Why Sweden ended its negative interest rate experiments

Sweden ended its negative rate policy recently. Bernanke recently spoke on how consequences of negative interest rates have not been that bad.

Daniel Lacalle gives an Austrian school perspective:

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.

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.

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?

 

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