A trillion dollars gets my attention too….

Brad Setser has an excellent overview of the Yen carry trade in his latest post. Nouriel Roubini reminds people of how fast things can go wrong in this post.

A lot of people are responding to them by arguing that the fundamentals justify the out flows and there is nothing to worry about. But that begs the question: what is truly fundamental?

In once sense, I agree that the current fundamentals in Japan, China, Saudi Arabia, and other countries favor foreign investment over domestic investment. When a central bank tries to keep the value of its own currency down, rational people will try to profit from that fact. Why fight city hall?

But why in the world would a rational government want its citizens to invest overseas rather then in their own country?

We all know the answer; they want to protect their exporters. But is it sustainable to continually encourage your citizens to invest their money in some other country?

I am just an ignorant hillbilly, but if I had a company and my accounts receivables were growing faster then my income I would be getting scared. By the same token, if I were running Japan or China and I saw that my reserves were climbing faster then my GDP I would be getting scared.

As Warren Buffet famously said, something that mathematically cannot go on forever won’t. It is impossible for reserve growth to outpace GDP growth forever. Therefore, GDP growth needs to pick up or reserves growth needs to slow down in China, Japan, and company.

But how can GDP growth pick up if Central Banks are encouraging their citizens to invest elsewhere?

It is thoughts like these that make me think that Yen carry trade is not sustainable.

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