The End of Super Imperialism? T Sabri Oncu

Oldrich Vasicek is an old friend. When I started my “quant” career in bonds in January 1994 in Walnut Creek, California, Oldrich was there. A recently graduated PhD in mathematics, I received my fi rst real-life fi nance education from him.

Vasicek (1977), a statistician by trait, is famous for developing the fi rst theory of term structure of default risk-free interests rates in 1977. But, despite this, he had been  unfortunate until lately because his theory allowed for negative nominal interest rates. Many modellers considered this as a fl aw because negative nominal interest rates were unimaginable then.

And recently, the entire term structures or in non-academic parlance yield curves of Denmark (on 24 July 2019), Switzerland (on 29 July 2019), Germany (on 5 August 2019) and the Netherlands (on 5 August 2019) went below zero. On 15 August 2019, Finland’s entire yield curve also went below zero, but the next day, the longest maturity rate was above zero. I presumed it would go below zero again and, as expected, it went below zero on 28 August for another day. Belgium and Sweden seem to appear next in line, although which one will win the competition remains uncertain.

Negative Interest Rates

Let us forget about the theories and look  at the history of nominal interest rates starting from about 5,000 years ago (who knows, maybe earlier?) when lending for interest started (Hudson 2018).  Although negative interest rates had occurred on some rare occasions in the past, such as on some gold deposits during the gold rush of 1848–55 in California as protection costs, the start of the “formal” history of negative interest rates goes back to the 1970s.

Given that Super Imperialism was kicked of f i n 1971 (Hudson 2003), it does not come as a surprise that the first “formal” negative interest rates had been imposed on bank deposits of foreigners in Switzerland from 1972 to 1978 to discourage capital infl ows to ease the appreciation of the Swiss franc. But, what is Super Imperialism and what happened in 1971?

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(This article was originally published in the Economic & Political Weekly on September 28, 2019)