R. Murphy and his misunderstanding of financial markets

Yup, Ritchie\’s managed to get the wrong end of the stick again.

Just when banks thought they might be getting away with things again along comes a new line of attack.

There has been massive speculation in the Yen since the Japanese earthquake / nuclear disaster began to unfold just over a week ago. A massive surge in the Yen, on the assumption that Japanese companies will be bringing assets back to Japan so will be in et selling mode.

But Japan is also a net exporting nation so the move would also be massively harmful to its economy just at a moment when it is already in deep trouble.

It’s vey good news to see international coordination to beat those who use the ruthless amorality of  neoliberal markets to exploit.

Umm, no.

Just no.

Here\’s what has actually been happening with the Yen.

For most of the last decade there\’s been something called the \”carry trade\”. This is where you borrow in a currency with a low interest rate and invest that money elsewhere in a country that has a high interest rate.

Interest rates are of course prices and moving something from a low valued use to a higher valued one is the very definition of wealth creation.

Interest rates in Yen have been, as one might have noticed, rather low for a decade and more. They\’ve been rather higher in places like, say, Australia. So, borrow some of those excess savings in Japan, pay little interest, stick them in Australia where the high rates are indicating a shortage of savings available for investment and make money: while creating additional value.

Lovely, our financial system is working as it should, allocating capital.

Now, the potential problem with this is that there is also exchange rate risk. That the value of the Yen against the AUS $ can change by more than the difference in interest rates. At which point you\’re still making an income gain, but you\’ve suffered a capital loss.

Hmm, so, what are you going to do if and when you think that the Yen is going to move significantly in the wrong direction for your position?

That\’s right, you get out of your position. You sell the AUS $, buy Yen and pay back your borrowings. In this manner capital will move from where it is now not quite so needed to where it is more needed: in Japan, where they\’d really rather like to use that money to rebuild the place.

So, once again, our international financial system is working just as we\’d like it to, allocating capital to where it is most needed.

Oh, and do note, this is not as a result of people speculating in the Yen. It\’s actually a result of people stopping speculating in the Yen.

This has been your daily bulletin showing that R. Murphy is, once again, wrong on all counts.

3 comments on “R. Murphy and his misunderstanding of financial markets

  1. Honestly, why is this guy paid so much money from so many sources when he’s clearly a buffoon?

    Ah, he comes up with bullshit that lefties like, and thus earns a confortable living from people who need a steady stream of “authoritative” bullshit.

  2. Johnydub, I agree and I’ve been saying the same thing for a long time.

    I kind of admire him. Taking money from the suckers at the unions etc is a highly moral thing to do, or so though Canada Bill Jones. I hope this is true and he really is a glorious con-man doing what he is doing with full knowledge of how wrong and stupid his reports are, chuckling as the suckers ante up.

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