Bailout May Be Whopper of a Carry Trade

There's an interesting Bloomberg article from John M. Berry that argues that the bailout will actually generate a profit from the government. He calls it a massive carry trade. What's a carry trade? It's a trade where the cost of raising capital for an investment is lower than the return provides by the purchased assets. The difference is profit. In this case, the government is borrowing money from the public and foreign governments via Treasuries at 3-4% and purchasing assets that should yield 8-10%. Based on this, he predicts positive cash flow for the government and an overall gain. The $700 billion is invested capital, not lost money.

There's an interesting Bloomberg article from John M. Berry that argues that the bailout will actually generate a profit from the government.  He calls it a massive carry trade. 

What's a carry trade?  It's a trade where the cost of raising capital for an investment is lower than the return provided by that investment.  The difference is profit.  The carry trade was hugely popular in the 1990s between the Japanese and US.  Investors could borrow money very cheaply in Japan because of their recession (interest rates were near 0 at the time) and then reinvest it in the United States at a much higher return.

In this case, the government is borrowing money from the public and foreign governments via Treasuries at 3-4% and purchasing assets that should yield 8-10%.

Based on this, he predicts positive cash flow for the government and an overall gain.  The $700 billion is invested capital, not lost money.

Sol Nasisi
Sol Nasisi: Sol Nasisi is the co-founder and a past president of BestCashCow, an online resource for comprehensive bank rate information. In this capacity, he closely followed rate trends for all savings-related and loan products and the impact of rate fluctuations on the economy. He specifically focused on how rates impact consumers' ability to borrow and save. He also has authored a wee

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