Swedes Swap Negativity for Positivity
Negative interest rates are a last resort, reserved for the throes of a massive downturn. Unless you literally stash cash under a mattress, negative interest rates result in you getting charged on money you save. The idea is to punish folks chickening out of investing when confidence is down, and to encourage risk-taking to get business moving again!
Facing weak and frozen economic indicators in the first half of this decade, Europe bit the bullet. Sweden, Denmark, Switzerland, and the European Central Bank, dipped into negative territory, embarking on a unique fiscal experiment. The potential payoffs have since inspired President Trump also to call for a sub-zero America. However, the extreme stock market stimulus is only one half of the story!
Despite a drop of equal heights, lowering interest rates from 0% to -0.25% sends out a far more disturbing message to markets than lowering them from 0.25% to 0%. When you go sub-zero, you’re supposed to be in the doghouse. The low-rate environment also kills bank profits, and financials have always been a major pillar of most economies. Charging lenders to deposit money doesn’t do the sector much good.
Citing these side effects, Sweden announced last week that it was finished with the extreme fiscal medication. Despite the krona scraping all-time lows against the euro amid rising debt, growth has accelerated, and inflation is nearing the Riksbank’s target. The Swedes have got what they came for. Now, it’s time to go “back to normal!”
There’s a chance the rest of Europe could follow, and without naming names elsewhere in the world, economist James Pomeroy of HSBC says there are “a lot of lessons from Sweden’s experience for others considering negative rates.” In the same way that a head-banging rock and roll frontman should not be given caffeine pills, a healthy state-side economy should not be administered negative interest rates. But, what if?