Will flow of yen dry up with stock scare?
TEXT OF INTERVIEW
Doug Krizner: Wall Street suffered huge losses yesterday, and the sell-off created ripples worldwide — $1.3 trillion in global market value was wiped out.
Let’s go London and Roger Bootle. He’s managing director of Capital Economics. Roger what’s this about?
Roger Bootle: Well, what’s happened is investors woke up to the idea that, actually, there is such a thing as risk. Over the last several years, we’ve had very low interest rates — and the consequence of that is that investors who have been used to getting decent returns on their money have gone off into other instruments — riskier instruments — in order to get the sort of return that they used to think they deserved. And so what’s happened in the last few weeks is there’s a reversal in that, with investors thinking “Goodness, gracious me — some of these things we’re holding are dodgy.”
Krizner: So Roger, how did these problems begin? Where did they come from?
Bootle: If you had to pick out a market where all this started, I think you’d have to say it’s in the U.S. mortgage market. That then has caused — has wiped out some lenders. And then, people have begun to think, “Well, gosh, else is at risk?”
Krizner: Do you have any sense on how protracted this may be, how deep will it go? And for how long we may see a routed stocks?
Bootle:It’s possible that you could get a one-off downward shock to stop the presses, then everything returns to normal. But I think the worrying thing is there are still a lot of elements in this story which haven’t yet been fully played out.
One is the so-called carry trade. That is to say, the way that investors have been borrowing in currencies, mainly yen, which has got very low interest rates, and investing in all other sorts of currencies. Unhedged, this is a massive, massive global gamble.
And a large amount of the money that’s been washing ’round the world, buying up assets of all sorts, is effectively coming out of Japan. And if this carry trade really does take a big knock, then what we’re going to see is this money drying up.
Krizner: Roger Bootle is managing director of the London-based Economic Consultancy/Capital Economics. Roger, thanks so much for speaking with us.
Bootle: Pleasure.
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