What Switzerland Did

Across the world during the 2008 financial crisis, international traders, aware that the dollar was not the place to be during its fall, sought refuge in the Swiss Franc because of its well-known status as a safe currency; at least, it is relatively safe compared to the monetary insanity committed by the Federal Reserve.  This movement led to a surge in the value of the Swiss Franc, therein making imports cheaper for the Swiss consumer, among other things.  This means the Swiss exporters would take a large portion of the brunt of the pain.

In 2010, Swiss Info, a news platform produced by the Swiss public broadcasting corporation, reported the following:

“It hurts us that the Swiss franc appreciates because we produce nearly everything in Switzerland,” Friday’s Swiss daily Blick quoted Swatch chief executive Nick Hayek as saying.

At a news conference in Zurich last Wednesday, the Swiss Export lobby group said small and medium-sized (SME) Swiss exporters would continue to feel heavy pressure in the coming years. 

Two-thirds of the 100 firms surveyed by the group said they had suffered a drop in profits over the past year of around 20 per cent and most said they expected only limited or stagnated growth in the next 12 months.

Political pressure is also bubbling. Earlier in the week Otto Ineichen, a businessman and a member of parliament for the centre-right Radical Party, called on the government to back special measures for SMEs for six months to prevent job losses. Ineichen would like the federal authorities to act as guarantor for part of the loans granted to exporting SMEs.

In other words, the exporters were lobbying for the government to do something about the “problem.”  The Government, acting on behalf of special business groups rather than the principles of the free market, made the quite regrettable decision to peg the Swiss Franc to the Euro so that any depreciation of the Euro would not result in a relative appreciation of the Franc. In other words, the Swiss National Bank (SNB) gave to the European Central Bank (ECB) permission to print without consequence of more investors abandoning the Euro for the stronger currency of the Franc.

To state this by way of analogy, the SNB decided to prop up the Euro in the same way that China, in pegging its currency to the US Dollar, props up the US markets.

The central planners at the SNB decided to make political niceties as more important than free market discipline. One should not be surprised at this, however. This is what powerful governments tend to do.

As Robert Wenzel recounts:

In 2011, as the franc continued to soar, Swiss exporters continued to put pressure on the Swiss government and the Swiss National Bank. Eventually,  the SNB announced that it would set a minimum value for the euro — 1.2 Swiss francs — and that to enforce this minimum it was “prepared to buy foreign currency in unlimited quantities.” This caused the Swiss franc to fall back from its highs and remain in a trading range.

In order for the SNB to maintain this trading range it had to sop up billions in euros and other currencies  that international investors were willing to exchange for francs. And I do mean billions.

By the end of 2014, the SNB holdings of foreign exchange reserves amounted to more than 500 billion (in terms of Swiss francs) up from under 50 billion in 2009.

In order for the SNB to purchase this huge amount of reserves, it had to print a massive amount of new Swiss francs.

Now, the Swiss have been historically relatively wary of such monetary irresponsibility and recklessness.  And thus, because the European Central Bank was expected to adopt a policy of American-style quantitative easing next week, the SNB decided it had had enough; it wasn’t about to continue to depreciate its own currency on behalf of the powerful and manipulative ECB decision makers (and also Swiss export lobbyists). And so, in the quiet of the night, the SNB swiftly removed the peg.

Good for the Swiss citizenry; bad for the West’s monetary establishment.

It never should have enacted such a currency cap; the SNB should have stayed true to the instincts that have long caused the Franc to be a source of safety.  The decision was bad in the first place and now the Swiss stock markets are having to be repriced as a consequence of poor decision making.  But it is better to stop doing bad things now and go through the painful consequences than to attempt to avoid the pain by continuing to inject oneself with the monetary heroin of quantitative easing.  The Swiss markets will experience pain, but detox is better than the Federal Reserve policy of refusing to face the real world consequences.  The Swiss should be frowned upon for making this deal several years ago, but praised for facing the music. Would that the Fed and the ECB and the BOJ and all other central banks own up to their own mistakes and pursue sound money.

But as Pater Tenebrarum, who edits the Austrian financial blog Acting Man pointed out, all the media-sourced blame is headed directly to the SNB.  Don’t expect the ECB to sit down in self-reflection and grieve over its counterfeit money creation and inflationary monetary policy.  Tenebrarum comments on the “miffed tone of voice” in the news reports of Big Bad Switzerland:

These unreliable rascals! When the SNB originally announced its interventionist policy, no such indignation was in evidence at Bloomberg or elsewhere in the mainstream financial press. CHF holders sure got creamed at the time though, as the franc quickly collapsed after the announcement.

We conclude that any policy that results in money printing on a gargantuan scale and shuts down an avenue for investors trying to protect their savings gets the nod from our bien pensants in the financial media, regardless of whether the markets are “surprised” by it or not. On the other hand, ending the inflationary policy in the same manner appears to meet with opprobrium.

Indeed.  The ECB and it’s media cohorts throughout the European and American world aren’t sorry; they’re sorry they got caught. The SNB’s decision unleashed a reality check that the central bankers around the world aren’t really fixing anything; in fact, through their careless efforts and deeds, they have been the source of financial bubbles and speculation-driven market results that, rather than being results of economic productivity, are merely artificial booms with no future except painful busts.  Painful indeed, but the pain is required for any hope of future economic prosperity.  As David Stockman explains, we need to learn a lessen from the SNB move and return to an economic model that allows for price discovery:

So let the price discovery begin. The global petroleum complex is already there. So is iron ore, copper and the most of the central bank bloated world of industrial commodities. The EM currencies are not far behind. Nor is the $9 trillion of vastly over-valued off-shore debt that was denominated in dollars and sold to yield hungry speculators.

Take a trip to Istanbul. Ask how the skyline of construction cranes will find the dollars to pay off the debt they have poured into still empty towers.

For that matter, can the Japanese monetary madhouse be far behind? Have not even the Shanghai market punters figured out that China’s $26 trillion tower of debt is already swaying precariously in the global financial winds?

Yes, the Swiss National Bank did ring the bell. Slowly at first, and then with a rush, the casino players will learn that the central banks have been lying all along. Then the lost art of “price discovery” will have its way.

The increasingly relevant question is this: if the SNB’s move to allow its currency to appreciate resulted in Euro turmoil, what will happen if China removes its peg?  If the Swiss Bank did this on behalf of its citizenry, what if China acted similarly on behalf of theirs?  What could the Fed do to save the West?

Absolutely nothing.

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