Like what you've read?

On Line Opinion is the only Australian site where you get all sides of the story. We don't
charge, but we need your support. Here’s how you can help.

  • Advertise

    We have a monthly audience of 70,000 and advertising packages from $200 a month.

  • Volunteer

    We always need commissioning editors and sub-editors.

  • Contribute

    Got something to say? Submit an essay.


 The National Forum   Donate   Your Account   On Line Opinion   Forum   Blogs   Polling   About   
On Line Opinion logo ON LINE OPINION - Australia's e-journal of social and political debate

Subscribe!
Subscribe





On Line Opinion is a not-for-profit publication and relies on the generosity of its sponsors, editors and contributors. If you would like to help, contact us.
___________

Syndicate
RSS/XML


RSS 2.0

Is the Big Bust yet to come?

By James Cumes - posted Tuesday, 20 March 2007


The trading week from February 26 to March 2 was fascinating and chastening. Some have seen it as bringing an end to complacency; but has it been more than that?

In some ways, it undoubtedly has been. Once again, we were impressed with how some unlikely development - something that we had not really focused on - was responsible for a sudden, severe shudder in global markets.

There were few who had their eyes focused on what was happening in the Shanghai stock market - or at least focused in any way beyond what was happening to day-to-day stock movements. There were worries about capital-gains taxes but few anticipated any serious run-on effect from those worries to the local Chinese market and then, lo and behold, to Wall Street and other major world markets.

Advertisement

But there was this run-on and that indicates to us again - yet again - how unpredictable may be the causes - the proximate stimulants - to major turnarounds or crises or collapses in world markets.

What we must ask now is whether we were in the midst of or at the beginning of a major market collapse - one affecting most markets around the world. Are we now, as we look forward, on the edge of a major crisis or collapse?

The actual figures for the percentage drop in the Dow and other stock markets are not too terrifying in historical terms. We have come through worse in the past without any ultimate catastrophe.

After the first shock in Shanghai, there have been after-shocks, more especially in Asia and Europe than in the United States, but these have not been of such a magnitude as to spark a global panic.

Nevertheless, we should perhaps investigate a little more deeply than that. Perhaps we should look less exclusively at the statistical record of the actual stock-market movements themselves - the market dropped 200 points for a percentage fall of 3 per cent or whatever - and more closely at some of the side effects.

One phenomenon of which we must be particularly aware is that of the carry trade, a phenomenon that has grown - blown itself up - enormously in recent months and years and that has been at the centre of much of the "liquidity" that has been sloshing around in a variety of markets. Capital flows linked to the carry trade have nourished housing markets, stock and bond markets, art markets and, for example, have helped to close the gap in trade and payments between what the United States receives from abroad monthly and what it pays out.

Advertisement

To some extent - and it may be to an important extent - the carry trade has been helping to hold the rather fragile global financial "system" together.

The key to this fascinating and apparently crucial trade is that there should be a sufficient margin between borrowing and lending rates and no more than a tolerable risk that the margin will be diminished or destroyed. The decisive borrowing environment in the recent past has been Japan, with near to zero borrowing rates and an exchange rate that has been low and tending to be moved still lower by the very operation of the carry-trade phenomenon itself.

A crucial question therefore must be what has the recent flurry on global stock markets done to the value of the Japanese yen and to the assurance with which the carry traders can continue to pursue their exploitation of this highly rewarding arbitrage.

  1. Pages:
  2. Page 1
  3. 2
  4. 3
  5. All

America's Suicidal Statecraft is available most readily through Amazon, at $26.99 a copy.



Discuss in our Forums

See what other readers are saying about this article!

Click here to read & post comments.

7 posts so far.

Share this:
reddit this reddit thisbookmark with del.icio.us Del.icio.usdigg thisseed newsvineSeed NewsvineStumbleUpon StumbleUponsubmit to propellerkwoff it

About the Author

James Cumes is a former Australian ambassador and author of America's Suicidal Statecraft: The Self-Destruction of a Superpower (2006).

Other articles by this Author

All articles by James Cumes

Creative Commons LicenseThis work is licensed under a Creative Commons License.

Photo of James Cumes
Article Tools
Comment 7 comments
Print Printable version
Subscribe Subscribe
Email Email a friend
Advertisement

About Us Search Discuss Feedback Legals Privacy