Hi I will work through an example for you In most Western economies money borrowed to invest is tax deductible In other words you are only taxed on net profits associated with a business or investment venture such as a carry trade in assets cash bonds or commodities So let s say the hypothetical carry trader as typically depicted in the financial media is borrowing Yen at 0 and investing in US treasuries or overnight repos at 5 25 Sounds like a profitable trade right Read on Now consider that said trader pays a marginal income tax rate of 40 And consider that Japan has been in deflation for the past number of years at deflationary rate of 1 In the same time period US inflation has been running at roughly 2 5 The real cost after tax cost of Yen nominal after tax cost rate of inflation The real return on USD assets nominal after tax returns rate of inflation So for the Yen borrowing the calculation is 0 1 40 0 1 1 And for the USD investment 5 25 1 40 3 15 2 5 0 65 So the real rate of return on USD investment is 0 65 while the real cost of Yen borrowing is 1 Since the real cost of Yen borrowing exceeds the real return on USD investment a so called carry trade should not have an expectation of profit Hedge funds and other institutional players are usually intelligent enough not to engage in activities that do not have expectations of profit Therefore it can be argued that all the talk in the financial media or even in the Economist about a so called profitable carry trade is complete nonsense It is true that there might be some speculators who have placed and done well with bets against the Yen in recent years since the bubble burst in the 90s but to confuse such with a profitable carry trade defies logic