one person's explaination: "yen carry trade" is a .....
from the gold thread, 1/2 of a long article, link to complete at end
The Death of Rational Knowledge and the Creation of a New Paradigm
In its aspiration for a new and perfect world, the New Age Movement
believes that there will have to be a "paradigm shift", which will
change the conventional way of thinking. Rational thinking, which
proceeds analytically and critically and which formed the basis of
scientific method, is to give way to synthetic thinking and intuitive
knowledge based on non-rational experience....
Nowhere is this "paradigm shift" more pronounced and ingrained than with
those that seek to provide an understanding of financial and economic
events.
... in order for the bubble to
intensify, measures must be developed to counter the effects of an
increasing trade imbalance. This has been accomplished through what is
called the "Yen Carry Trade". The "yen carry trade" is a series of paper
financial transactions within the Japanese banking system that has not
only allowed the American financial bubble to be created, but has added
greatly to it's rise. Within the Japanese banks, offsetting bookkeeping
entrys have created vast amounts of new loans and new Yen. This new Yen
is then sold for U.S. dollars in sufficient quantity to not only offset
the effects of a trade imbalance, but significantly increase the value
of the U.S. dollar. This Japanese created liquidity has had a
significant effect on America, providing funds not only to finance the
trade imbalance, but also funds for the purchase of U.S. government
bonds (thus holding down long term interest rates) and investments in
the U.S. stock markets (thus helping to fuel the speculative fever). The
combination of a rising U.S. dollar, and higher investment returns in
America have allowed investors in the Yen carry trade to show
significant paper profits. It must be stressed that the creation of such
a large financial bubble in America would not be possible without the
"Yen Carry Trade". It truly attests to the power given to bankers to
manipulate the world economy through the creation of money from nothing,
even to the point of creating money in one country to control the
economy of another....
However, to make matters even worse, what profits are shown are likely
to be significantly higher than would be possible without the massive
credit expansion or creative bookkeeping. Specifically, in that the
credit expansion within America and Japan (financing the Yen Carry
Trade) has lead to an increase in American economic activity, this has
been supportive of American profitability. Secondly, with a rising stock
market, the defined pension plans of many companies have risen in value
to such an extent that no company contributions are now required,
inflating company profits by the savings of pension contributions.
Thirdly, an era of share buy-backs has been used to increase earnings
per share. For the most part, these buy-backs are financed through
loans, and not profits. For example, since 1995, IBM has reduced the
number of shares outstanding by 22%, while it's debt has increased from
$22.6 billion to $30 billion. According to the Federal Reserves flow of
funds data, for non-financial corporations, in 1994 a net $44.9 billion
in stocks were retired while corporate borrowings showed a net increase
of $51.3 billion. In 1998, a net $262.8 billion in stocks was retired
while net borrowings increased by $342.9 billion. We must ask why U.S.
companies are buying back their stocks on credit, which not only
leverages their earnings, but also further fuels an overvalued stock
market. Fourthly, the use of stock options....
.... absence of any new loans, consumption is limited to income less
loan payments. With consumption now exceeding incomes, consumers must be
increasing debt by the amount of their loan payments plus the excess of
consumption over income. Due to the compounding of interest, ever
increasing levels of debt must be created just to maintain present GDP.
The idea of a self-sustaining system is now non-existent. Should
consumers reduce consumption sufficient to meet loan payments from
income, the resulting fall in demand would send the economy into a death
spiral, with falling incomes, profits and government tax revenues
feeding the collapse. The present option of increasing levels of
unpayable debt will one day do the same through a credit collapse.
.... I will discuss the events that will occur, should the
loans involved in the "Yen Carry Trade" be repaid. This will first
involve a major sell off on the U.S. bond and stock markets to convert
to U.S. dollars. Then, this massive sale of U.S. dollars at a time when
the trade deficit is about $250 billion/year will create a major decline
in the value of the U.S. dollar. This will add greatly to future
inflation expectations, further accelerating the sell-off of the bond
and stock markets. Consumers, seeing the value of their savings fall,
will further accelerate the fall as they sell to meet margin calls or
salvage their savings before further falls. More importantly, there will
be a major reduction in consumption due to rising interest rates, a
falling dollar and stock market, all creating a negative wealth effect.
This will put the economy into a major downward spiral with falling
employment, profits, and government tax revenue further diminishing
demand. It is important to note that a major source of government tax
revenue is due to capital gains income, and that once taxpayers start
claiming capital losses....
.... Corporations, facing rising interest costs and collapsing demand,
will see profits greatly diminished. This will be another factor driving
down the stock market. Layoffs and insolvency's will be common place as
corporations attempt to deal with falling demand, tightening profit....
It should be noted that we are not talking here about a return to a gold
standard. In toady's financial system, money can be created through the
banking system through the creation of new loans, or it can be created
through the printing of government notes. With government notes
representing about 1% of bank assets, it is clear that almost all money
is created within the banking system. It is the creation of money by the
banks that must be stopped, and even a return to some type of gold
standard that does not prevent banks from creating money will not solve
the flaws of our financial system. Indeed, if we view "money" as being
for the common good of all mankind, there should not be a problem with a
government creating new government notes as long as it is done in a
responsible manner. It is only if governments act in an irresponsible
manner, should we consider linking money to a commodity such as gold.
Moreover, it must be recognized that the manipulation of the gold
markets through the gold lending activities of the central banks has
allowed the ownership of both gold and gold companies to be concentrated
in a few powerful hands. Furthermore, the creation of a gold standard
would give these people tremendous power and wealth. It must be stressed
that the central banks have manipulated the gold price downward, not by
selling their gold, but by lending it. Had they sold their gold, their
future influence on the price of gold would be greatly reduced. However,
by lending their gold, they are able to cause a substantial future
increase simply by having these gold loans repaid (called in).
In recent years large quantities of leased gold have been absorbed by
the market, indicating that demand for gold is much greater than
generally acknowledged. When bankers ask for the repayment of their gold
loans, and the short sellers that have been supplying the market also
become buyers to cover short positions, we will see a substantial price
increase. As it is not apparent where the supply of gold will come from
to meet both the normal demand for gold, as well as to cover repayment
of gold loans, this rise could be very substantial. Should these events
occur at a time of severe stock and bond market weakness, we could see
other investors move into the gold market, further fueling the price
rise.....
.... This article has provided a solution
to our economic problems, as well as describing the consequences should
these solutions not be implemented. As such, it provides a blueprint of
our destiny.
John Kutyn 10 July 1999
gold-eagle.com
doug post 15 in a row |
