The Swedish central bank is now paying negative interest to depositors —that is… charging interest to leave money on deposit with them.

The weak development of the economy requires a somewhat more expansionary monetary policy. The Executive Board of the Riksbank has therefore decided to cut the repo rate by 0.25 of a percentage point to 0.25 per cent. The repo rate is expected to remain at this low level over the coming year.

The deposit rate is at the same time cut to -0.25 per cent and the lending rate to 0.75 per cent.

Mish‘s thoughts are scathing:

The global economy is in a mess because of the lack of savings not because of an excess of it. People spent money they did not have, pushing asset prices to ridiculous levels. Banks, in belief that asset prices would keep rising exponentially, increased leverage. Now consumers everywhere are retrenching in the wake of the collapse, a much needed phenomenon.

In light of the above, punishing savers with negative deposit rates is the height of stupidity.

It would be fitting if there was an immediate run on deposits. And if that happens what will Sweden do? Halt deposits? Sweden risks (and deserves) a currency collapse and bank runs for this insane effort. Look for capital flight in Sweden.

Although, to us, the Swedish have an  understandable attitude, it is indeed one which is very risky.  They want the banks (and consumers) to lend and spend idle cash reserves increasing velocity.  But banks (and consumers alike) do not want to take on risk by lending (borrowing)!  With alternatives like gold and, having neglected to alter the Swedish currency so that it, too,  bears (negative) interest and… with other currency deposits readily available in Europe, the possibility of a massive flight of deposits from Swiss banks appears to us to be very real. We will not be surprised to see a reversal of this policy very soon. If it is not reversed, it will be because MANY other central banks follow the Swedish lead…

To us, the real bottom line of this news is that the Swedish are DESPERATE!  Things are really getting spooky if central banks are resorting to extreme measures such as this.  To see these extreme measures inacted emphasizes how ridiculous the thinking of those  like Dennis “The Recession is Over” Kneale truly is.  For more on the concept of negative interest rates, see Mankiw’s article in NYT of April 18 and Willem Buiter’s blog post of May 7.