[OPE-L] A Yen shock?

From: Jurriaan Bendien (adsl675281@TISCALI.NL)
Date: Mon Nov 12 2007 - 16:28:46 EST

Yen shock may prompt next wave of market crisis

By Mike Dolan - Analysis

LONDON (Reuters) - Just as renewed waves of forced asset sales and bank write-downs risk turning this year's credit market turmoil into a vicious circle, the Japanese yen looks set to deliver another shock to global markets. An accelerating slide in the U.S. dollar  this week has been driven by a growing conviction that the U.S. Federal Reserve will be forced into further steep interest rate cuts. And as dollar losses against the yen started to spiral on Friday, fears have risen of a mass unwinding of the yen "carry trade" -- currency trades funded by cheap, low interest rate yen and estimated to be worth up to $200 billion.

Sudden losses on these trades -- which thrive when currency market volatility is low -- could force speculative hedge funds to cut other market bets to fund those losses, and also reverse the flood of Japanese money invested overseas in recent years."The potential for a further carry unwind -- presuming we are now in a second wave of risk aversion -- is quite high now," said Michael Metcalfe, senior strategist at State Street. "These waves of risk aversion are washing through markets one after the other and seem to be hitting the credit markets first, then equity markets and then the FX markets," added Metcalfe. "It's what happened in July and August and it seems to be what's happening again now."

The global financial system supercharged historically low central bank interest rates in recent years in several ways but there were three powerful injections. One was through repackaging bank loans into securities for sale to a wide range of investors, freeing up bank balance sheets to allow them to lend more. Those markets are now in meltdown after a U.S. mortgage market bust called into question valuations of these complex instruments. The second was via leveraged buyouts by the likes of private equity firms, who used cheap credit to raise cash and pumped billions into stock markets via a wave of takeovers. The credit squeeze has put much of this activity on ice. And the third amplifier was currency carry trades, with cheap yen financing at its core. Now that too looks at risk.

Complete story:  http://www.reuters.com/article/newsOne/idUSL0964162820071109?pageNumber=4

(This is what Ernest Mandel wrote in 1982:)

The banks take in large short-term deposits and invest them long-term on the assumption that the short-term will not be withdrawn.  This is not just against the law but contravenes the elementary basis of banking.  If a number of short-term deposits were withdrawn, then the whole system tumbles down because the money has been invested where it is not liquid.  There is no bank in the world which can repay more than one-third of its deposits.  If there was panic and people were to demand their deposits, then the banking system would not be capable of coping.  

During the collapse of the German Herstadt and American Franklin banks in 1974, the world's top bankers made a decision in Basle not to allow another major bank to go under.  They agreed that the resources would be advanced to avoid such a panic which could threaten the world credit system.  They took and applied that decision.  During the present recession no major bank has been permitted to collapse. (...) 

Can the world banking system continue to roll over credits and inflate the total credit loan?   I doubt if this can be done forever -- perhaps for a further limited period.  If they continue to do so they face two major problems.  

The first pertains to the distribution of risks, to inter-imperialist rivalry and the absence of a lender of the last resort.  This system can only be controlled if there is a world bourgeois state with a world central bank which would function on a world scale in the same way as each of the national central banks does on a national scale.  That is, it would lend money to the private banks to avoid their collapse, but private property and competition prevents the creation of such a world state.  Because there is inter-imperialist rivalry, there can be no lender of last resort.  Thus, there always exists the question of dividing the risks and subsequent costs.  This is open for negotiation and horse trading.  What part will the Americans, Germans, Japanese, British, French or Italians pay? (...) 

The second difficulty relates to the function of deflationary policies, the rise in the interest rate and the strangling of fresh credit.  These are social as well as technical policies.  They are being used to weaken the working class via mass unemployment and have the long-term goal of sapping the strength and militancy of the labour movement.  They also are intended, like the capitalist crises, to clear dead wood from the system.  But that means bankruptcy, and, as I have argued, that threatens the future of the banking system itself.  The other question is how to discipline the banks.  How do you force them to cease credit expansion while at the same time avoiding a crisis of 1929-1932 proportions? That is the dilemma for the ruling class.  Outright deflation entails a collapse of the banking system while all-out inflation stops the system functioning.  Today, politics are a mix of the two. http://www.ernestmandel.org/en/works/txt/1982/world_monetary_crisis.htm

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