Wednesday, June 27, 2007

Huge currency misalignments are leading to enormous current account imbalances. The Turkish and New Zealand current account deficits, for instance,

Carry trade threatens a deflationary global collapse

Concerns that the credit cycle may be turning down are growing. But so far, the impact on stock markets has been fairly limited. Investors take comfort in three misguided beliefs. They believe that equities are not expensive and that there is no sign of any diminution in the flood of global "liquidity". Furthermore, they believe that if the worst happens, the US Federal Reserve will come to the rescue.

Posted by chris @ 10:09 AM (507 views)
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4 thoughts on “Huge currency misalignments are leading to enormous current account imbalances. The Turkish and New Zealand current account deficits, for instance,

  • Stoatgobbler says:

    I think this came out yesterday but it was just as ridiculous then. Only someone who has never traded would suggest that PPP is an effective way of valuing currencies; it has absolutely no use whatsoever in the real world.

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  • “…they believe that if the worst happens, the US Federal Reserve will come to the rescue.”

    Last I heard, the Fed had no facility to print Yen or Yuan. It has no reserves of these currencies and, so, is powerless in these circumstances!

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  • sold 2 rent 1 says:

    Wow – a truly scary article.

    Quote:
    “Central banks are likely to attempt to ratify current inflated asset values by inflating prices and incomes to avoid a deflationary economic collapse. Unfortunately, sharp reductions in interest rates in the US, UK and the euro area will lead to a rapid unwinding of the global carry trade, perversely threatening to worsen problems in the credit markets.”

    Central banks have been trying to create inflation by increasing the money supply. All that has happened is debts and assets have gone up even more.
    You can’t create wage-price spiral inflation in the West when 3 billion workers are added to the global economy.

    What do you think of this, Stoatgobbler?
    China is not even mentioned and we have a picture close to armageddon. An investment bust in China will only add fuel to the fire.

    We thought the world changed after 9/11. This is entirely different and much much worse.

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  • Stoatgobbler says:

    Well I mainly think Tim Lee doesn’t have to justify what he says with his cleints’ money. I also think that the article is garbage (of course) mainly because Tim has no idea of the correct value for equities, and provides no suggestion, he clearly hasn’t noticed that there has been massive global tightening through the CBs, exchange rates and bond prices, and to suggest that the Fed does not have at its core a duty to finacial stability is just stupid. Above all though, he bases his argument for the carry trade being wrong on PPP. Oh dear, oh dear. Eyes on China folks, and make sure you don’t mix up (stupid, journalistic) noise with important signals.

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