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Negative Interest Rates

Last week Switzerland elected to lower their interest rates to negative (-25) basis points.  Most people roll their eyes when they see news like this when in reality in they they should be greatly concerned. It is almost unheard of for a bank to charge depositors a fee for putting money in their bank. However, but in this case, the Swiss bankers are getting nervous for what lies ahead.

negratesFor generations the Swiss have had the strongest and safest banking system with a real emphasis on privacy and, because of this, money has been pouring into the country.According to SNB President Thomas Jordan, the main factor in the bank’s decision was to slow down the inflow of Russian money into Switzerland.  Because of the drop in oil prices causing a financial crisis for the Russian ruble, wealthy Russians are sending money to Switzerland because of its “safe haven” status and concerns that Russia will nationalize the banks and, essentially, steal the peoples’ monies.

Since the crisis in 2008, central banks all over the world have been buying back bonds and printing money at a furious pace to inflate assets. However, with oil and other commodity prices beginning to fall, cracks are beginning to appear in the financial system.

Given the size of its country , the Swiss are not capable of handling this influx of cash and are trying to discourage money from coming their way. The Swiss don’t want the value of their currency to soar… nor do they want to import inflation. In an effort to stem that tide, they are employing measures to stop this from happening.

The fact is most small countries in the world can’t handle these massive types of inflows. There are really only three markets in the world that could likely handle this type of inflow: Japan, the United States and the European Union.

However these three markets are probably the most indebted in the world and have the largest bond markets. Because of  this, they are able to soak up most of the world’s reserves, thereby placing them in huge positions of power. The size of the debt markets gives them an unfair advantage and enables them to siphon off tremendous amounts of money. But in this instance the Russians are not sending their money to one of these markets but to a small European country.

The “great concern” I mentioned in the opening paragraph is this: Russian deposits into Swiss banks as opposed to Japan, the United States or EU implies they no longer trust the financial stability of the world’s three biggest investment blocks.

 

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