…on Wednesday, a new thing happened: Switzerland sold 10-year government debt at a negative yield. They’d been selling debt at negative yields for a while, but with a 10-year maturity. No country had.
The little country with piles of money is defending itself against the influx of euros by repressing interest rates and making it in theory unpalatable to hold Swiss francs. But it isn’t working. What dreadful thoughts are rumbling through the heads of these investors that would scare them into lending their money to the Swiss government for ten years, not to earn a fair return, but for safekeeping apparently, and they’re even willing to pay for it!
The Iron Bank of Helvetia.
Like who the heck heeds warnings now a days.
I remember about 40 years ago some financial genius working for the City of Edmonton had them borrow a large amount of cash at a really low interest rate. All was well until it had to be paid back. Who could have possibly known that the Swiss franc would double in value? Like – everyone?
Negative interest bonds are, on the face of it, absurd, and a sign that something is very amiss in the financial world.
Think about what has transpired here. Someone has loaned the Swiss government money for ten years, with the certainty that they will get less than the loaned amount back. The worst case might involve default or some significant intervening inflation. Best case would be they get repaid less than they loaned, with intervening deflation to give them the gain they need to offset their risks.
This is precisely what they are betting on, and this deflationary expectation is precisely what is amiss in our world. The last time the world encountered a sustained period of deflation was the “dirty thirties”, and that did not end well, if I recall correctly.
That’s the feature not the bug wood porter.
They are banking on a serious crash, world war, who knows but they know something is up.
They are hoping that they will get back most of their money back from the Swiss. They are afraid that they will have less if they keep it in their own currencies.
Q: >>”But how the heck do you stop this madness before something BIG breaks? How do you get out of it without bringing down the whole construct?”
A:>> Have a world war. The Left honestly believes this is how the depression was beat. Are we not walking down this path by letting Iran build nukes and being the “regional power” in the ME, or letting Russia have its with way with border countries, or letting China do its thing in the far east?
FOMC
Who would guess that’s the acronym for the Federal Open Market Committee unless they googled it? I wish they would just say what is. Otherwise good article.