What's The Definition Of "Insanity" Again -- Doing The Same Thing Over And Over, Expecting A Different Result? -- January 19, 2015

The other day I happened to see this article in Business Insider: The Swiss Franc Chaos Shows Why Negative Interest Rates Don't Work.

Not long ago, a theory was floated that in order to avert an economic crisis, all central banks had to do was cut interest rates below zero and this would boost growth. That theory was then put to the test in the eurozone and Switzerland. And now, it's failing.
In June 2014, the European Central Bank (ECB) decided to cut its deposit rate (the interest rate that it pays on reserves held by the central bank) to -0.10%. In September, this was cut again to -0.20%.

The theory was that charging banks for holding money with the central bank would force them to seek better returns elsewhere, either through investing in productive assets in the monetary union or transferring their money to safe assets overseas.

In the first case, the additional productive investment would help drive up growth directly, whereas in the second, the capital outflows would help weaken the currency and make the region's exports more competitive, also improving its growth prospects.
So what happened?

Well, the investment channel didn't exactly deliver. Data released in December showed Euro-area investment contracted for a second consecutive quarter, falling 0.2% in the three months to the end of September after a 0.6% fall over the previous period.

I wasn't going to post the link or the article; it didn't excite me, but then this article today about Denmark over at Bloomberg:

Denmark moved to quash speculation it may follow Switzerland and abandon its euro peg, delivering a surprise interest-rate cut to prevent the krone gaining further.

"We have the necessary tools to defend the peg,"Karsten Biltoft, head of communications at the Copenhagen-based central bank, said by phone.

Since the Swiss National Bank shocked markets on January 15 by jettisoning its three-year-old euro peg, Scandinavia's biggest banks have fielded calls from hedge funds and other offshore investors asking whether Denmark could be next.

"The comparison that is made between Denmark and Switzerland I think is somewhat off," [a spokesman] said. "I don't think you can make a comparison between the two cases."

So what is the "tool" that Denmark says it has to save "its peg to the Euro"? 

The Danish bank today cut its deposit rate to minus 0.2 percent, matching a record low, from minus 0.05 percent and lowered its lending rate to a record 0.05 percent from 0.2 percent.

Today's cuts "underline the fact that the inflow has been pretty massive since they decided to move on a Monday. We should price in a probability of a new cut on Thursday, especially if the FX intervention continues." 

What's the definition of insanity, again?

So, if you put your money into a Danish bank, you are guaranteed a savings rate of minus 0.2 percent. And a strongly likelihood of a worsening recession.