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Time for Some Mattress Padding

March 9, 2015

Time for Some Mattress Padding

Can you imagine borrowing $1000 from the bank and receiving $10 per year interest from the bank? I didn’t think so. However, this is the happy situation facing some European countries and even a few Swiss companies. The Swiss, Swedish, and Danish governments and the food multinational Nestle are now borrowing money from lenders who are happy to pay them for the privilege. In what may signal the beginning of the end of the current financial system, we have moved beyond zero percent interest rates to negative interest rates.

 
Why are negative interest rates now making an appearance? They are a natural consequence of the rampant money creation undertaken by central banks in response to the global financial crisis. To look at Switzerland, as European savers lost confidence in the euro in 2010 and 2011 and started converting their euro into Swiss francs, the value of the franc against the euro began to rise rapidly. This increase in the value of the franc made Swiss-made products expensive compared to French- or German-made products. In order to keep Swiss companies in business (and Swiss workers in jobs) the Swiss National Bank committed to keeping the value of the franc at or below 83 euro cents.
In order to do this, it was necessary for the Swiss National Bank to do two things. First, it created billions of additional francs and exchanged them for euro on the foreign currency markets. Second, it set Swiss interest rates lower than European interest rates in order to make Swiss bank deposits unattractive to European savers and Swiss loans attractive to European borrowers. 

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