Switzerland Tried Negative Rates in the 1970s | Hacker News Reader

Switzerland Tried Negative Rates in the 1970s

bloomberg.com

74 pointspseudolus68 comments

~ Nobody goes there anymore. It’s too crowded.

There remains something bizarre about how the language of international trade is couched. I still don't see downsides from having a strong currency that are so bad it needs such a response.

The basic problem is you want Swiss Watchmaker to be able to swap watches for, say, Italian tomatoes. Devaluing the Swiss currency doesn't cause him to be able to buy any more tomatoes; it just forces him to sell more watches. If he was happy to swap watches for tomatoes at that rate, he already had the power to sell his watches more cheaply.

Honestly, I don't like transfer payments but they are better than trying to hold down a currency with financial shenanigans. If the market says it will give you 10,000 tomatoes for 9,000 watches, the gain of forcing the equilibrium to 10,000 tomatoes and 10,000 watches is highly questionable. And any individual watchmakers could already force the equilibrium in that direction if they wanted to without any help.

He may not be able to sell his watches as well with a strong currency. For one thing, if his inputs are mostly Swiss (suppliers and labor) then they too have gone up in price, so he can’t slash prices in response. And if the Swiss watches get too expensive people may start looking to buy some Japanese watches instead because they’re relatively cheaper.

> For one thing, if his inputs are mostly Swiss (suppliers and labor) then they too have gone up in price, so he can’t slash prices in response.

But this implies he's taking resources which could be productively used in Switzerland and redirecting them to foreigners. No individual would be worse off, and the net would be better, if the market was left alone except for some transfer payments within Switzerland.

Option A) Sell A watches for B tomatoes, some transfer payments to even out who gets the tomatoes. C watches worth of resources remain with the Swiss.

Option B) Sell A + C watches for B tomatoes, no transfer payments because the tomatoes are distributed as A.

Neither of these solutions are the capitalist one (which is A but no redistribution). However, if the government is going to pick one, A looks better.

Possibly dropping prices would result in more resources entering, but if the watchmakers didn't think dropping their prices initially was a good idea then this aspect is almost surely going to lead to worse use of the resources than leaving them in Switzerland. It is too complicated to reason about the effect that would have; but it certainly isn't at all obvious that it would be a good thing vs the benefits of a strong currency and consuming resources internally.

> And if the Swiss watches get too expensive people may start looking to buy some Japanese watches instead because they’re relatively cheaper.

I don't see this as countering my original compliant; the Swiss government doesn't need to force watchmakers to drop prices - they can do that on their own.

My point here is that this is ultimately a redistributive policy. Roughly the same amount of resources are coming in to Switzerland, but instead of going to a small group of watchmakers they are going to a larger group of watchmakers. Ok. No worries. But why is a key part of the plan subsidising Italian consumption? By government mandate? Through a very-difficult-to-measure-the-exact-effects process of negative interest rates and worrying about currency strength? Could they not just institute a struggling watchmaker payment funded by a gentle tax on capital inflows without the strange dance? It would be much easier to measure the effects of a gentle tax than mucking around with interest rates.

This is a solution that works because nobody knows if they are the one paying for it. But it is going to cost more than a plain tax-and-spend scheme, because it has many opportunities for strange market-bending side effects.

It seems to me that bloomberg omits fully describing the situation (political and economical) in the '70's and '80's, at least in EU countries there was instability (petrol crisis, terrorism, among others) that induced many (right or wrong) to fear for the future and use Switzerland as a huge moneybox.

Also, the article doesn't back up the claim that Switzerland's policy was a failure. To me it seems that things would have gotten even worse without negative interest rates on foreign capital.

Also, the policy described was a lot more than "let's try mildly negative interest rates". And the oil crisis was probably not Switzerland's fault.

The headline is scaremongering.

Yeah, I was re-reading it, trying to grasp how exactly it got 'ugly', and how were the negative rates to blame.

Apropos of this, one wonders if the Swiss shouldn't permanently take on exchange rate instead of inflation rate targeting. It works very well for the Singaporeans and their economies could be said to be similar in some ways.

They used to do that prior to 2014 or 2015, don't remember. It was pegged to EUR by constantly printing CHF and selling for EUR.

Then one beautiful day the peg was dropped without a warning. Many people and brokerages went broke in a matter of a minute.

Prior to the downturn, official unemployment figures only acknowledged 81 unemployed people – yes, 81 – in a country of 6.4 million.

Incredible number.

Often unemployment numbers are at least partly political. There are many ways the number can be manipulated. Unemployment of 1% is considered extremely good.

The International Labor Organization defines being employed as anyone who works just one hour a week, which is 10 days per year (at a 40 hour work week).

This leads to countries such as Cambodia (0.3 - 0.5%) and Thailand (0.7%) claiming crazy low unemployment because grandmother sweeps the farmhouse flood once a week [0]. In reality the stats hide poverty. Another way to have high unemployment is to have most of the work done by migrants and deport them as soon as they don't have a job (UAE, 1.6%), or ensure the rent is high enough they are forced to leave if they lose a job (Gibraltar 1%).

In a functional developed economy you need people to move between jobs as supply and demand change, so a certain level of unemployment is expected.

[0] https://www.cambodiadaily.com/editors-choice/cambodias-low-j...

Absolutely. The presence of frictional unemployment in a super tight labor market would alone result in a higher number of unemployed people than that for a population of ~6 million, so I would assume any economist reading the stat quoted in the article would immediately proclaim it to be, in technical terms, "poppycock".

That really depends on the law that manage transition between two jobs. It's seems perfectly plausible to me. For example, if the law mandate to warn fired people 3 months in advance, they have the time to find another job before losing their current one, specially if the economy is doing well.

> In a functional developed economy you need people to move between jobs as supply and demand change, so a certain level of unemployment is expected.

Absolutely. Technically someone who leaves an employer at the end of July and starts a new job in September is unemployed for one month. This is part of any statistic.

Put another way: it is almost impossible to have an unemployment rate below 1%, as you said.

Just how insane the climate was that -40% yearly interest rates didn't stop the CHF mania! I'm speechless.

> In January 1975, the Swiss government held an emergency meeting and then took the extraordinary step of slapping a 41% annual penalty on foreign deposits. But even this failed to stem the tide. The franc continued to appreciate against the dollar — a total of 70% in nominal terms between 1971 and 1975 alone.

I wonder what happened to the money raised via negative interest rates? If used to fund UBI, maybe everyone would be happy?

Could someone explain like I'm 5, why doesn't SNB just print (digitally) more money to weaken the Frank?

Would that drive their inflation crazy?

The issue is: how do you feed in this liquidity without damaging the economy? Quantitative Easing with bonds purchases may be a least bad option, but it is still picking winners: I won't be emitting bonds to buy you lollies anytime soon.

Get the government to finance public projects?

Heresy.

Roads bridges and tunnels to nowhere? Ghost cities Chinese style? There's no room for that in Switzerland!

The Swiss government is already financing a lot of public projects.

By developed country standards Swiss taxation and government spending is quite low.

https://en.wikipedia.org/wiki/List_of_countries_by_tax_reven...

I'm having a hard time thinking of any more projects that are not funded yet and still make sense.

At least that all the citizens live in a perfect paradise, that shows a really lack of imagination.

Even, if ideologically you are against spending the citizens money in the citizens, there are always things like basic research programs. The world could do with a few Manhattan Projects for batteries or cultured meat to help with the CO2 emissions, another spacial program or many other things.

Not perfect, but everything seems to be already on the verge of diminishing returns. The only underprovisioned aspect is daycare, but that's a societal, not budgetary problem.

To the main point, yes, I didn't think of research. It definitely makes sense to pour all surplus resources into it and it won't collapse the order. Now I'm curious why is it not being done.

>Not perfect, but everything seems to be already on the verge of diminishing returns.

Very true, for example there are about ~2060 (2026 are trading above par by about %11 on avg, as of 22-08-2019) IG bonds tracked by LQD ETF with the avg maturity date of 2023-05-04, that effectively (subtracting/adding avg % of each bond trading above/below par value from its interest rate when written) yields %0.12, negative if you subtract off "risk free" rate of a UST with a 3-5 year maturity.

> Now I'm curious why is it not being done.

My take: Plenty of government money already goes into research, the problem is that the process of allocation today follows the opaque prestige grant funding hamster wheel process with cronyistic characteristics, and not say "cash drop" to anyone who can post sub 5 page action plan for x funds on what outcomes/targets/objectives could happen from research to a public repo that tracks said research/ fund allocation through the life-cycle (where "[future] rights" on said repos could be bought and sold by various actors with contract conditionality such that %x of transactions are used to fund y initiatives).

Large public works projects are great if you have mass unemployment and generally a lot of slack in the economy. The Swiss unemployment rate is 2.3%. I doubt there are many qualified electricians, plumbers, civil engineers or brick layers among them.

They could import temporary workers EU with 5y work visas.

EU nationals have a right to work in Switzerland anyway, but there simply isn't a huge pool of unemployed, well educated and ready to move engineers and craftsmen anywhere in Europe.

Even if these workers were available, I doubt that bringing them in would have much effect on exchange rates. Changing money supply proportional to the size of the population shouldn't do much, but correct me if I'm wrong.

Migration certainly has a lot of benefits, but I don't think it's the right tool to manage exchange rates. Peoples' lives are less flexible than short term market gyrations.

Pay it out to residents unconditionally, or especially to poorer ones.

UBI was on the ballot not so long ago and it didn't make it. But it was probably just too early.

I deliberately didn't write UBI since this would be one-off or at least very irregular, and not necessarily an amount high enough to deserve the name UBI.

This means that voters could decide differently than on UBI. Especially if these payments are financed by magic money printing rather than taxes.

It definitely can, but it's not guaranteed. Japan has been effectively printing money for ages, but it hasn't really led to inflation because demand is so weak - nothing gets bid up.

Well that's easy, you just build bullet trains everywhere, and create a culture where people build new houses, rather than buy second hand [1]. That should get things moving...

Snark aside, are there any good sources looking at Japanese economics, because they don't seem to follow the same rules as everyone else.

[1] https://www.theguardian.com/cities/2017/nov/16/japan-reusabl...

I would recommend looking at it from a Modern Monetary Theory perspective (1) (2). In my case, it's only then, when everything started to make sense.

(1) - http://bilbo.economicoutlook.net/blog/?p=33094 (2) - http://bilbo.economicoutlook.net/blog/?p=40250

They (Japan) themselves are doing it: https://www.bloomberg.com/news/articles/2019-06-05/japan-wor...

Given that even the proponents of MMT don't agree on what it is, I wouldn't. Economics as a discipline has problems(1), but I don't think MMT goes anywhere near to addressing them, nor to providing a scientific basis for doing so.

(1) Source: I hold a bachelor and master degree in econ

>>"Given that even the proponents of MMT don't agree on what it is [..]"

I'm not an economist but I have read a lot of the MMT literature, including the available textbook (1) and it's a totally coherent framework.

Can you point me to some of those contradictions that you have observed?

(1) - https://www.amazon.com/Macroeconomics-William-Mitchell/dp/11...

>Well that's easy, you just build bullet trains everywhere, and create a culture where people build new houses, rather than buy second hand [1]. That should get things moving...

Yeah, so?

They should just throw money out of helicopters. That ought to do it. Dunno why nobody has tried doing that yet.

Protestant work ethic.

Giving the average working person money without making them "earn" it is seen as far more offensive to the order of society than, say, burning down the Amazon.

Just to give an entirely hypothetical example. </s>

Because that is the responsibility of the parliament. The problem with that is that the parliament will become addicted to the infinite monry spigot since the parliament isn't bound by the inflation target. If the central banks were authorized to hand out a pseudo UBI but only to hit inflation goals then helicoper money might work. It's basically some stupid political game.

Australia avoided recession in 2008-09 by doing almost precisely this. Everyone got A$900 or thereabouts (a month's rent or more for some). Worked fantastically.

Think of it as applying a defibrilator to all parts of the body at once because there's no central point you can target. Infrastructure projects aren't as good as this because they take time and only really effect one particular geographic region with some spillover if you're lucky.

Defibrillators literally kill people after which you can manually revive them because their ventricular fibrillation is stopped. Maybe the metaphor is still fitting but I'm not sure you were going for it...

Langauge is metaphor.

A vfib patient is already dead, or on their way there. The heart has lost all rhythm, isn't effectively circulating blood (though it's expending energy like mad), and in a few minutes, further classifications of clinical death (brain death, organ death, cell death) will inevitably follow.

What a defibrillator does is stop an invariably fatal loss or order, and allow the heart's normal rhythm to be reasserted. That may happen spontaneously or via further artificial stimulation.

Vfib itself is described as "an electrical disorder of the heart", which is what distinguishes itself from other forms of cardiac insult, most especially a coronary infarction, which is a physical blockage of blood supply, generally from accumulated plaque, blood clots, or both.

The analogoue to financial systems is at best imprecise, but what a financial stimulus shock such as the apocryphal "helicoptor drops" does is to provide free cash (spending credits) to a large fraction of the population in a case where spending has dried up. The idea being that the availability of money will get economic activity flowing again. In a case where normal activity has stopped, it's at least a fair analogy -- a one-time widespread cash shock which may start flows moving again.

The key point being that complex interactive systems operate on an ordered dynamic state. The heart needs to contract and relax, with a regular rhythm. The economy needs payments, receipts, and wages, exchanged on a regular basis. Stopping, blocking, or disrupting the regular flows is what's fatal.

Defibrillation isn't killing the patient. It's restoring regularity.

Didn't the US do this - approx $600/person - in ... 2008? And... similar in 2001?

https://www.thebalance.com/bush-economic-stimulus-package-33...

Didn't seem to stave off a recession here...

> Japan has been effectively printing money for ages, but it hasn't really led to inflation because demand is so weak

So where does this extra money go?

In large part, overseas. Japan has long been known for what's called "the carry trade". This is where you borrow money at whatever ridiculously low rate is available in your jurisdiction (e.g. Japan) and then "carry" it to somewhere that has a higher interest rate and invest it there. You then pocket the difference (or spread). I hasten to add that this is due to low interest rates rather than inflation, but guess how we wound up with low rates. The deflation Japan has been suffering from directly arises from the expectation that prices will be lower tomorrow compared to today. So why spend? Invest it somewhere instead.

This carry trade stuff has really screwed with a number of exchange rates relative to the Yen and has been going on for a long time.

So why is Japan perceived as expensive by most other countries? You'd think this activity would cheapen the yen

They used to do that prior to 2014 or 2015, don't remember. It was pegged to EUR by constantly printing CHF and selling for EUR.

Then one beautiful day the peg was dropped without a warning. Many people and brokerages went broke in a matter of a minute.

> Many people and brokerages went broke in a matter of a minute.

I was here then as well, I somehow doubt many people went broke... It only went from being pegged at 1.2 dropping to around 1.0 as far as I remember. How would this cause anyone to to broke?

Leverage and the necessary stop losses. Much of forex trading is done on high leverage, and as such requires stop losses. For example at 10x leverage you can only sustain a 10% drop, even if it is very short, before your margin gets burned and the position forcibly liquidated. For a similar example look up the $SVXY long term chart (the event was called the volpocalypse, CBOE has a write-up on that).

Naturally there is no guarantee that a stop loss can be executed at any predetermined price - the market can just fly by your desired exit point without stopping there. This leads to huge losses when the position is actually liquidated, below the desired stop loss point.

The Talebs of the markets win a shit ton of money on days like that. Not sure who made money on chf/eur depegging (other than CHF deposit/bonds holders :) ), but volpocalypse was the cashout day for the mystery "50-cent trader".

Because forex trades can be levered a lot more than the usual equity instruments for consumers.

>They used to do that prior to 2014 or 2015, don't remember

15 January 2015: https://www.snb.ch/en/mmr/reference/pre_20150115/source/pre_...

Because doing this inflates the price of everything, including the exchange rate.

Imagine the following (simplified) situation:

Before inflation, a beer costs 10CHF, Euro is at parity: 10EUR = 10CHF = 1 beer

After inflation of 10x, beer now costs 100CHF: 10EUR = 100CHF = 1 beer

In the end, if you pay in EUR, a beer always costs 10EUR. The value of the CHF has not really weaken (only numerically)

That's assuming said beer is fully important vs a beer made domestically (with only domestic ingredients), which should still be closer to 10 CHF in your example (or now 1 EUR)

So what are the downsides for Switzerland using the Euro?

How much of Switzerland is tied up in it having its own currency?

Sovereignty over its fiscal policy is the the number one factor why countries opt out of a common currency.

That combined with one or two more arguments and you have yourself and abstaining country.

Switzerland would first need to be part of the European Union to be able to be part of the Euro Currency region. They voted against this in 1992 and again in 2001. I am not swiss myself so take this with a grain of salt, but a quick research showed that overwhelmingly swiss citizens are against joining the EU to keep their independence and their unique way of doing democracy (direct votes on issues) probably couldn't work so well anymore.

>overwhelmingly swiss citizens are against joining the EU

According to a Report from ETH Zurich [0] 16% of swiss citizens support joining the EU, so this confirms your statement.

[0]"Sicherheit 2018", page 21 https://css.ethz.ch/content/dam/ethz/special-interest/gess/c...

> Switzerland would first need to be part of the European Union to be able to be part of the Euro Currency region.

That's incorrect, there are non-EU countries using the Euro too like Andorra.

Andorra has a population of 70,000, you can't use it as an example of what Switzerland could do.

Yes, technically correct statement, but in practice, not gonna happen

Kosovo and Montenegro (1.7M and 0.7M habitants) are unilaterally using euro. Other (bigger) countries have their money pegged to euro : https://en.wikipedia.org/wiki/International_status_and_usage...

Yes, though they have a very close relationship, so they're "out but close enough"

> Switzerland would first need to be part of the European Union to be able to be part of the Euro Currency region. They voted against this in 1992 and again in 2001. I am not swiss myself so take this with a grain of salt, but a quick research showed that overwhelmingly swiss citizens are against joining the EU to keep their independence and their unique way of doing democracy (direct votes on issues) probably couldn't work so well anymore.

From a legal perspective, what's stopping any country from adopting the Euro? In theory they could continuously purchase euro with their currency and limit national currency use. Obviously there are downsides to the country doing it but is there anything legally stopping them (in an international law sense)?

Why would Switzerland want Germany to manage their currency?

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