Kasia Burzynska clarifies how to printing money on your own. Printing money isn’t that difficult. Global investors have been carrying it out within the last few years thanks to the marvelous machine called carry trade. Everything comes to the strategy in which a trader borrows a low-yielding money and uses the money to buy higher-yielding one.
Yen carry trade is the best example. When Japan economy confronted the turmoil in the 1990s, the lender of Japan made a decision to maintain for a very long time zero rates of interest policy. Till today the rates are kept suprisingly low – at the moment it is 0.5 percent. On the other hand, the standard rate in Euroland is 4 percent currently, in America 4.75 percent and in New Zealand as much as 8.25 %.
The traders have been eagerly taking benefit of this yield difference. They could borrow 10 000 yen from a Japanese bank or investment company, convert the funds into New Zealand’s re-loan and kiwi it away. The spread of 7.75 percent (i.e. 8.25 % – 0.5 percent) makes up profit. And it can be even bigger whenever we take leverage, that is a popular approach to increasing gain using borrowed money, into consideration. Common leverage factor of 10:1 increases profits to 77.5 percent. But carry would not be that interesting without risk.
And bring trade can be a risky business. First of all the rates of interest can change. The investors got used to surprisingly low rates of interest in Japan and take it for granted. The investors must mind the chance from other sides too. Very often the amount of money from borrowing the yen is invested in places like emerging marketplaces, which are more unpredictable and riskier.
When the economic slowdown comes, the risky property shall lose in value, that may lead to the situation in which investors would want to receive their money back to settle the obligations in yen. This may make the yen rise and even more investors must get back to the yen, deepening the pattern.
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What is even more interesting, no one understands how much capital in carry trade is involved really. 1 trillion (Lenzner, 2007). But theoretically it should not can be found or at least not for long. The carry trade is against financial theory that says the high-yield currency compensates investors for the chance of depreciation.
Similarly the low-yield money must have the tendency to understand. Nevertheless, the yen remains vulnerable. The very activities of traders can be a good description of why it happens. They sell yen and buy other currencies. The more investors enter carry trade the greater they strengthen the tendency for the yen to fall and other currencies like the kiwi or gained to go up.