The Swiss still have plenty of ammo

During the Great Recession, the Fed’s target interest rate never fell below 0.25%. The various QE programs pushed the monetary base up to a peak of just over 20% of GDP.

In contrast, the Swiss have reduced their target interest rate to negative 0.75%, and their monetary base has been increased to roughly 100% of GDP. So you might wonder if the Swiss are out of ammo. Far from it:

The Swiss National Bank can lower its subzero interest rates even further, President Thomas Jordan told newspaper Blick.

In the interview, Jordan affirmed the ongoing need for a deposit rate of minus 0.75 percent plus a pledge to intervene in currency markets, if necessary, adding the franc remains highly valued. . . .

“We always have the possibility of lowering rates further. We have already gone quite far, but still we’ve got the necessary room to maneuver,” he was quoted as saying in comments published in Saturday’s Blick. “And we can, if necessary, expand the balance sheet further via interventions.”

While the Swiss economy is currently doing pretty well, it’s nice to know that they have the necessary ammo for more stimulus, if needed. Indeed their willingness to employ this ammo is one of the reasons why the Swiss economy is doing OK.

If only the Fed had been willing to be more aggressive during the Great Recession. In that case there might have been only a mild recession, and no need for them to actually be so aggressive.

Another country with plenty of ammo is Argentina, where inflation is running at 50%. The Economist describes the problem this way:

Argentina’s macroeconomic policies are now consistent with lower inflation: the fiscal deficit is narrowing, interest rates are painfully high and the imf has boosted the central bank’s foreign-exchange reserves. But inflation has its own momentum: it is high, because it was high, and is expected to remain so.

That final sentence kind of makes my skin crawl. I get that rising inflation expectations can boost velocity, but let’s get serious. There’s no mystery here; there are actual concrete steps that lead to high inflation:

I guess Argentina doesn’t have a low birth rate like Japan. You know, the “demographics” that supposedly cause “lowflation”.



7 Responses to “The Swiss still have plenty of ammo”

  1. Gravatar of David Pinto David Pinto
    29. April 2019 at 09:42

    Argentina has been respectfully asked not to cry. 🙂

  2. Gravatar of H_WASSHOI (Maekawa Miku-nyan lover) H_WASSHOI (Maekawa Miku-nyan lover)
    29. April 2019 at 10:19

    I know Japanese have already anthropomorphized the Swiss rifle SIG.!!

  3. Gravatar of ssumner ssumner
    29. April 2019 at 11:23

    David, But can we outsiders cry for Argentina?

    Wasshoi, Japan is my favorite country.

  4. Gravatar of Michael Sandifer Michael Sandifer
    30. April 2019 at 04:46

    Yes, as Jason Smith points out in his efficient research, there is a clear correlation between money growth and Inflation when inflation rates are about 10% or higher, though he doesn’t buy the quantity of money explanation.

    When inflation is below 10%, I suspect at least part of the reason the correlation is lacking is due to a low signal-to-noise ratio.

  5. Gravatar of MrBroegger MrBroegger
    30. April 2019 at 11:03

    Scott, what is your monetary prescription for Argentina? Is it possible to come back down from 50%+ inflation, any precedents that ended well?

  6. Gravatar of ssumner ssumner
    30. April 2019 at 15:57

    MrBroegger, Print less money. The adjustment is likely to be at least slightly painful.

    To boost living standards, adopt Singapore style economic policies.

  7. Gravatar of MrBroegger MrBroegger
    4. May 2019 at 12:59

    Seems they stopped printing! Of course, people may expect printing to resume if Christina wins in October.

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