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 lets say the hypothetical carry trader as typically depicted in the financial media is borrowing Yen at  and investing in US treasuries or overnight repos at   Sounds like a profitable trade right  Read on  Now consider that said trader pays a marginal income tax rate of   And consider that Japan has been in deflation for the past number of years at deflationary rate of   In the same time period US inflation has been running at roughly   The real cost aftertax cost of Yen  nominal aftertax cost  rate of inflation The real return on USD assets  nominal aftertax returns  rate of inflation  So for the Yen borrowing the calculation is          And for the USD investment           So the real rate of return on USD investment is  while the real cost of Yen borrowing is   Since the real cost of Yen borrowing exceeds the real return on USD investment a socalled 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 socalled 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 s but to confuse such with a profitable carry trade defies logic