Investors pay Switzerland to borrow from them
on August 18, 2012

JUUGS Aug12.png2 years ago, Italy was paying 3.82% to borrow for 10 years (red column). Spain was paying 4.11%. These rates were similar to the UK’s 3.07%.

A year ago (blue column), the world was clearly changing. This led the blog to introduce the concept of the JUUGS (Japan, UK, US, Germany, Switzerland), as a ‘safe haven’ compared to the PIIGS (Portugal, Ireland, Italy, Greece, Spain).

Its argument was that investors were becoming much more interested in return of capital, rather than return on capital. This was due to the:

• Ageing population in the West, which needs to save more (and securely), for its retirement
• Loss of confidence in stock markets, which seem to have become a casino ruled by computerised trading

As the chart shows, these trends have continued in 2012 (green). Rates in Spain and Italy are now close to the 7% level where repayment becomes impossible. Thus they are in danger of joining the other PIIGS as candidates for formal debt restructuring.

Meanwhile, rates continue to fall in the JUUGS. They now average 1.2%, compared to 1.7% a year ago and 2% in August 2010. Even more remarkable is that investors are now paying interest to Germany and Switzerland when they lend money for a 2 year period:

• Investors pay Switzerland 0.36% when they lend
• They pay Germany 0.03%

Thus, as we argue in chapter 2 of Boom, Gloom and the New Normal, the Western world is following the Japanese model. Sadly, policymakers are pursuing exactly the samed failed policies as Japanese central bankers a decade ago.

Japan’s current central bank Governor has spelt out the issue very clearly in a series of speeches:

“The implications of population aging and decline are also very profound, as they contribute to a decline in growth potential, a deterioration in the fiscal balance, and a fall in housing prices.”

But it seems nobody in a position of power in the West wants to listen.

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