September 22, 2022
Notable:
- Swiss National Bank hikes rates by 75 basis points, bringing it out of the negative.
- Turkey CUTS interest rates despite a staggering inflation rate of over 80%.
- Japan intervenes to support the yen against the dollar.
Not Tyra Banks:
The Swiss National Bank (SNB — the Swiss Fed) is hiking rates by 75 basis points, the same as the US. [Yawn.] However, it’s worth noting that this pulls their interest rate up out of the negative. What? Their interest rate was negative? Yes — same for Denmark and Japan. How does that work? We’ve said before that when interest rates rise, the economy falters and people get depressed and drink Guinness. The opposite is also true, meaning that lower rates spur growth, not that low rates make people stop drinking Guinness. That’s just crazy talk.
So…how low can you go? Apparently, sub-zero. (Economic growth! Get over here!) Has the US ever gone below zero? Technically, no, though it’s taken other actions known as Quantitative Easing (QE, which I promise you’ll understand someday…in heaven) that some would say is almost the same.
From a practical perspective, what does it mean to have a negative interest rate? Well, normally when you buy a sovereign bond you get paid for holding it, but with a negative interest rate, you get the rare privilege of paying the government interest on the money it has borrowed from you. That’s like you borrowing your mortgage from the bank, and it pays you every month instead of the other way around. Wow, how can I get in on that action? Maybe I should change my name to Kuroda Haruhiko.
Turkey cuts interest rates. Say what? Isn’t everyone supposed to be raising them right now to fight inflation? Oh, right, Turkey’s inflation is only at 80%. Wut!!! Who made that decision? Turkey is led (ruled with an iron fist) by Prime Minister Recep Erdogan. Even though the rest of the world is raising rates, he clearly knows something the other 7.753 billion of us don’t. He’s a rare example of rationality and gentility in the upper echelons of power. By the way, did you know he almost put a man in prison for comparing him to Gollum? It became a meme, and Erdogan hates it forever.
And hey, Colbert! Luthien rescued Beren from Morgoth, not Sauron. Get it right, “super fan!”
Japan is supporting the yen against the almighty greenback. How does a country do that? Countries have what are known as currency reserves. In this case, it means Japan holds dollars, to the tune of $1.17T. Remember when I said that, crazy as it sounds, people buy money because you were totally paying attention to everything I write? In order to support the yen, Japan will use its dollars to buy yen. Basically, exchange them. Since someone will be buying lots and lots and lots of yen on the market, the demand for yen will increase, and it will get stronger compared to the dollar. Simple Keynesian supply and demand.
That’s the theory, anyway.
Hedge fund managers sometimes make bets against these sovereign activities. They short the currency that’s being defended. In this case, they might be (almost certainly are) shorting the Japanese yen. When they short it, it gets weaker, and when Japan buys it, the yen gets stronger. It’s a game of chicken and when one side blinks, the yen will crater in value and the rich hedge fund managers will make enough money to move to Puerto Rico where they don’t have to pay taxes.
The most famous example of this is the reason why England hates George Soros, who doesn’t live in Puerto Rico. In 1992, the UK was desperately trying to keep the British pound strong for reasons beyond the scope of this discussion becuase…zzzz... On September 15, 1992, Soros began selling the pound. When the market opened the next day — soon to be immortalized as Black Wednesday — the Bank of England (BOE) began desperately buying pounds to fight evil (aka George Soros). The pound kept going lower, so the BOE raised interest rates from 10% to 12% and then to 15%. (Remember, interest rate up means currency up because people want to buy it, not sell it.) Holy frijoles, Batman! The US Fed has raised rates this year by less than 4% in 10 months, and the BOE did 5% in one morning!
The BOE eventually caved after a hard-fought battle of several hours and George Soros went down in history as the man who broke the BOE’s back and made $1B in a day.
What lesson can we take from this? If you have billions and billions of dollars in your back pocket you can crash a currency and get rich. Wait, billions and billions…you’re already rich. Okay, more rich. Maybe Turkey would be a good choice (victim). Of course, you’d be destroying an already desperate economy, possibly pushing it into hyperinflation so that all Turkish lira become utterly worthless thus instigating a nation-wide crisis that would probably put millions of people into penury, but hey, you’d be more rich!
Finally, because I know you really, really want it, here’s Tyra Banks.