Los Angeles Times - 23.08.2019

C2 FRIDAY, AUGUST 23, 2019 WST LATIMES.COM/BUSINESS

BUSINESS BEAT

Three Federal Reserve
policymakers voiced their
resistance to the notion that
the U.S. economy needs
lower interest rates, and a
fourth said he wants to avoid
taking further action “un-
less we have to,” foreshad-
owing a sharp debate with
officials who want to cut
rates again.
Investors have fully
priced in a quarter-percent-
age-point reduction at the
Fed’s Sept. 17-18 policy meet-
ing, but dissenting Fed
voices may limit the pro-
spects for the larger move
that some — including Presi-
dent Trump — have advo-
cated.
Chairman Jerome H.
Powell could provide more
guidance when he speaks
Friday at the central
bankers’ annual retreat in
Jackson Hole, Wyo.
This year the policy sym-
posium will examine chal-
lenges facing monetary pol-
icy, a timely topic as officials
weigh the appropriate policy
response to slowing global
economic growth and the
risks of an escalating trade
war.
“As I look at where the
economy is, it’s not yet time,
I’m not ready, to provide
more accommodation to the
economy without seeing an
outlook that suggests the
economy is getting weaker,”
conference host and Kansas
City Fed President Esther
George told Bloomberg
Television late Wednesday.
On Thursday, Philadel-
phia Fed chief Patrick
Harker said he went along
with the recent rate cut
“somewhat reluctantly” and
would like to hold rates
steady for some time.
“We’re roughly where
neutral is right now, and I
think we should stay here for
a while and see how things
play out,” Harker said in an
interview with CNBC televi-
sion.
Later on Thursday, Dal-
las Fed President Robert
Kaplan also sounded hesi-
tant about cutting rates at
the Fed’s September meet-
ing.
“I’d like to avoid having to
take further action, but I
think I’m going to have an
open mind about taking ac-
tion over at least the next
number of months if we need
to,” he said in an interview
with CNBC.
Boston Fed President
Eric Rosengren also has
voiced opposition to addi-

tional cuts, speaking in a

Monday interview on

Bloomberg TV.

George and Rosengren

dissented against the Fed’s

July 31 decision to cut inter-

est rates — the central

bank’s first rate cut since

2008.

Minutes of the July policy

meeting, published

Wednesday, revealed that

Fed officials were split over

the need to cut rates. The

discussion pitted policy

makers concerned about

trade conflicts, slowing glob-

al growth and too-low infla-

tion against those who saw

strong U.S. economic data

as an indication that busi-

nesses and consumers are

powering through the latest

uncertainties. The minutes

said “several” officials fa-

vored keeping rates on hold,

making clear the opposition

went beyond George and

Rosengren.

“Easing policy is not a

free choice,” George said. “It,

remember, pulls forward de-

mand. It can make leverage

more attractive. And I think,

depending on where you

think you are in the business

cycle, it can create more

risk.”

Like Rosengren and

Harker, George said the U.S.

economy was slowing but

still appeared to be in good

shape.

“When I look at where un-

employment is and I look at

where inflation is right now, I

think we’re in a good place as

long as the consumer can

continue to pull the econo-

my forward,” George said.

“Obviously, we have some

weaker segments in our

economy, but to the extent

that our forecast of growing

at around 2% holds, then I

think we’re OK.”

Financial markets have

been volatile in recent weeks

amid unfavorable news

about economic weakness

overseas and renewed trade

tensions between the

Trump administration and

China. Data released Thurs-

day showed U.S. factory or-

ders in August contracted

for the first time since Sep-

tember 2009.

“Markets see how the rest

of the world is slowing. I

think uncertainty never

plays well in the markets,”

George said.

“So, I understand why

you see fear and uncertainty

right now. That isn’t the

metric, though, that I feel we

have to focus on. We have a

clear mandate and, I think, a

long-term view that we have

to stay focused on.”

Fed members

resist calls for

more rate cuts

bloomberg

In the looking-glass

world of negative interest

rates, the Swiss are in a spe-

cial category.

The Swiss National Bank

went below zero ahead of

everyone else back in 2014;

now the bank is poised to

slash rates still further.

Swiss banks such as UBS

have followed suit: They’ll

soon start charging larger

depositors to hold their

cash.

The Swiss pioneered the

practice back in the 1970s for

the same reason: to keep

their safe-haven currency

from appreciating too much.

But the lessons of that mon-

etary experiment should

give pause to anyone who

believes that negative rates

can halt capital inflows and

appreciation in countries

where the currency is funda-

mentally strong.

The postwar Swiss econ-

omy was largely driven by

high-value exports such as

precision tools and watches.

This worked well in the Bret-

ton Woods system of fixed

exchange rates that defined

much of the postwar era.

But when President

Nixon suspended the con-

version of U.S. dollars into

gold in 1971, currencies grad-

ually began to “float” against

one another. The dollar went

into a steep decline.

This unsettled currency

markets. But one nation

beckoned as a refuge from

the growing storm: Switzer-

land. A combination of fiscal

probity and monetary sta-

bility made the currency a

safe place to wait out the cri-

sis, and investors began buy-

ing up Swiss currency, driv-

ing up the value of the franc.

This was a disaster for

Swiss exporters, and the

Swiss government initially

imposed reserve require-

ments on nonresident de-

posits. When that failed to

stem the inflow of capital,

the government banned in-

terest payments to nonresi-

dents. And when that didn’t

work, it went negative, im-

posing a 2% penalty per

quarter on anyone with the

temerity to buy francs.

The government backed

off this radical move in 1973,

but in the fall of that year, the

oil shock pushed many

speculators to abandon the

dollar for the Swiss franc.

Capital poured into the tiny

country, and the Swiss gov-

ernment swiftly reinstated

negative rates on foreign de-

positors.

In November 1974, the sit-

uation had gotten worse,

leading to further measures.

When the Swiss government

imposed a 12% negative rate

on nonresident deposits,

“the move stunned market

participants,” prompting

the dollar to surge, accord-

ing to the Wall Street Jour-

nal.

And then the dollar fell —

again. The government im-

posed more onerous reserve

requirements on foreign de-

positors in December 1974.

An official from the Swiss

National Bank expressed

confidence to a reporter that

this latest move would put

an end to those pesky in-

flows. “Taken together,

these measures should rep-

resent some discourage-

ment. They are rather

heavy,” the official told the

Irish Times.

They were heavy. But

nothing could stop the influx

of capital. In January 1975,

the Swiss government held

an emergency meeting and

then took the extraordinary

step of slapping a 41% annual

penalty on foreign deposits.

But even this failed to

stem the tide. The franc con-

tinued to appreciate against

the dollar — a total of 70% in

nominal terms between 1971

and 1975 alone.

The export sector stum-

bled, and the Swiss econo-

my, long the envy of the

world, suffered a serious re-

cession. Industrial produc-

tion fell 15% in 1975, plants

worked well below capacity,

and exports declined by over

8% in real terms. Before the

downturn, official unem-

ployment figures only ac-

knowledged 81 unemployed

people — yes, 81 — in a coun-

try of 6.4 million. That figure

quickly jumped to 32,000,

but it would have been

higher had the Swiss not

sent 150,000 foreign guest

workers packing.

As the recession tight-

ened its grip, industrial pro-

duction plummeted. Swiss

unions went on strike,

mounting between 30 and 40

demonstrations a week.

Normally, such signs of un-

rest would have deterred for-

eign capital. But the rest of

the world snickered at the

idea of blood running in the

streets of Zurich. Swiss la-

bor radicals? Come on.

Waldemar Jucker, of the

country’s Trade Union Fed-

eration, complained to

Forbes about the positive

media coverage of the

strikes: “The damned for-

eign journalists write that

we behaved ‘in a very disci-

plined manner,’ and the

franc strengthens even

more.”

The only growth sector in

the economy was — you

guessed it — finance, with

bank profits up 15% between

1974 and 1975 alone. As facto-

ries stood idle, banks pulsed

with activity, all fueled by the

influx of foreign capital.

For the rest of the decade,

Switzerland tried and failed

to deter foreign capital. It

didn’t help that both the

government and the central

bank keep a tight rein on fi-

nances throughout the or-

deal. Little wonder that the

nation’s inflation rate of

2.5% was the lowest in the

world.

And therein lay a deeper

problem. As one of the few

studies of this strange epi-

sode concluded, Swiss at-

tempts to fend off apprecia-

tion using negative rates and

capital controls “were fun-

damentally inconsistent

with the thrust of tight do-

mestic monetary policy,

which was the ultimate

source of the capital inflows

into the country.”

The suffering of the Swiss

ended only when the coun-

try’s central bank focused

exclusively on the exchange

rate, inflation be damned.

That meant massive

amounts of unsterilized in-

tervention in currency mar-

kets. But this came at a seri-

ous cost, as inflation started

to rage out of control.

By 1982, the Swiss had

abandoned this approach, a

decision made possible by

the fact that the U.S. had fi-

nally tamed inflation,

thanks to Federal Reserve

Chairman Paul Volcker. And

so things sort of returned to

normal.

The situation now is very

different from the 1970s, giv-

en that inflation is nowhere

to be seen. But in the current

climate of competitive de-

basements, countries with

strong currencies are apt to

try to fend off capital inflows

with negative rates.

They can try, but history

suggests they’ll be unlikely

to halt appreciation, par-

ticularly now that everyone

is playing the same game.

SWISS BANKSlike UBS will soon start charging larger depositors to hold their cash, a move the Swiss pio-

neered back in the 1970s to keep their currency from appreciating too much after the gold standard ended.

Walter BieriAssociated Press

Negative interest rates didn’t

save Switzerland in the ’70s

Charging for foreign

deposits was a strategy

to deter large inflows

of capital to the

country. It flopped.

By Stephen Mihm

COMMENTARY

Preschool television fa-

vorite Peppa Pig is moving in

with the Power Rangers,

Transformers and Mr. Po-

tato Head.

Toymaker Hasbro Inc.

will buy Entertainment One

Ltd., the Toronto-based

owner of the popular ani-

mated series, for about

$4 billion — its biggest ac-

quisition ever, according to

data compiled by

Bloomberg. The deal adds

the character and a suite of

other kids media properties

to its portfolio of bankable

brands and positions Has-

bro as a bigger player in the

TV and movie segment.

Under terms of the all-

cash transaction, share-

holders of Entertainment

One, also known as eOne,

will receive 5.60 pounds for

each common share, which

Hasbro said represents a

31% premium to its 30-day

average price. Hasbro’s

shares slipped in late trad-

ing.

The transaction marks a

major expansion of Hasbro’s

media efforts as well as an-

other example of the race to

pick up smaller content

owners and producers as a

plethora of video-streaming

companies comes onto the

scene.

The deal will give the toy

company Entertainment

One’s scripted and un-

scripted TV production and

development capabilities,

which include animated and

live action shows. Hasbro

has been a driving force in

turning toy properties such

as Transformers into enter-

tainment, but until now, it

has had to license its charac-

ters to studios to make films,

said John Tinker, an analyst

for Gabelli & Co.

After years of looking for

an entertainment company

to buy, including dalliances

with Lions Gate Entertain-

ment Corp. and Dream-

Works Animation, Hasbro

has finally locked up a deal

that “can take their business

to another level,” Tinker

said. “If they want to make

larger films, they are equip-

ped to do so.”

The acquisition also ex-

pands Hasbro’s global reach

by adding a major interna-

tional brand to its portfolio.

Peppa Pig is a global suc-

cess, with big viewership in

China, and new brand Ricky

Zoom has the makings of a

hit too, Tinker said. About

half of Entertainment One’s

revenue comes from outside

the U.S.

Tinker also noted that

the declining value of Ster-

ling made Entertainment

One, which is listed in Lon-

don, a better deal for an

American company.

Hasbro, based in Paw-

tucket, R.I., plans to plug

these characters into a

brand-building infrastruc-

ture that has turned dor-

mant properties like My Lit-

tle Pony into massive reve-

nue generators.

Hasbro shares fell 4% in

late trading in New York.

Hasbro acquires ‘Peppa Pig’ studio

The toymaker will

pay $4 billion for

Entertainment One.

bloomberg

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