From "Old Fred"
A few notions on negative notional rates.
Today the Swiss National Bank did something virtually unheard of in the realm of sovereign banking by reducing their notional short term deposit rates to a NEGATIVE 75bp.
What does this mean? Pick your context. First off, the net effect is you are paying the bank to hold your cash on an absolute basis. Put in 1000 ChF/USD and 30 days later you get back 925. It's not a fee, it's not a positive carry for the use of your deposit, it's a direct statement that the Swiss really don't want your cash anymore. At least not for the short term.
Lifting of the ChF peg to the euro was the ostensible reason given for the move, because of the continuing demand onslaught for a safe haven non-dollar currency. Do remember that a recent referendum was raised to reinstate the gold standard for the franc. A nifty way to adjust the balance sheet for the Swiss Fed.
It may be Econ 101 but don't lose sight of the fact that all currencies are derivatives by definition.
The almighty dollar
Another thought, lurking behind the move is the implicit attack on the status of the US dollar as a functional reserve
currency. Does this herald a move to unseat the Dollar? Perhaps but it wouldn't be the first time, Saddam Hussein lost his place on the world stage principally for suggesting he would prefer being paid in Euros for Iraqi oil, amongst other issues.
It certainly won't be the last time either. To wit, the largest consumers of bullion are India, who has import issues well documented, and China, the only other sovereign nation with a gold-backed currency. Given the vast US dollar reserves and Treasury bond holdings in Beijing, any risk transference afforded by a stabilization in the recent price of the metal comes as good news indeed. The fact remains that a G7 country contemplating a return to hard currency policies, frankly is a sea change of significant import.
There is other recent news of renewed bullion purchases by central banks after years of metal sales. Fiat currencies have historically ended badly, this is not news. The question of whether or not the implicit soft dollar policies that QE demands -- hell instills -- in the world economy, can be tempered by effectively doing a reverse repo on cash in circulation, should be the front and center topic of discussion for the FOMC.
DC begins to learn about boundaries
Make no mistake about it, the Fed is backed into a corner that has terrifying consequences for the US economy and globally if not adroitly managed. Are you paying attention Janet? A return to the bad old days of Frank Burns led stagflation in late 1970s, as a result of Nixon closing the gold window at the Fed, isn't beyond the pale. Paul Volker spent several years yanking interest rate levers and M1 targets around before stagflation finally was expunged.
Miscalculations by the Fed and Congress in the past led to some violent economic conditions as suggested above, some readers might not be old enough to remember them, but those of us who lived through them do not wish to see them return.
But we're not alone
The ECB is all set to launch a round of QE exercises in an attempt to rescue(?) the sagging fortunes of Greece and other struggling members, the Swiss move may preempt the effectiveness of such an attempt.
And what of Japan, whose circumstances of population demographics and declining economic output led the Diet to embrace an explicit QE effort to help extricate their economy from a multi-decade deflationary spiral? For the moment they get to be on the winning side of the trade as JPY/ChF spikes to levels not seen in over a year.
Gold is good; paper less so, is the message here from the Swiss. The future will tell us who is listening.
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