but by the output the country generates. what is meant by ‘ debt - free ’ payments? in the current system, the snb creates money by purchasing foreign currency and investing it, or by granting banks loans. every franc of central bank money which enters circulation in the economy in this way therefore has a countervalue that yields profit over time. the snb takes stock at the end of each year and distributes part of these profits to the confederation and the cantons. if the snb had to pay out money ‘ debt - free ’, as called for by the initiative, it would be giving money away without receiving an equivalent amount in return. however, the snb would not be able to earn income on the money it gives away. in a system with ‘ debt - free ’ payments, we would therefore be unable to make an annual distribution to the confederation and the cantons. it is important to recognise that economically speaking, the two approaches are ultimately equivalent. we can distribute the profits on our investments every year, or we can give newly created money away, but then no longer pay out any profits. in other words : under established practice today we distribute the interest on our capital, while under a sovereign money system we would be selling off the family silver, as it were. ‘ debt - free ’ payments would not make our country any richer. the initiative ’ s authors also suggest that, with the introduction of sovereign money, the snb would be able to redirect the profits that banks currently earn from money creation to taxpayers. this idea is based on the assumption that, by creating money, banks are filling their own coffers. but, in reality it is all the banks ’ customers – private individuals as well as companies, savers and borrowers – who benefit from the creation of money by banks. loan conditions are more favourable and the terms on sight deposits are better than they would be under a sovereign money system. since banks have to compete with each other, they are left with only enough of the profits from money creation to enable them to remain in business. in a sovereign money system, money creation would be centralised at the snb, from where the corresponding profits would be distributed. but total profits would be no higher than under the current system. for the general population then, the whole thing would be, at best, a zero - sum game. damaging effects of sovereign money the fact that the swiss sovereign money initiative promises too much is only

just when interest rates are at record lows. the vulnerabilities associated with debt build up over longer periods than the ups and downs with which monetary policy is usually concerned. in that sense, the credit and business cycles are distinct. using monetary policy now to target indebtedness would risk undershooting the inflation target and damaging growth. for all of these reasons, monetary policy is the last line of defence against financial instability. raising interest rates today would be the wrong response to this potential vulnerability tomorrow. fortunately, we are not up the proverbial creek without a paddle. we have many of them which we can use to steer towards two objectives. the first is to ensure that the banking system is resilient. to that end, the bank is conducting a stress test to assess how well major banks and building societies can withstand a sharp housing market correction during a prolonged and painful recession. the results and any consequences that flow from them will be announced later this year. the second objective is to reduce the risk of excessive indebtedness itself by taking out insurance. given recent experience, few can now believe that the right policy is to wait to mop for - one with income, supply constraints are likely to put increasing pressure on prices in a now rapidly - growing economy. that is high relative to other advanced economies. household debt stands at between 105 % and 115 % of disposable income across the euro - area, us and japan ( imf, 2014 ). by latest estimates, around 40 % of new mortgages were at ltis of at least 3. 5x. 25 % at were at ltis of at least 4x. 10 % were at ltis of at least 4. 5x. bis central bankers ’ speeches up the consequences of debt - driven busts after they crystallise. that is even more obvious when bank rate is at its effective lower bound. in other words, when you hear the thunder of the falls, it is wise to get off the river. measures to take out insurance can be graduated and proportionate if action is taken sufficiently early. we can limit risks tomorrow by acting against a loosening in underwriting standards in new mortgage lending today. the value of acting early is reinforced by uncertainty around the precise impact of macroprudential tools. while these have proven effective in other countries, they are still relatively novel here. 8 by acting, assessing, and if necessary re - calibrating, we are more