1/8/2020 Why Sweden Ended Its Negative Interest Rate Experiment | Zero Hedge

Why Sweden Ended Its Negative Interest Rate Experiment

by Tyler Durden
Wed, 01/08/2020 - 03:30

Authored by Daniel Lacalle via The Mises Institute,

Negative rates are the destruction of money, an economic aberration based on the mistakes of many
central banks and some of their economists, who start with a wrong diagnosis: the idea that economic
agents do not take more credit or invest more because they choose to save too much and that therefore
saving must be penalized to stimulate the economy. Excuse the bluntness, but it is a ludicrous idea.

Inflation and growth are not low due to excess savings, but because of excess debt, perpetuating
overcapacity with low rates and high liquidity, and zombifying the economy by subsidizing the low-
productivity and highly indebted sectors and penalizing high productivity with rising and confiscatory
taxation.

Historical evidence of negative rates shows that they do not help reduce debt, they incentivize it. They
do not strengthen the credit capacity of families, because the prices of nonreplicable assets (real estate,
etc.) skyrockets because of monetary excess, and the lower cost of debt does not compensate for the
greater risk.

Investment and credit growth are not subdued because economic agents are ignorant or saving too
much, but because they don’t have amnesia. Families and businesses are more cautious in their

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investment and spending decisions, because they perceive, correctly, that the reality of the economy that
they see each day does not correspond to the cost and the quantity of money.

It is completely incorrect to think that families and businesses are not investing or spending. They are only
spending less than what central planners would want. However, that is not a mistake from the private sector
side, but a typical case of central planners’ misguided estimates, which come from using 2001–7 as a “base
case” of investment and credit demand instead of what those years really were: a bubble.

The argument of the central planners is based on an inconsistency — that rates are negative because
markets demand them, not because they are imposed by the central bank. If that is the case, why not let
rates float freely if the result is going to be the same? Because it is false.
Think for a moment what type of investment, company, or financial decision is one that is profitable
with rates at –0.5 percent but unviable with rates at 1 percent. A time bomb. It is no surprise that
investment in bubble-prone sectors is rising with negative rates and nonreplicable and financial assets
skyrocketing.

Public debt trades at artificially low yields and, instead of strengthening economies, negative rates make
governments more dependent on cheap debt. Politicians abandon any reformist impulse and prefer to
accumulate more debt.

The financial repression of central banks begins with a misdiagnosis, assuming that low growth and below-
target inflation is a problem of demand, not of the previous excess, and ends up perpetuating the bubbles
that they sought to solve.

The policy of negative rates can only be defended by people who have never invested or created a
job, because no one that has worked in the real economy can believe that financial repression will lead
economic agents to take much more credit and strengthen the economy.

Negative rates are a huge transfer of wealth from savers and real wages to the government and the
indebted. A tax on caution. They are the destruction of the perception of risk that always benefits the most
reckless. The bailout of the inefficient.

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Central banks ignore the effects of demography, technology, and competition on inflation and the
growth of consumption, credit, and investment, and with the wrong policies they generate new bubbles
that become more dangerous than the previous ones. The next bubble will again increase the fiscal
imbalances of the countries. When central banks present themselves as the agents that will reverse the
effect of technology and demographics, they will be creating a greater risk and bubble.

Sweden launched its failed negative rate plan almost five years ago and has now reversed it due to
the financial risks that are created. The most interesting thing is that it reversed the policy of negative
rates precisely because of the risk of an economic slowdown, because the evidence shows that investment
and consumption decisions do not increase with financial repression.

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In Sweden, with negative rates, the real estate price index has increased 50 percent (from 160 points to
240), the average residential index has risen 27 percent, nonreplicable assets have risen between 30 and 70
percent (infrastructure, etc.), and the stock market has risen more than 20 percent. In that period,
household consumption and investment (gross capital formation) have increased very little and real wages
have remained stagnant.

Monetary policy has gone from being a support for structural reforms to an excuse to avoid them.
Now, governments are delighted to read that “fiscal measures” must be implemented. And when a
government hears “fiscal measures,” it translates it into “spending.” And when the eurozone governments
start spending, the result is always the same: more debt and higher taxes.

In the eurozone, the economic aberration of negative rates continues despite the evidence of the
collateral risks they generate. Meanwhile, you and I are blamed for not spending and borrowing more.
What can go wrong?

15479  29 

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All Comments 29 Viewing Options

Best President Ever 3 hours ago  

To Help ZH propagate their Pro Trump propaganda.
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Yen Cross 3 hours ago  

 I's suggest you act like a *****?
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PT 3 hours ago  
BestP...:  Is that all you have got???

With a comment like that, I can only assume that:

1.  You want to clog up the comment stream with ****.
and
2.  You want to see Trump re-elected.

There's a whole internet out there and yet here you are.
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Junaid Abbasi 3 hours ago  

The first tests of a ten-core Intel processor on a new socket
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PT 3 hours ago (Edited)  
Ten cores?  TEN cores???  Who are these idiots?  Why not 16 cores?

Tell marketing to **** off and put the engineers in charge.

Edit:  Or are the other 6 cores for NSA-use only?

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1

Yen Cross 3 hours ago  

 Get back to me when the rapings stop

 Scandanavion pussies?
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2 2

Junaid Abbasi 3 hours ago  

AMD has done a miracle? Vega GPUs in new Ryzen mobile processors are really much faster than
old ones
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1 1

MalteseFalcon 11 minutes ago  

"They didn't go negative enough.  How do I know?  There's still savings in Sweden"
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CTG_Sweden 2 hours ago (Edited)  

The Swedish central bank had to give up the negative interest policy since on order to curb the
depreciation of the Swedish krona somewhat. The Swedish current account balance has
deteriorated a lot over the past 15 years since the population has grown by about 10 % which in
turn automatically increases the demand for imported goods like consumer electronics, oil and
oranges. At the same time Sweden does not automatically export more just because the
population grows. It doesn´t grow more trees that you can chop down and export just because the
population grows. You don´t automatically get more big export companies like Sandvik, Atlas
Copco and Volvo just because the population grows. No such company has emerged in Sweden
during the post-war era. The big export companies are generally 80-180 years old. It´s very hard
to create such companies. Therefore, a larger population has to share about the same export
revenues as in the past, ceteris paribus.

To the politicians this is no big problem, however. If the Swedish krona depreciates too much, and
the general public notices that, they just say "see, we got to join the Eurozone". This is probably
also why they keep the government debt relatively low and instead let the debt for the
municipalities grow fast by various means (such as forcing them to pay for the refugees rather
than than let the government pay for such things). Remember that you can´t join the Eurozone if
the national debt to GDP ratio is too high (when the Euro was introduced I think the limit was 60
%).
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kellys_eye 2 hours ago  

Some form of (brief) sanity ensues I suppose...... if they could apply it to their policies on
immigration too that would also open a few eyes.

Either way, if the banks don't bring the country down their open borders policy surely will.  End
result is exactly the same.
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SnatchnGrab 2 hours ago  

Sweden launched its failed negative rate plan almost five years ago and has now reversed it
due to the financial risks that are created.

******************

These are the same folks who thought that importing tens of thousands of third-world, non-
assimilating, no culture-sharing, individuals was a good idea.

 
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Fireman 2 hours ago  

Au

Ag

Pb

Because all fiat filth returns to zero; alway$!

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tac_for_tac 2 hours ago  

If the US indeed landed on the moon then the Iranian could hack into something other than the
federal library but since it’s ffyesffyesffyesffyesffyesffyesfffake then they couldn’t not hack into f-
a-K-e websites, instead also Iran and US are plotting together against something bigger which is
stopping Lebanon my country to regain independence and sovereignty, Racha
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Fireman 2 hours ago  

WTF
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Fireman 2 hours ago  

There are still those that "believe" USSANS "landed" on da Moon?

Shocked I am...truly shocked.

But you can still be helped....

https://www.youtube.com/user/BartSibrel1
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p // y / /

https://www.youtube.com/watch?v=16MMZJlp_0Y

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tac_for_tac 2 hours ago (Edited)  
Through time, I believe Fireman you excuse me should know through time, black holes
don’t work because there’s no act of love in the world, it’s all an act of fakery, you should
be able like any miraclework to work a black hole if there’s love. 
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Kayhla the Prettiest 2 hours ago  

Because, at the end of the day, who doesn’t love losing money?

Asking for a friend.

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ali-ali-al-qomfri 3 hours ago  

How the F is Greta gonna explain this?.............profits?

"how dare you".

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Batman11 3 hours ago (Edited)  

They have had a real estate boom.

“Who hasn’t?” I hear you ask.

To maintain those real estate valuations interest rates have to stay low.

They don’t want to do a “Greenspan”.

http://newsimg.bbc.co.uk/media/images/45089000/gif/_45089770_us_rates_oct08_226gr.gif

There were delays while the teaser rate mortgages reset; the new mortgage repayments became
unpayable; the defaults and other losses accumulated within the system until everything came
crashing down in 2008.

They’ve backed themselves into the real estate corner.

Inflated real estate valuations aren’t real wealth that is measured by GDP.

It’s there, and the next thing you know it’s gone.

1990s – UK, US (S&L), Canada (Toronto), Scandinavia, Japan

2000s – Iceland, Dubai, US (2008)

2010s – Ireland, Spain, Greece

Get ready to put Australia, Canada, Norway, Sweden and Hong Kong on the list.

They don’t want that real estate bubble to burst whatever happens.

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The clowns in the US are going for the hat-trick.

1990s – S&L

2000s – 2008

2010s – Another real estate bust is due

Spot the brain cell.

Ritual humiliation of the old and greedy – aka US policymakers.

https://www.youtube.com/watch?v=FNvaYxn45-U

 
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Batman11 2 hours ago (Edited)  

This will make you laugh.

Spot the brain cell.

Ritual humiliation of the old and greedy – aka US policymakers.

What lifted US stocks to 1929 levels in 1929?

Margin lending and share buybacks.

What lifted US stocks to 1929 levels in 2019?

Margin lending and share buybacks.

As long as US companies keep doing share buybacks things should be OK, otherwise it’s all
going to fall off the edge of a cliff.

A former US congressman has been looking at the data.

https://www.youtube.com/watch?v=7zu3SgXx3q4

******* clowns.

Ready for more?

Spot the brain cell.

Ritual humiliation of the old and greedy – aka US policymakers.

1929 and 2008 look so similar because they are; it’s the same economics and thinking.

https://www.youtube.com/watch?
v=vAStZJCKmbU&list=PLmtuEaMvhDZZQLxg24CAiFgZYldtoCR-R&index=6

At 18 mins.
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Richard Vague has analysed the data for 1929 and 2008 and they were even more similar
than they initially appear.

Real estate lending was actually the biggest problem in 1929.

Margin lending was another factor in 2008.

It’s got be a joke, hasn’t it?

No one can really be that stupid.

 
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The Real Tony 7 minutes ago  

Share buyback don't work because corporations today are paying 6 to 10 times the true
valuation of those shares. Like I've said all along Share Buybacks = Chapter 11 Bankruptcy
= The GE Effect (General Electric Effect).
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JailBanksters 3 hours ago  

Even simpler answer

ALL Financial Instruments are ONLY designed for Positive Interest Rates.

When it goes Negative, you solve one problem but creates even more problems.

If swedes are so smart, then didn't know this before they did it.
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_ConanTheLibertarian_ 3 hours ago (Edited)  

At least they learned from their mistake.

Now throw the muzzies out. That was the biggest mistake.

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Orwellian Brother 3 hours ago  

and all the other non whites...
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Panic Mode 3 hours ago  

It's a TAX, nothing else. STUPID!
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PersonalResponsibility 3 hours ago  

Why can't I get a negative rate? I'd borrow $100 trillion and live off the interest. I mean, if the MIC
want us to borrow and spend more, let me borrow $100 trillion with a negative rate. I mean it's no
risk that I won't pay it back because I never have to.
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PT 3 hours ago  
This is the "Some Animals Are More Equal Than Others" part of the story.

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Nordicist 2 hours ago  

It's the rate charged lending your money to them. It's like a fee for having your money in a
"safe harbour"

If you can provide safety you too can benefit from these low or negative rates. Like owning
property and taking out a loan with that as security.

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