Draining the Swamp

You know it's about to get ugly when a currency analyst at one of the biggest banks in the world flatly admits it.

"It's going to come to an end later this year and it's going to be ugly, even if we haven't reached the shake-out just yet," [said David Bloom, currency analyst at HSBC]

"People have a Panglossian belief in the march of global capitalism but that will change as soon as attention switches back to US financial imbalances," he said.

He attributes the coming disaster to simultaneous moves by central banks across the globe to close the taps of ultra-cheap credit which in turn will bring what he calls the 'carry trade' to a crashing halt.

The "carry trade" - as it is known - is a near limitless cash machine for banks and hedge funds. They can borrow at near zero interest rates in Japan, or 1pc in Switzerland, to re-lend anywhere in the world that offers higher yields, whether Argentine notes or US mortgage securities.

Please note, that (1) the 'near limitless cash machine' is nothing but counterfeiting on a global scale; (2) only banks and hedge funds have access to this "free" money; and (3) this entire global network of parasitoids ultimately feeds off the sweat of workers around the world.

Arguably, [this carry trade] has prolonged asset bubbles everywhere, blunting the efforts of the US and other central banks to restrain over-heating in their own countries.

The Bank of International Settlements last year estimated the turnover in exchange and interest rates derivatives markets at $2,400bn a day.

"The carry trade has pervaded every single instrument imaginable, credit spreads, bond spreads: everything is poisoned."

Let that sink into your brain, for a moment. $2.4 TRILLION in derivatives is traded EVERY day! That's more than the total GDP of the UK (PDF) for the entire year of 2004!

And when this pie in the sky comes crashing down, these parasites are going to try to minimize their losses by sucking everything they can out of the physical economy.

"There are several hundred billion dollars of positions in the carry trade that will be unwound as soon as they become unprofitable," said Stephen Lewis, an economist at Monument Securities. "When the Bank of Japan starts tightening we may see some spectacular effects. The world has never been through this before, so there is a high risk of mistakes."

Toshihiko Fukui, the Japanese central bank governor, gave a fresh warning yesterday that this day is near, saying the country was pulling out of seven years of deflation. The economy grew at a 5.5pc rate in the fourth quarter of 2005.

In his strongest words yet, he said the bank would act "immediately" to curtail its extra injections of liquidity, preparing the way for rate rises above zero in coming months.

"The moment of truth is approaching,'' said Kenichiro Ikezawa of Daiwa SB.

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Most of the world is now tightening, with no sign of a fresh credit window opening to keep the game going. This is new. Japan has had the tap on continuously as the trade exploded over the past five years, while America itself became the source of funds after it slashed rates to 1pc at the end of the dotcom bubble, and held them there until June 2004 . . .

There are other big forces at work: huge purchases of US Treasuries by Asian central banks, and petrodollar surpluses coming back to the US credit markets. Stephen Roach, chief economist at Morgan Stanley, warns that the carry trade is itself, in all its forms, a major cause of dangerous speculative excess.

"The lure of the carry trade is so compelling, it creates artificial demand for 'carryable' assets that has the potential to turn normal asset price appreciation into bubble-like proportions," he said.

"History tells us that carry trades end when central bank tightening cycles begin," he said. Ominously, almost every bank other than the Bank of England is now tightening in unison.

In other words, they're draining the swamp.

This is the moment of truth. Either people wakeup and realize that these parasites only control us because we let them, or in their relentless greed, they are going to suck up every last drop of currency that keeps our economies floating.