The Swiss National Bank (SNB) shocked markets on Thursday by announcing that it would no longer hold the value of the Swiss franc down at 1.2 per euro, although it would lower interest rates from -0.25 to -0.75 percent. Mayhem ensued. The Swiss franc immediately shot up as much as 39 percent against the euro, before settling at "only" up 17 percent on the day. This is basically the biggest single-day move for a rich country's currency, as economist David Zervos points out, in the last 40 years. And it's sent Switzerland's stock market down 10 percent, as its suddenly more expensive currency will cripple its exporters by making their goods more expensive abroad...More at the link and more at this Bloomberg Business Week article. This is a big deal for those outside of Switzerland who purchase Swiss products and for those who have their mortgages demoninated in Swiss francs.
Now let's back up a minute. Why was Switzerland pushing its currency down, and why has it stopped now? Well, in four words, it's the euro crisis. Back in 2011, you see, what looked like the imminent end of the euro made people want to move their money to the safety of Swiss banks...
Switzerland is still stuck in deflation, with prices falling 0.3 percent, and a stronger currency is only going to make that worse. Now, they tried to offset this by charging people even more to hold their money in Switzerland—aka negative interest rates—but that wasn't nearly enough to stop the Swiss franc from going vertical...
It's also the first time I remember encountering negative interest rates. How does that work? You deposit your money and they take a little away each week?
Addendum: I posted the above in January of 2015. This past week I saw an article in the telegraph entitled Sweden cuts rates below zero as global currency wars spread:
Sweden has cut interest rates below zero and launched quantitative easing to fight deflation, becoming the latest Scandinavian state to join Europe’s escalating currency wars...This isn't front-page news in mass media. One hopes it doesn't become such...
The move comes as neighbouring Denmark takes ever more drastic steps to stop a flood of money overwhelming its exchange rate peg to the euro and tightening the deflationary noose. The Danes have cut rates four times to minus 0.75pc in a month to combat fall-out from the European Central Bank’s forthcoming QE...
Exchange rate mayhem in Europe is matched by a parallel saga in Asia, where Japan’s vast monetary stimulus and barely disguised efforts to drive down the yen are causing heartburn in China...
The Riksbank insists that the only motive is to stave off deflation but there are widespread suspicions that Sweden is in fact protecting its industrial and export base. It is no stranger to controversy. The oldest central bank in the world, it took radical action early in the 1930s to liberate Sweden from the constraints of the Gold Standard. Its prescience shielded the country from the worst of the Great Depression.
Stephen Lewis from Monument Securities says the emergency actions are getting out of hand: “The chief threat from a global currency war is that it will lead central banks to take up monetary stances so extreme that they damage the smooth functioning of financial markets. It is remarkable that they should be closing their minds to the possibility that they are undermining the basic motive to save and invest as they blindly wage their currency wars.”
Please feel free to offer advice in the Comments as to what an ordinary person should do in such circumstances.
Addendum: Reposted again from February to add some information from a Telegraph column which is thought-provoking (though I think not fear-mongering):
Here’s an astonishing statistic; more than 30pc of all government debt in the eurozone – around €2 trillion of securities in total – is trading on a negative interest rate.
With the advent of European Central Bank quantitative easing, what began four months ago when 10-year Swiss yields turned negative for the first time has snowballed into a veritable avalanche of negative rates across European government bond markets...Quite a bit more at the link.
What makes today’s negative interest rate environment so worrying is this; to the extent that demand is growing at all in the world economy, it seems again to be almost entirely dependent on rising levels of debt. The financial crisis was meant to have exploded the credit bubble once and for all, but there's very little sign of it. Rising public indebtedness has taken over where households and companies left off...
One by one, all the major central banks have joined the money printing party. First it was the US Federal Reserve. Then came the Bank of England and later the Bank of Japan. Just lately, it’s the European Central Bank. Now even the People’s Bank of China is considering the “unconventional” monetary support of bond buying. Anything to keep the show on the road...
The flip side of the cheap money story is soaring asset prices. The bond market bubble is just the half of it; since most other assets are priced relative to bonds, just about everything else has been going up as well. Eventually, there will be a massive correction, in which creditors will suffer sickening losses.
Nobody can tell you when that moment will arrive. We live in an “extend and pretend” world in which economies pathetically fight between themselves for any scraps of demand.
You see a negative interest rate all the time, just don't realize it. It's typically called "service fees"
ReplyDeleteFor example, if you have less than $1000 in our local bank, they charge a "service fee" for you to have a checking account. It's like $100 a year, or a negative 10% (-10%). If you have $1000 they stop the service fee, and if over $5000 they pay you interest on the monthly minimum balance in the checking account (a whopping 0.10% interest...)
You ought to take the time to check into local credit unions. Seriously.
Deletehttp://tywkiwdbi.blogspot.com/2011/12/big-banks-dont-want-your-money.html
*laughing* seriously? Note I never said that I had an account with the local bank. If they're going to charge "service fees" like that, why should I let them use my money?
DeleteBut you'd said you'd never heard of "negative interest" or changing people to keep their money. Really? You've never seen "service fees"?
Thanks for the explanation, all. When I heard, "Negative Interest Rates," I thought the banks were now _paying_ people to borrow money. Silly me.
DeleteLurker111
AFAIK European credit institutes have to deposit a certain percentage of their "pocket cash" at the European Central Bank, for that money they get an interest. Out of that ECB-money banks can also take loans for rates that are controlled by the ECB. Basically you take a loan from your bank for 4% and the credit instutute takes the same loan at the ECB for 3%. These rates now have been negative for all of Euro-regions for year or so. So banks lose a little money every night when they have to deposit the percentage at the ECB.
ReplyDeleteBasically money is cheap to borrow, to encourage people to spend or invest. Credit institutes actually make a killing because at low rates people are much more willing to take up a loan, but they still charge like a 1% difference for their service.
Pretty sure the federal reserve interest rate conlroll, works in a similar way.
http://www.nytimes.com/reuters/2015/01/18/business/18reuters-credit-suisse-negative-rates.html?src=busln
ReplyDeleteTx. Nice to see they're not applying it to savings accounts.
DeleteIt seems mildly insane that they didn't do this gradually. Oh well, I guess it is good for all those prisoners of war that are entitled to their pay in Swiss Francs under the Geneva Convention.
ReplyDeletewha-do-i-do to save my 401k?
ReplyDeleteI-)
If you're the type of person that needs a 401k to live your later years in life, than you are "expendable" in the eyes of the central bank and the governments that pull their strings.
Deletethanks for the future cheer.
DeleteI-)
As a regular person you can do very little other than vote for people who will actually have your interests at heart. In the US, that probably means voting for a non-D or R politician. Rs are nothing but slaves of the banks, and since NY elects Ds, Ds owe banks a lot as well.
ReplyDeleteThere is a real issue with the fact that governments, central banks and regulators are trying to keep 'the markets' quiet, while throwing regular people under the bus. Low interests are great for people with debt. But not for people with savings. And most of us regular people have quite a lot of savings through our retirement, in whatever form it comes.
The same thing happened after world war 2 (it has a cool name in economic circles: financial repression) to pay off the war debt (or actually to grow the economy such that the war debt was a small fraction of GDP and hence not a big deal, it was never actually paid off.
ReplyDeleteAn ordinary person should do the same thing in a system of financial repression that they would do in normal economic times: live below (or at least within) your means, don't buy on credit (which doesn't seem that expensive except inflation won't help you reduce your debts and deflation will drive you into debt slavery), pay down debts, have at least six months of income saved for a rainy day, diversify your investments, don't invest in penny stocks or magic beans, don't let a "professional" manage your investments (unless you're George Soros or know George Soros) - there are lots of Vanguard funds that will do at least as well as any advisor that an ordinary person might have access to and will probably do 1 to 3% better.