Deflation, Inflation, Zinsen: Daniel Kalt, UBS Switzerland’s Chief Economist, explains which true assets investors should rely on.
07 Sep 2017
Lend money and you earn interest – why is that no longer true?
The National Bank establishes the base lending rates: i.e., the interest charged on short-term loans between banks. When the National Bank lowered these rates to below zero, the intention was to make Swiss franc investments less attractive, thereby devaluing the currency. This happened when it abandoned the minimum exchange rate of 1.20 Swiss francs to the euro. Interest on government bonds then moved into negative territory.
Saving’s no longer worth it.
That’s right. But if the banks had taken their cue from the money markets, they would have passed that negative interest on to their own private clients. They didn’t do that – for fear of causing a run on the banks by savers looking to withdraw their money.
There has never been so much money printed as since the financial crisis. A risky experiment?
We’ve never had a situation before where the central banks – in the US, Europe, England, Japan and also Switzerland – have coordinated the printing of so much money, which they used to buy massive amounts of government bonds and other debt papers to stimulate the economy. However, the US Federal Reserve has now made moves to wind down its expansionary monetary policy. Other countries are likely to follow. Even so, it could take 10 years or more before the situation gets back to normal.
The central banks used to insist they were independent. Many people doubt this now.
It’s true that the central banks have indirectly helped to finance state budgets – because states have received credit more or less “free.” This has made the banks dependent on policymakers, as they can’t simply take back the money they’ve lent. Such a move would cause upheavals on the financial markets.
How can small investors get more out of their savings?
If you have 10 years or more, a diversified investment portfolio that includes equities will generate attractive return opportunities.
Sometimes there is talk of inflation, sometimes of deflation. Why’s that?
In Switzerland, we’ve experienced slight deflation over the past few years. This means that the prices of goods fell on average. Big deflation would be dangerous, as mountains of debt would continue to grow. And people would stop buying cars – waiting for prices to fall. That could bring the economy to a standstill. Inflation is the opposite: prices rise. This becomes a problem if prices rise by more than five percent. If interest is lower than inflation, savings lose their purchasing power.
What triggered deflation?
The strong franc lowered the price of imported goods. And the collapse in the oil price made gasoline and heating oil cheaper.
When will inflation kick in?
The US and the eurozone are already seeing a slight rise in inflation. Switzerland is lagging behind. We expect 0.5 percent inflation this year and 1 percent next year.
The superrich are buying up farms and forests as a hedge against disaster. What can the rest of us do?
If inflation reaches dramatic levels, real assets will protect your wealth more effectively than nominal ones. Land, real estate, commodities, gold and equities are better than a savings account.
So now is the time to buy a home?
It’s not possible to make such a general recommendation. Owning a home protects you against inflation in the long but not the short term. Prices on the Swiss real estate market are relatively high at the moment. They’ve begun to slide in the luxury segment.