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Swiss National Bank Cuts Interest Rate To Minus 0.25%

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Reminds me of a online lecture given by some Bulgarian many of us on HPC have seen where he says in an animated way:
“First you have a period of deflation and then comes the big inflation and then you have currency collapse”…

Edited by PricedOutNative

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Reminds me of a online lecture given by some Bulgarian many of us on HPC have seen where he says in an animated way:

“First you have a period of deflation and then comes the big inflation and then you have currency collapse”…

Looks like he was correct. Supply side destruction in the oil industry must be horrendous at the moment, and to a lesser extent most other commodities. Any wiff of a genuine global recovery and prices are going to go ballistic.

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They've been spending vast amounts reducing their currency (!!!) to 1.20 €. They can't do that forever so now that, say, Russia is at 17% they're at -0.25%. Depositors have their options.

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How does this work?

You deposit £100 and they take off 0.25% annually?

also known as a bail in

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caught a comment on the business news on the Beeb

strong showing on the 'footsie' means interest rates can be kept low - SO WE HAVE MORE MONEY IN OUR POCKETS TO SPEND

but only if we borrow to spend - aaaargh

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caught a comment on the business news on the Beeb

strong showing on the 'footsie' means interest rates can be kept low - SO WE HAVE MORE MONEY IN OUR POCKETS TO SPEND

but only if we borrow to spend - aaaargh

I saw that too.

I swore constantly at the telly while chopping onions.

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Something I don't understand maybe some one can help.

If the base rate is minus 0.25% and I borrow a million to buy a house. The million comes out of thin air. The person I buy the house off deposits the money into the bank and the bank loses 0.25% per annum. on that million pound deposit. Why would that encourage the bank to make the loan in the first place?

If the bank only pays 0.25% on the money held at the central bank. Again why would it encourage the bank to make a loan when it doesn't lend that money it lends money out of thin air?

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Something I don't understand maybe some one can help.

If the base rate is minus 0.25% and I borrow a million to buy a house. The million comes out of thin air. The person I buy the house off deposits the money into the bank and the bank loses 0.25% per annum. on that million pound deposit. Why would that encourage the bank to make the loan in the first place?

If the bank only pays 0.25% on the money held at the central bank. Again why would it encourage the bank to make a loan when it doesn't lend that money it lends money out of thin air?

Negative interest rates don't encourage lending. What they do is encourage consumption of savings (deposits) until those savings (deposits) which are left are in balance with the value of the assets held by the bank.

Its not about encouraging borrowing, its about discouraging saving.

What this translates to is that the income the SNB gets from its -0.25% rate on deposits with it needs to be deleted by the SNB - not spent back into the economy somehow,

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Negative interest rates don't encourage lending. What they do is encourage consumption of savings (deposits) until those savings (deposits) which are left are in balance with the value of the assets held by the bank.

Its not about encouraging borrowing, its about discouraging saving.

What this translates to is that the income the SNB gets from its -0.25% rate on deposits with it needs to be deleted by the SNB - not spent back into the economy somehow,

Which does raise an interesting point what's the plan when all the savings have gone....

However if you have deflation and negative rates you could be saving in real terms even if nominally you are losing cash. Although then you have the arguement you would just hold cash, but then you run the risk of it being stolen.

Negative rates are complete head feck, in reality there is nothing stopping you from borrowing money on a negative rate where you'd make a repayment each month to reduce the principle and the negative rate would also reduce some of the principle.

Edited by interestrateripoff

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Something I don't understand maybe some one can help.

If the base rate is minus 0.25% and I borrow a million to buy a house. The million comes out of thin air. The person I buy the house off deposits the money into the bank and the bank loses 0.25% per annum. on that million pound deposit. Why would that encourage the bank to make the loan in the first place?

If the bank only pays 0.25% on the money held at the central bank. Again why would it encourage the bank to make a loan when it doesn't lend that money it lends money out of thin air?

erm I don't think you or other posters understand how this works. The bank will lend the money deposited out at say 2% rather than park it with the central bank at -0.25%.

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erm I don't think you or other posters understand how this works. The bank will lend the money deposited out at say 2% rather than park it with the central bank at -0.25%.

Not if they think they won't get it back they won't. If the risk is losing 1% of the money then by lending it compared to only losing 0.25% then you park the money in the bank. To force lending the losses the bank will suffer need to be greater than losing the money that's parked.

To even be in this position demonstrates how fecked the global economy is.

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Which does raise an interesting point what's the plan when all the savings have gone....

However if you have deflation and negative rates you could be saving in real terms even if nominally you are losing cash. Although then you have the arguement you would just hold cash, but then you run the risk of it being stolen.

Negative rates are complete head feck, in reality there is nothing stopping you from borrowing money on a negative rate where you'd make a repayment each month to reduce the principle and the negative rate would also reduce some of the principle.

People have a choice of course.

Nobody is forcing Russian billionaires to put money on deposit in Swiss banks or buy overpriced London property.

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As I understand it, if you deposit more than 10million CHF in the SNB within a certain instant access account your interest rate is -0.25% (i.e. you pay them).

This isn't a direct problem to the average Swiss citizen.

But the problem is, banks are regularly storing money in this account for safe keeping, this increases costs for banks, which will then be passed on to customers (probably in the form of higher bank charges, and lower interest rates on savings).

I assume money kept out of the SNB is not affected.

Edited by reddog

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Which does raise an interesting point what's the plan when all the savings have gone....

Don't view cash savings as a real thing. Year to year, the global economy saves nothing in actual fact apart from inventory. Inventory is finished production goods and raw materials available but not sold/consumed. The savings you are talking about are necessarily balanced by borrowings.

What good is inventory if its not going to be used? No good at all. Note that services cannot be part of inventory since services not consumed immediately go to waste as idle labour.

If there was suddenly no savings at all and no borrowings at all, we could recover instantly from that situation by parties X deciding to lend an amount S, and parties Y deciding to borrow amount B, where S=B. Now we have lots of "savings" again.

Stored up financial savings are not required for an economy to function except in so far as they drive capital concentrations to a level where societies resources can be focussed on particular things. Further, there is no guarantee that the focus of those savings is useful.

If there is too much savings S, then either B must rise match it or S must fall. Negative rates are about making S fall to match B, not the other way about.

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Don't view cash savings as a real thing. Year to year, the global economy saves nothing in actual fact apart from inventory. Inventory is finished production goods and raw materials available but not sold/consumed. The savings you are talking about are necessarily balanced by borrowings.

What good is inventory if its not going to be used? No good at all. Note that services cannot be part of inventory since services not consumed immediately go to waste as idle labour.

If there was suddenly no savings at all and no borrowings at all, we could recover instantly from that situation by parties X deciding to lend an amount S, and parties Y deciding to borrow amount B, where S=B. Now we have lots of "savings" again.

Stored up financial savings are not required for an economy to function except in so far as they drive capital concentrations to a level where societies resources can be focussed on particular things. Further, there is no guarantee that the focus of those savings is useful.

If there is too much savings S, then either B must rise match it or S must fall. Negative rates are about making S fall to match B, not the other way about.

stop focusing on money...it is not real.

.

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Negative interest rates don't encourage lending. What they do is encourage consumption of savings (deposits) until those savings (deposits) which are left are in balance with the value of the assets held by the bank.

Its not about encouraging borrowing, its about discouraging saving.

What this translates to is that the income the SNB gets from its -0.25% rate on deposits with it needs to be deleted by the SNB - not spent back into the economy somehow,

Thank you that makes sense. If people save the government has to take on more debt to balance it.

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erm I don't think you or other posters understand how this works. The bank will lend the money deposited out at say 2% rather than park it with the central bank at -0.25%.

Banks don't lend out their deposits they lend out money out of thin air.

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So they have to hold 100% of deposited money?

They don't really hold much money. They hold a lot of zero's and one's that represent money. You may hold a piece of paper saying I.O.U a million pound. It doesn't mean you are going to get your million pound.

To try and explain what I mean.

Say four people are locked into a room and the only money in that room was £100. one person has a I.O.U of £1000 another may hold an I.O.U for £2000. and the other two may betweeen them have a debt of £3000. So long as the balance sheet balances The amount of money is irrelevant.

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