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Politics : Ask Michael Burke -- Ignore unavailable to you. Want to Upgrade?

To: Mike M2 who wrote (59046)	5/11/1999 1:21:00 PM
From: Don Lloyd	Read Replies (1) \| Respond to of 132070

Mike - (...higher US rates would have made the carry trade more profitable but I am not sure how big a factor even greater profits from an already profitable carry trade would have been. Higher US rates would have curtailed some of the stampede out of bank accounts into mutual funds and curtailed some of the debt-financed corporate share repurchases. This is a complex issue and much more could be said but basicly the Austrian economists would say the Fed should have done more to contain or prevent this bubble. Unfortunately few see the problem until it is too late...) I agree that it is possible that the Yen carry trade might be already essentially saturated at current levels, although an increase in U.S. rates would reduce the beneficial effects of a given amount of increase in Japanese rates when that occurs. The increase in rates might very well increase a similar Euro carry trade effect, however. In the absence of currency or capital controls, differential interest rates can only reflect the relative perceived currency and default risk. Not only can the FED not set interest rates independently of other nations, but it can only influence interest rates at home, as the market will most often take the bit in its teeth, as it is doing now in the direction that you prefer. U.S. rates are are already the highest in the world for a more or less real currency. As far as bank deposits go, my checking (NOW) account yields 0.5% and my savings account yields 3.04%, and neither of them will be materially changed enough in response to any FED rate increase to cause any re-allocation. My brokerage sweep MMF was yielding 3.9% last month. Actually, an increase in rates would tend to cause more flow away from banks as they will respond least to any rate change and they would be even less competitive. Regards, Don