE. In a surprising editorial in the
{Japan Times}, Thomas Palley of the U.S.-China Economic and
Security Review Commission, calls on Japan to shut down the
"dangerous" yen carry trade before it triggers "global contagion"
upsetting the world financial markets. Most notably, Palley says
it is this carry trade -- and {not} the value of the Chinese
yuan, which is triggering huge trade imbalances with the United
States, and "generating worldwide asset inflation." Palley also
says the carry trade has pressured other Asian countries to
undervalue their currencies, costing jobs and growth elsewhere in
the world.
In late February, economist Lyndon LaRouche warned the yen
carry trade was a burning fuse for a global financial blow-out.
Palley's May 23 warning comes only one day after Asahi Shinbun,
the major Tokyo daily, editorialized on the same danger. But
Asahi Shinbun's editorial attributes the danger to unregulated
hedge funds, which it said are now dominating this carry trade.
Palley blames the low-interest-rate policy of the Bank of Japan
and monetary authorities.
The yen carry trade is a huge, perhaps $700 billion-$1
trillion, engine for worldwide speculations, done with cheap
borrowed yen "carried" to every capital market and speculation in
the world. Palley attacks this trade for threatening to trigger a
general crisis: "the carry trade generates global financial
fragility by creating fundamental -- and dangerous --
mismatches.... Unexpected yen appreciation could cause large
exchange-rate losses.... Such losses, or just the thought of them
have the potential to trigger global contagion."
Adding a number of arguments to the effect that closing the
interest-rate gap between Japan and the rest of the OECD
countries -- i.e., ending the carry trade -- would benefit
Japan's own economy and population, Palley concludes, "Japan
should decisively abandon ultra-low interest rates."