Not A Sign of Good Health

Swiss government bonds are trading at rates that imply a negative interest rate.  The German government is issuing bonds with interest rates of zero that are actually trading above face value.

This is really bad news.  Investing in these securities is effectively the equivalent of putting money in one's mattress -- it means that investors don't perceive any money-making uses for their money better than paying paying financially strong governments to keep it safe for a while.   I am far from an expert on banking regulations, but my first guess on this is that this is at least in part a function of bank capital requirements that effectively require banks to put a lot of cash into government securities no matter how bad the return.

Germany and Switzerland certainly are providing some value in creating a safe haven for capital, but I wonder if in the long-run this is anything but destructive, shifting wealth and investment out of the private economy and into investments with no return.

 

  • LarryG

    When the govt does this - people STILL have a CHOICE and what the govt is doing, in effect, is encouraging people to invest in other things for a better return.

    If the govt actually paid more/better interests, THAT would be a DISASTER as money would exit the private sector and flow to govt bond and gov debt would skyrocket.

    right?

  • tomw

    Well, think about it. Would YOU hold onto the Euro if you could get Swiss Francs in exchange? Knowing that Graecia and Hispania are trying to decide *when* to dump membership in the EEC(European Economic Community?) or basically, dump the Euro for Drachma and Peseta(?) This portends definite large, economy size losses for the Deutch and Franco banks ... along with anyone else buying Greek and Spanish bonds ... which in the case of the 1st will likely get an economy sized haircut.
    How much of this Greek/Spanish bouncy bonds do the US banks hold? Enough to put them under water? I dunno... but Swiss francs look better and better as they are all backed by Au.
    tom

  • me

    Physical gold. Except, of course, you can't get your hands on it, and if you can get your hands on it, you'd better not leave a record, lest it be confiscated.

  • Mark2

    @Larry G. Kindof. The government also loans the banks money to invest. In the US they are given money essentially for free, and told - due to new regulations to protect us all - that they better invest it in something safe. Hmm, free money Treasury bonds @ 1.5% OK, I'll invest there and live off of the spread instead of trying to find someone who can use the money in the private sector.

    Some have suggested that the Federal Reserve should raise borrowing costs higher than 10 year treasuries, so banks start privately lending again. Of course if that happens, how will the government force the Banks to finance the Federal deficit? And Bonus, at the same time allowing he government to berate the banks for not lending to privates.

  • skh.pcola

    @tomw: The Swiss franc is not backed by gold, due to a referendum that passed sometime in 2000. The US holds over 8 metric tonnes of gold, more than 2x the amount held by the next-largest reserves.

  • bradley13

    For what it's worth, the view from within Switzerland is kind of strange at the moment. Being rather conservative, the Swiss have (by law) a balanced federal budget. This means that the currency markets have been viewing Switzerland as a safe haven for a few years now, which was driving up the value of the Swiss franc.

    The problem is that we are tiny and we have an export-oriented economy: precision machinery, pharmaceuticals, etc.. When the currency started going up, Swiss exports started to collapse. The banks might be happy, but the rest of the economy was starting to look really ugly.

    The result was a decision by the Swiss National Bank to nail a minimum exchange rate with the Euro: CHF 1.20 = EUR 1.00. The SNB has basically printed something like CHF 100 billion, and used it to buy Euros, in order to hold this exchange rate.

    Meanwhile, the big investment houses (mostly US, the same ones who brought you the 2008 banking crisis) have begun to bet that the SNB will stop supporting the exchange rate. As a result, the speculators hope to make a killing at our expense. Since the SNB can print as much money as it cares to, there is really no reason why this should be allowed to work. However, the investment houses have a direct line to Washington, and we can expect to see some hefty political pressure any day now. Within a few months, the speculators will be getting desperate: those currency options do eventually expire...

    Personally, I hope that the SNB just quietly keeps going until the currency speculators lose their shirts. If this means that the big investment houses go bankrupt again, maybe this time the US government will let them fall. Heck, maybe they will throw a few of the more egregious crooks in jail. One can dream...

  • tomw

    bradley13:Personally, I hope that the SNB just quietly keeps going until the currency speculators lose their shirts. If this means that the big investment houses go bankrupt again, maybe this time the US government will let them fall. Heck, maybe they will throw a few of the more egregious crooks in jail. One can dream…
    June 4, 2012, 11:31 pm

    You and a WHOLE LOT of regular old people have the same hope. Somehow, it is OK for 'special' people to do things that would be grounds for normal, run-of-the-mill Shmoes to get thrown in jail.
    Steal{funny 'transfer'} their money, get rich. Sell bogus 'Credit Swaps' to your customers, get rich. Tout stocks and bonds that you predict will tank, get rich, both on the transaction fee, and selling the stock/bond before it drops. Or selling short. Find a bank/house that is in a bit of trouble, and drive it into the ground by shorting its stock. It's all OK because, you know, we have A GUY...
    tom

  • Kelv

    @skh.pcola: I think that would be 8000+ metric tonnes - otherwise the USA really is in trouble.

    @bradley13:re Switzerland. The problem is the Swiss National Bank could (will) end up printing unlimited CHF to buy the EUR defending the peg. Not a good plan if all your EUR "assets" on the balance sheet freefall in value in a breakup scenario. The losses could be a huge % (or worse, multiple)of Swiss GDP. Good luck controlling things in that situation...eventually someone - taxpayers raise a hand - has to foot the bill. It could get very uncomfortable for the SNB and that is what the speculators are betting on. As you say, Switzerland is a small economy and it gets expensive to divided billions of losses by 7 million population... or max 4 million taxpayers.

  • Kelv

    @bradley13: Just an aside.
    In fact you could say it was an act of that peculiar European term "solidarity" for the SNB to actively support the EUR - which is exactly what they are doing.

    For me the unintended consequence may be that, should the ECB try to stimulate/print/LTRO etc, again - what if this just propels a flood of bank funds into CHF?

  • Mark2

    @Bradly13, due to the World currency status, the United States has been the safe currency now for most of 40 years, with doubt cropping in the last few years.

    Since Switzerland is small you can see the effects faster. As the currency is unnaturally overvalued by speculators looking for a safe haven, exports have become more expensive, and if it keeps up the Swiss won't be able to manufacture anything but money.

    But for some reason folks don't see that the United States having an overvalued currency for 40 years due to world currency and safe haven status, caused much of our manufacturing to go overseas. In fact if you think it through much of our economic distortions can be attributed to the overvalued dollar.

    There is a reason why China does not want to take the mantle as reserve currency country - as it rightly should - they know in 40 years China would end up a wreck.

  • rpb

    @bradley13:

    Interesting thesis. If you are certain of this next leg in the crisis, the mechanism for personal profit is anything but opaque. Please, pray tell, what financial positions have you taken to affect this view?

    - Curious

  • a_random_guy

    @Kelv: "In fact you could say it was an act of that peculiar European term “solidarity” for the SNB to actively support the EUR – which is exactly what they are doing" Well, part of it is the economy. The solidarity part may be due to political pressure. You know, little things like threats to cancel the open-borders/free-trade status we have with our neighbors...

    @rpb: "If you are certain of this next leg in the crisis, the mechanism for personal profit is anything but opaque. Please, pray tell, what financial positions have you taken to affect this view?" The problem is: I am not certain at all. Will the SNB stick to its guns, or will it (as Kelv indicates) eventually cut its losses? Even the experts don't know - I certainly don't.

    I just hope that our little country survives the coming collapse of the Euro-zone; we are massively endangered even though we try to remain as uninvolved as possible. Ok, maybe I am also hoping for a bit of "Schadenfreude" for the speculators who keep causing these crises. Too much very real power in too few (and too unscrupulous) hands.

  • tomw

    There is a reason why China does not want to take the mantle as reserve currency country – as it rightly should – they know in 40 years China would end up a wreck.
    ....
    Gotta ask. Would YOU trust that the Chinese would not diddle with the renminbi or decide certain 'special' bank notes were suddenly more valuable than others?
    All of the major "socialst ... republics", such as USSR, China, and North Korea were about as trustworthy as a used car salesman on the 30th of the month. Pardon the slur to all used car salesman.
    I see no way that the Chinese currency can take the place of the US dollar.