
Switzerland Tried Negative Rates in the 1970s - pseudolus
https://www.bloomberg.com/opinion/articles/2019-08-22/swiss-history-of-negative-interest-rates-is-ugly
======
roenxi
~ 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.

~~~
bobthepanda
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.

~~~
roenxi
> 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.

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jaclaz
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.

~~~
nwellnhof
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.

~~~
tom_mellior
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.

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s_Hogg
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.

~~~
H8crilA
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.

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k5hp
_Prior to the downturn, official unemployment figures only acknowledged 81
unemployed people – yes, 81 – in a country of 6.4 million._

Incredible number.

~~~
steve19
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...](https://www.cambodiadaily.com/editors-choice/cambodias-low-jobless-
rate-hides-harsh-reality-106803/)

~~~
ACow_Adonis
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".

~~~
Rexxar
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.

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H8crilA
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._

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

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Varqu
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?

~~~
s_Hogg
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.

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

~~~
s_Hogg
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.

~~~
blackbrokkoli
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...

~~~
dredmorbius
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.

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zeristor
So what are the downsides for Switzerland using the Euro?

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

~~~
beberlei
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.

~~~
lagadu
> 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.

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

~~~
Rexxar
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...](https://en.wikipedia.org/wiki/International_status_and_usage_of_the_euro#Pegged_currencies)

