A Private Little Tax

Uh-oh:

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 euros).

So far individual depositors have been shielded from the burn of decisions by several central banks, including Switzerland’s, to introduce negative interest rates to light a flame under growth or ward off unwanted currency investors.

ABS, which grew out of the ideals the 1960’s protest movement, justified the unprecedented development by saying it would provide manoeuvering room for financing “meaningful projects”.

The move did not go unnoticed in Swiss financial circles as banks in the wealthy Alpine nation search for ways to deal with the negative rates imposed on them by the central bank in January.

“This decision on negative rates is costing us a lot of money — pretty much the equivalent of our entire annual profit last year,” ABS chief Martin Rohner told AFP.

The Swiss central bank introduced a negative deposit rate in January after it abruptly abandoned its three-year effort to hold down the franc’s exchange rate to protect exports.

The -0.75 percent rate is meant to dissuade foreign investors buying and holding Swiss francs as a safe haven investment, which had been putting upward pressure on the currency.

Let’s call negative interest rates what they are: A tax on money you haven’t made. That’s a tax on savings and investment, which is a tax on future growth.

Negative interest rates are an admission that things are so bad now, that the only way to make things better in the short term is to make things worse in the longer term.

Negative interest rates send two messages: Spend, don’t save; speculate, don’t invest.

Our own central bank has dropped its own hints about the possibility of negative interest rates, while all-but-promising a rate hike (a modest and belated rate hike) in December.

So we’ve avoided Switzerland’s fate, but I do sometimes wonder if the Fed feels it necessary to raise rates, just so they’ll have something above zero to cut back down to.