In 'The Only Investment Guide You'll Ever Need,' Andrew Tobias wrote:[A] book explains how by converting your dollars to pesos you can earn 12% on your savings in Mexico instead of 5-1/2% here.... the author reassures, the peso is one of the stablest currencies in the world, having been pegged at a fixed rate to the dollar for 21 years, and the Mexican government has repeatedly stated its intention not to devalue. Now who the heck are you, who needed to buy a book to tell you about this in the first place, supposed to evaluate the stability of the Mexican peso? So, scared of the stock market and impressed by the author's credentials, you take el plunge.
And for 18 months you are getting all the girls. Because while others are pointing lamely to the free clock radios they are getting with their new 5-1/2% savings accounts, you are talking Mexican pesos at 12%.
Comes September, and Mexico announces that its peso is no longer fixed at the rate of 12.5 to the dollar, but will be allowed to "float." Overnight it floats 25% lower, and in a matter of days it is down 40%. Whammo....
(Everything changes and nothing changes. That was 1976. In 1982 the peso was devaluted again--by 80%. In 1995, it dropped 55%. From mid-2002 to mid-2004, it edged down 20%.)
boggler wrote:So in other words, the benefit of the high interest rates is counteracted by high inflation?
linuxizer wrote:Look up "global carry trade" and you'll see that the forces that work to align interest rates globally are undertaking risk. Therefore it's not arbitrage in the strictest sense of the word.
aaplhpq wrote:Don't do this!
I'm of Indian origin, and learned a small lesson a hard way. I transferred $10k money to India when $1 = Rs 45. By the time I pulled it out it was Rs 55, and this was just before the Rupee slid and hit ~60. I got lucky.
Here are the problems
1) Currency risk - This is no better than currency speculation. You should plan what you'll do when the Rupee hits Rs 80 = $1 (which is quite possible)
2) Country/political/social risk - You'd much rather take this risk on the equities side rather than on fixed income side
3) Tax issues in the US - 1) You need to file FBAR when $ outside the US is > $10,000. 2) The income from the India CD is taxes at ordinary income rates.
4) Indian banks - Don't expect the same type of response rates, customer service that you'd expect from US banks
5) Insurance - AFAIK, the deposits are covered by the Indian government for upto only $2500 or so. Moreover the credit rating of India itself is around BBB. So you are taking on much higher risk
This is a horrible way to "invest"