Re: Carry Trade

Chris — Thu, 14 Jan 2010 03:35:25 GMT

I believe what you're talking about are banks leaving their reserves at the Fed and getting paid interest on them. Hence the banks are getting paid to simply do nothing and obviously the Fed gets this money (interest) by creating it.

The carry trade (usually) refers to lending across countries with different interest rates. The Fed funds rate is 0 - 0.25% while the overnight rate in Australia for example is 3.75%.

Carry Trade

Michael Suede — Thu, 14 Jan 2010 00:57:09 GMT

Suppose this:

Central Bank Y

Commercial Bank Yc

Central Bank Z

Commercial Bank Zc

Y loans 1 million to Yc at zero percent interest based on a check written on itself (money from nothing).

Yc turns around and then deposits the free money it just got from Y into Zc earning 2%

At this point no loans have been made but Yc is earning 2% on free money.

Is that how this works?

If I was Yc, Why wouldn't I just take out as much money as I possibly could from the Fed and suck interest from Zc till the cows come home?

Or alternatively, just lend it all out and collect on an enormous spread.

If banks don't lend it out, but instead engage in the carry trade, does that keep the inflation off the books since there's no loans made, just deposits?

The entire business of the Fed setting rates, let alone setting them at zero percent, seems wildly irrational.

How can banks be allowed to profit from interest accrued on an interest free loan, or on any loan from the fed that's less than what they could get earning market interest? That seems like blatant fraud. If someone gave me a million dollars interest free, I'd make a fortune on the interest alone without ever touching the principle. I could pay it back in full whenever I wanted but why ever bother? The whole thing seems blatantly criminal.

Someone educate me if I'm way off on this please.

Economics Questions

Re: Carry Trade

Carry Trade