Introduction

“The Rise of Carry” by Tim Lee, Jamie Lee, and Kevin Coldiron is a thought-provoking exploration of the modern financial landscape. Published in 2020, this book delves into the concept of “carry” and its pervasive influence on global markets, economic policies, and social dynamics. The authors argue that the dominance of carry trades has fundamentally altered the nature of financial markets, leading to a new economic paradigm characterized by low growth, increasing inequality, and recurring financial crises.

Summary of Key Points

What is “Carry”?

  • Carry refers to an investment strategy where investors borrow at low interest rates to invest in higher-yielding assets
  • The carry trade involves profiting from interest rate differentials between currencies
  • Carry strategies have expanded beyond currency markets to include various asset classes
  • The authors argue that carry has become the dominant force in global financial markets

The Mechanics of Carry

  • Carry trades are self-reinforcing: successful trades lead to currency appreciation, further increasing profits
  • Carry strategies tend to be highly leveraged, amplifying both gains and potential losses
  • Central bank policies, particularly low interest rates, have inadvertently supported and encouraged carry trades
  • The volatility paradox: periods of low volatility encourage more risk-taking, potentially leading to future instability

The Global Carry Regime

  • The authors propose that a Global Carry Regime has emerged, reshaping the financial landscape
  • This regime is characterized by:
    • Persistent low interest rates
    • Suppressed volatility
    • Asset price inflation
    • Increasing wealth inequality
  • The Global Carry Regime has profound effects on:
    • Monetary policy
    • Fiscal policy
    • Corporate behavior
    • Social and political dynamics

Economic Consequences

  • Declining productivity growth: carry encourages financial engineering over productive investment
  • Zombie companies: low interest rates allow unprofitable firms to survive, reducing overall economic efficiency
  • Financialization of the economy: resources are increasingly allocated to financial activities rather than productive sectors
  • Wealth concentration: carry benefits asset owners, exacerbating inequality

Political and Social Implications

  • Rising populism: economic disparities fueled by carry contribute to political instability
  • Generational divide: younger generations struggle with high asset prices and limited economic opportunities
  • Policy constraints: governments and central banks become trapped in a cycle of supporting asset prices
  • Global imbalances: carry flows create persistent trade imbalances between nations

The Cycle of Carry

  • Carry strategies create periods of apparent stability punctuated by severe crises
  • The Minsky Moment: a point where excessive speculation leads to a sudden market collapse
  • Crises are followed by interventions that ultimately reinforce the carry regime
  • The authors argue this cycle is becoming increasingly difficult to sustain

Key Takeaways

  • The global financial system has become dominated by carry trades, fundamentally altering market dynamics
  • Central bank policies, particularly low interest rates, have inadvertently supported and perpetuated the carry regime
  • The rise of carry has contributed to declining productivity growth, increasing wealth inequality, and recurring financial crises
  • Traditional economic models and policies are ill-equipped to address the challenges posed by the Global Carry Regime
  • The carry cycle creates periods of artificial stability followed by severe market dislocations
  • The financialization of the economy has led to resources being diverted from productive investments to speculative activities
  • Political and social tensions are exacerbated by the economic disparities resulting from the carry regime
  • Breaking the carry cycle may require significant policy changes and a reevaluation of current economic paradigms
  • Understanding the mechanics of carry is crucial for investors, policymakers, and citizens to navigate the modern financial landscape
  • The authors suggest that the Global Carry Regime is unsustainable in the long term, potentially leading to a major economic reset

Critical Analysis

Strengths

  • Novel perspective: The book offers a unique lens through which to view modern financial markets and economic trends
  • Comprehensive approach: The authors effectively link financial mechanics to broader economic, social, and political issues
  • Explanatory power: The carry concept provides a compelling explanation for various puzzling economic phenomena
  • Interdisciplinary analysis: The book draws on insights from economics, finance, psychology, and political science
  • Accessible writing: Complex financial concepts are explained in a manner understandable to non-specialist readers

Weaknesses

  • Overemphasis on carry: Some critics argue that the authors attribute too much explanatory power to the carry concept
  • Limited policy prescriptions: While the book excels at diagnosis, it offers fewer concrete solutions to the problems it identifies
  • Potential confirmation bias: The authors may sometimes overinterpret evidence to fit their carry narrative
  • Underemphasis on technological factors: The role of technological change in shaping economic trends could be more fully explored

Contribution to the Field

“The Rise of Carry” makes a significant contribution to our understanding of modern finance and economics by:

  • Providing a unified framework for understanding diverse economic trends
  • Challenging conventional economic wisdom and policy approaches
  • Highlighting the unintended consequences of well-intentioned monetary policies
  • Offering a fresh perspective on the causes of financial instability and economic inequality

Controversies and Debates

The book has sparked several debates within financial and economic circles:

  • The extent to which carry trades, as opposed to other factors, drive market behavior
  • The effectiveness and consequences of unconventional monetary policies
  • The sustainability of current economic models and the potential for systemic change
  • The role of financial markets in exacerbating social and economic inequalities

These debates underscore the book’s relevance and its challenge to established economic thinking.

Conclusion

“The Rise of Carry” presents a compelling and provocative analysis of the modern financial system and its far-reaching impacts. By introducing the concept of the Global Carry Regime, the authors offer a fresh perspective on the interconnected nature of financial markets, economic policies, and social outcomes. While some may debate the extent of carry’s influence, the book undeniably provides valuable insights into the mechanics of contemporary finance and the challenges facing policymakers and society at large.

The strength of the book lies in its ability to connect complex financial phenomena to broader economic and social trends, making it relevant not only to finance professionals but also to anyone seeking to understand the forces shaping our economic landscape. Its warnings about the unsustainability of current practices and the potential for future crises serve as a crucial wake-up call.

However, readers should approach the book with a critical mind, considering alternative explanations and weighing the evidence presented. The authors’ carry-centric view, while illuminating, may not fully capture all the nuances of global economic dynamics.

Overall, “The Rise of Carry” is an essential read for those looking to gain a deeper understanding of the hidden forces driving financial markets and their impact on the broader economy and society. It challenges readers to reconsider conventional economic wisdom and to contemplate the long-term consequences of our current financial system.

The Rise of Carry: The New Financial Order of Decaying Growth and Recurring Crisis is available for purchase on Amazon. As an Amazon Associate, I earn a small commission from qualifying purchases made through this link.