Carry Trade: Key To Understanding Crisis Turn

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This post is by Katherine Sciacchitano. --Eds.

I saw the article on Friday. Neither the NYT nor the WSJ has picked this up. Articles on the carry trade in the past have talked about its unwinding, but without grasping the extent of the global linkages.

Authers' key points show up even more clearly in a video clip on the site. The clip has charts showing the direct correlation between the yen carry trade and global stock markets since the early nineties. As Authers put it, the carry trade is the mother of all bubbles, and we're now watching it burst. Additionanl charts show global currencies (other than the dollar and yen) falling in tandem as the carry trade unwinds.

Apart from the long term implications for recovery of stock markets, Authers' point is that the unwinding has put developing market currencies into freefall - greatly exacerbating the risk of defaults, which would be the last major part of this whole thing to be set in motion (even as layers of the shadow banking system continue to implode).

I don't find Authers final call (in the video) for re-negotiating fixed exchange rates to the point - coordination of exchange rates and capital controls would be more like it, along with a different structure for handling trade imbalances, debt etc. But it all points -rather ironically - to a large immediate role for the IMF in stabilizing the current situation, if in fact it can still be stabilized.