Interest Rate Differentials
EconMatters | Feb 26, 2017 01:19AM ET
We discuss the rate differentials between Switzerland, Britain, Europe, Japan and the United States and how this developed financial market carry trade is incentivizing excessive risk taking with tremendous leverage and destabilizing the entire financial system in the process in this video. You want to know what is behind weekly market records, borrowed money via punchbowl central bank liquidity. This ends badly every time, central banks. You can run this model 1 million iterations, and it plays out the same way; the financial bubble implodes in on itself where liquidity evaporates into nothingness. It is ironic that when the bubble pops, given all the central bank infused liquidity to create this bubble paradigm, that all liquidity dries up, and all the sudden there is no real liquidity at all in the system when everyone direly needs it!
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Conclusion:
Central Banks need a coordinated response to figure how they get out of this developed world interest rate differential problem that risks blowing up the entire global financial system because of poor incentives in regards to promoting excessive leverage, poor risk management and imprudent investment decision making processes. My solution would be for the first four central banks to tighten monetary policy more than the US Federal Reserve. However, the status quo relationship is untenable, and the next alternative would be for the Fed to surprise market participants, showing traders to be on their toes, that there are risks to excessive leverage with borrowed central bank carry funds in a risk-off environment.
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