In part one of this essay I suggested:
"An "Event," is going to give way and topple the "Great Game." I'd venture aguess though... "It" will come from the East."

Our "Most Favored Nation", the United States has become the largest debtors' nation in history. Asian Nations have willingly become history's largest creditor's largely through exports recycled back into United States Treasury Bills, Notes and Bonds. The balance of trade/payments has dramatically shifted continents in less than 22 years.

As the dollar's slide presented a threat to Japan's Competitive Advantage in Manufacturing, Currency Intervention was employed to maintain their export base. The cost of this ongoing exchange maintenance has exceeded 4% of Japan's Gross Domestic Product in 2003. During the first several months of 2004 interventions approached a staggering $120 billion.

Abruptly, On Monday, March 15th the Japanese Central Bank announced its decision to end Currency Intervention by the end of March 2004. The timing of this release was telling. It occurred one day before the Federal Reserve met to discuss Interest Rate Policy. It appears to have been largely ignored by the Fed as it's bias remained consistent within its "Considerable Period" policy statements made by Alan Greenspan in public since the beginning of the year.

The JCB's decision was preceded by an earlier statement issued by Japanese Finance Minister Tanigaki that he would "cautiously consider the positioning gold within foreign reserves . . . " This statement, released on January 28th, 2004, signaled a shift in the future weighting of Foreign Reserves held by the JCB primarily consisting of Dollar denominated assets.

This "Consideration" was made public within Japan's Parliament and appeared to be a shot across the United States Central Bank's bow, prior to the Fed's March assembly. Essentially, this amounted to a "Get Your Act Together" suggestion. The follow-on was far more poignant.

After the dust settled, it would appear Secretary of Treasury John Snow and the Federal Reserve Board of Governors beat a hasty path towards a "Social Dinner" in order to develop a cohesive "Interest Rate Strategy" for the remainder of 2004.

Perhaps the warning shots have been heeded. . .

Japan was simply asking us to raise rates. Our Central Bank, on the other hand, has simply begged the rest of the globe's Central Bankers to follow "In Our Footsteps."

The reply has been direct and firm: "No Thank You."

The "Carry Trade" must view this in a disturbing light. After all, the table appears to be tilting among the Globe's Central Bankers as they are openly debating the realities of Negative Real Interest Rates in the light of day and having a rather tenuous go of it.

Europe has failed to follow suit and Japan's overnight rates are precisely what has fostered the massive Carry Trade of borrowing short and lending long to capture an arbitrage spread. Negative Real Rates are clearly fostering a very large bubble in Bonds. Interest Rates have no basis in reality, but in preserving global Financial systems teetering on the brink of disaster. The Yen Carry Trade faces a difficult road ahead, one that by design may usher in hyperinflation of currencies or an out an out collapse of Japan's financial system.

For all intensive purposes, the Fed is trapped. Although Alan Greenspan has signaled on several occasions the current federal funds rate is "inconsistent with long-term stability", its policy is at odds with itself. Alan Greenspan has staunchly assured us all the economy is out of the woods, while employment reports continue to provide a bias towards the "Considerable Period". The jobless recovery may be alive and well, but it is certainly wrecking havoc with Fed Policy.

We may fair no better than our Asian creditors.

Part 3: "The Carry Trade Unwinds" to follow