Negative interest rates are here at last

Well, we feared this day was coming. And now it’s finally here. Negative interest rates have been passed on to the customer for the first time. But it probably won’t be the last. This from Yahoo over the weekend (emphasis added is mine):

“A tiny Swiss bank specialised in financing social and environmental projects will on January 1 go where no retail lender has gone before, applying negative interest rates on individual clients.

“The Alternative Bank Schweiz (ABS) caused shockwaves with a letter sent to all clients in mid-October informing them that it would begin imposing interest charges on deposits in 2016.

“For current accounts, the bank said it would impose a -0.125-percent rate, while slapping a -0.75-percent rate on client deposits higher than 100,000 Swiss francs ($98,650/€92,420).”

It’s true that the higher negative interest rate only affects those with large deposits. But if you think this is something that will affect only the rich, I strongly encourage you to think again. It always starts this way, establishing something in principle. And then it goes from there.

Some people still think we’re over-hyping the risk to your savings – that it could never happen here; that you don’t need to worry about it, much less plan ahead to prepare for it. Well, we’ll see. More on this story throughout the week.

Brexit not bad for British credit

There is some good news this Monday. While Brussels is on lockdown in fear of a terrorist event, credit ratings agency Moody’s said that, should British voters choose to leave the EU between now and 2017 (and should British politicians respect the wishes of voters), it would not lead to an automatic downgrade of Britain’s sovereign credit rating.

According to Moody’s senior vice president, Kathrin Muehlbronner:

“What we care about is economic strength, and it is our view that the economic impact of a Brexit would be negative. The question is: how big would the damage be? Would we just be looking at a short-term moderation of growth where the UK puts in place other policies that mitigate the other downsides? In that case, it might well be that there is no impact on the rating. For example, in a scenario where growth falls that doesn’t change some of the fundamentals of the UK, we see it as a very strong, large, diversified and rich economy with strong institutions.”

Britain’s been ‘doing’ free market capitalism for the better part of 400 years. You don’t lose that kind of institutional strength overnight. This is a point Charlie Morris makes in his cover story on why Britain should leave the EU. That story comes out in MoneyWeek on Friday.

The other ratings agencies are weighing in as well

Standard & Poor’s disagrees with Moody’s. It has warned that Brexit could cause Britain to lose two notches on its AAA credit rating. Moody’s and Fitch have already downgraded Britain from AAA status.

What do you think? Is Britain a better or worse credit risk outside Europe? Structural government deficits are a big part of long-term credit outlooks. In that sense, Britain has plenty to worry about, whether it stays or leaves the European Union.

But it usually comes down to economics. If leaving the EU caused a fall in the pound, the trade deficit would skyrocket and interest rates would climb. This would make servicing short-term government debt more expensive. It would also make financing new government debt more expensive.

To me that’s the key question: what affect does Brexit have on the pound and British interest rates? Would global capital flows to London decrease? Or would they increase? More from Charlie later this week.

Bulgarian salt pit reveals rare find

Archaeologists in Europe’s oldest prehistoric town have found a two-gramme pendant made of 24 carat gold that’s over 6,600 years old. The find took place in the Bulgarian city of Solnisata, which means ‘salt pit’.

At two grammes, it’s not exactly a golden horde. But it does show you something simple: people have treated gold as a store of value for as long as human civilisation has been around. Credit and debt may enable more rapid expansion in growth as trust in an economy grows.

But if you’re in one of those periods in history where you can’t trust the financial system – where the future is dangerous and uncertain – then storing your wealth in physical objects is what people have always done.

Category: Central Banks