Two headlines today from Switzerland tell an important story. The first is about the rapid increase of foreign reserves due to the currency “Peg” administered by the Swiss National Bank (SNB). The reserve rose by another CHF 41.4Bn ($43Bn) in July. This follows big increases in May (CHF 59.1Bn) and June (CHF 68.4Bn).
In an effort to protect the domestic Swiss economy from deflation, and all the other ills that are besetting the rest of the Europe, the SNB has purchased all of the Euros that have been coming into Switzerland the past three months.
Guess what? It’s working! With the benefit of unlimited printing of Swiss Francs and the “rigging” of the exchange rate, the Swiss economy is doing very well. This headline was also in the Swiss press this morning:
2.7% unemployed? That’s a remarkable result given the economic chaos that surrounds Switzerland. Its neighbors have much higher unemployment numbers:
France = 10.1%
Italy = 10.8%
Spain = 25%
Germany = 6.8%
I know that someone from Switzerland will say to me that that the low Swiss unemployment is a reflection of the efficiency of the Swiss manufactures and the hard working folks who work for those companies. I say “Rubbish”. Swiss unemployment would be substantially higher (and the economy much weaker) if there were not an artificial floor under the CHF.
I see the “Peg Policy” as economic warfare by the Swiss against its neighbors. The Swiss are winning this war for the time being, but they are suffering casualties in the process. To maintain the peg, the SNB must increase reserves of Euros. Reserves are now equal to 80% of GDP. Those reserves will rise to well above 100% of GDP before the end of the year.
Someone will put forth the argument that the SNB can continue this indefinitely. All they have to do is print more Francs to satisfy the demands of the market. That’s not correct.
At some point, the SNB will have to give this up. When they do, the Franc will appreciate to parity against the Euro. When that happens, the SNB will lose billions. I believe that the Swiss are already at substantial risk; to continue the peg puts the entire economy in jeopardy.
The next foot to fall on the Swiss will come from their neighbors who look across the border and see how “good” things are in Schweitz. At some point there will be a response. There has to be. Switzerland is beggaring their neighbors; they are doing it every single day.
The SNB invests its hoard of Euro reserves in short-term German government paper. They have avoided holding their reserves in debt instruments of Italy and Spain. This has influenced market rates in Germany; two-year yields have been at or below zero for months as a result of the Swiss. This has mucked up the European bond markets as it results in a huge spread between German and Spanish yields. The Swiss intervention is adding to the stress in Euro funding markets.
The SNB will be diversifying some of its holdings of Euros. It will sell the unwanted reserves for US dollars, Yen, Canadian/Aussie $’s. In the process, it will influence global exchange rates, and there will be consequences to the countries that are on the receiving end. I wonder if the recent strength in the A$ is not the result of the SNB diversification effort. The strong A$ is not a reflection of high raw materials prices.
Draghi has told the world that he is prepared to do what it takes to stabilize the Euro Zone financial markets. Mario fully understands that the Swiss are working counter to his objectives. I would not be at all surprised if we start to see politicians, central bankers and Ministry of Finance types speak up against the Swiss in the coming months.
Switzerland has morphed into the new China. They are currency manipulators. Like the Chinese, they have gained a tremendous advantage as a result of their manipulation. That’s a very good way to make some enemies. The “riches” of the Swiss will be their undoing.
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mr krasting,
didn’t you just the other day, in the post where you stated that lowering wages was insane for the euro countries, say that the correct policy response for the euro was to devalue the currency?
how can it be a correct policy response for one country to devalue a currency and for another it is wrong, playing games, beggaring thy neighbor, etc?
it all comes back to the fact, as i stated before, that the adjustment should always come from wages that are out of line with world markets, and not playing around with currencies. screwing with currencies will keep unions happy, but will destroy everyone else on earth.
Were are the Swiss getting the euros in the first place? It’s not the Swiss holding guns to Italian, Spanish, Greek, French (German) heads demanding them. Without Switzerland, the funds will flow elsewhere (USA, Japan, UK). Anywhere there is a lender of last resort.
What comes next is capital controls and the peg will vanish. One or the other: there are no independent monetary polices anywhere on planet Earth … anywhere there are cars, gas stations and motorists. Consequently, there are few tools remaining to managers to effect outcomes.
This is endgame: tallest mast on a sinking ship.
Conservation by other means …
mr jim nazum,there r far more financial savy people here than me.Your comment on BK begger thy nieghbor post is correct but comes from an idealistic view.These people want to keep power in the real world and that always trumps anything else so a nieghbors actions may not make sence.
Man I cannot believe you still see it this way. You cannot compare swiss to china, at eur/chf 1.2 chf is still heavily overvalued, where china keep their currency undervalued. This is not about getting advantage, this is about keeping at least some threshold. What else should SNB do? Do you really think parity would stop it appreciating? I bet we could see as low as 0.5chf per euro!
Its not their problem, they are trying to survive, its EU and Brussel that fucked everything up! If strong chf continued to appreciate, it would actually kill whole domestic economy, its not like too far to german or french borders is it? Everyone was buying at the border before floor, maybe even now some still do. You make it sound like swiss are screwing others and taking advantage, NO! They are preserving their own country as the surroundings are busting! Does ECB or Brussel dont like what SNB is doing? They are responsible for this so if I were Jordan I would say FUCK YOU ALL!! They had damn 3 years if not more to do something, what they did!?!? WHAT?! Its that stupid retarded Merkel and her dog Sakrozy(now also Hollande) who are responsible for this, because of their stupid retarded decisions! With other idiots like Shultz and Barosso in their pack of course. EU threaty FORBID lending to other countries, some much smarter heads put that § for a reason! And they broke it, they own rules.
If its true what I read before, that Greece at its beginning of insolvency has around 40b deficit, then after all those loans it rose to 240b, then it speaks for EU mentality enough. Whats more, only today I read Greece ordered some HUGE deal of arms! Now when they are on life support they buy unexpectedly huge military stuff!! WTF?! Of course Brussel know, its them who sell it(germany, france and US do). Merkel, instead of making base math and doing some proper research and consultation with best economists before putting any loans on the table(or rather working on contingency plan from beginning), just did what she herself “thought” was best and sent everyone into spiral. Nigel Farage was saying this since BEFORE crisis even started, he warned them, made precise forecast like when he said years ago that after Greece, Spain will be next. He is not even economist just politic, they LAUGHED at him, just search youtube!
And so here we are with SNB, why should they care about idiots, only thing they should do is trying to survive this mess. They are NOT manipulators, trying to take advantage. If they were, they would do it since ever. Its just that they simply cannot do anything else but to try keeping overvalued chf at least *somewhere* – not to let it bust whole domestic economy. Parity would be really too low. And what do you thing would happen if they released peg? Its too late now and they are certainly not one to blame. SNB is merely a reaction of market to EU policy. Just like Japan would surely not let Yen appreciate to infinity too.
Switzerland did not even started to “take advantage”, they still live in deflation, chf is still way too high, so there is no any advantage others would have reason to point finger at. US couldnt take advantage and still ran deficits when euro was 60% above parity – just example.
Bottom line: EU can blame themself only, I hope they die in fire for own stupidity. They were warned long before by smarter people at whose they laughed. I really want them worst. I want to see EU politics looking at own citizens dying from lack of drugs in hospitals and hunger, I want those same politics be captured and burned alive by people, to see who will laugh last. Stupid idiots…
PS: I am not swiss btw but I know and visit country for many years.
Yikes, Bruce – value your insight and enjoy the blog, but you’ve been so wrong on the CHF floor.
I can point to ten guys who have lost vast amounts of cash by pointing at the HKD peg, the ever-burgeoning HK reserves (over well over 100% of GDP) and said “That has to break”. They were all wrong.
Borrow the CHF as cheap as you can and buy short/medium term Euro yielding assets.
Let’s try and put this in perspective. So because the Swiss have been able to successfully keep the peg, barely above 1.20 for a whopping one year, he’s been wrong? Meanwhile, here they are losing tens of billions of francs, their FX reserves will certainly hit a trillion franc by what, spring 2014 if they’re lucky, and to top it all off, Europe is desperate to devalue the euro. This sure sounds like a winning formula to me.
Expected Value = Frequency x Magnitude
Your argument is like the option trader who just sells naked options all day collecting pennies for years and years. And then, one day, boom….you’re paying out $100 bills to everyone….betcha you run out of $100 bills before you pay off the whole line. Just ask Victor Niederhoffer, he has a lot of experience with that….
Bruce,
SNB is in a dream position, frightened Germans without any coercion give claims on future German economy output in exchange for some empty CHF paper
once the Euro thing blows/calms .. the newly printed CHFs will compete for other currencies on the way downwards .. then SNB will then have pleny of ammunition to protect CHF from too quick depreciation
HKD example shows that this policy can be maintained for a looong time
…if there were not an artificial floor under the CHF.
Maybe it’s roof you want here. Or ceiling – ‘if there wasn’t an artificial ceiling on the value of the CHF’. Because I presume the purpose of buying euros is to keep the exchange rate vis-a-vis the CHF low enough so that Swiss products are still affordable when priced in euros. Which helps the Swiss economy and helps lower Swiss unemployment.
OFF TOPIC…..Bruce – just wanted to say how much I enjoy the new blog format….nice.
Also, continue to appreciate the images and some funny lines: “Currency manipulation Pays!”.
Bruce – Are you aware of an ETF a US based simpleton can use to take a side in this argument? And thank you for your insights.
You write:
“That’s not correct”
Can you expand a bit on WHY that’s not correct? I can see it not being prudent but I don’t understand why they can’t.
Thanks, Bruce. Your blog is like the little ball inside the spraypaint can that stirs up the aerosol within as it rattles around inside. The paint applies itself with a more even consistency, allowing the letters of my graffii to last longer. Let’s just say you help make the message stick.
Why I think I’m going to go spray graffiti on a boxcar with : “currency manipulation pays!”
The US is the largest manipulator of currency, terrorist nation and dealer of death the human race has ever seen
SNB works for Germans
I never really have understood why people say that the SNB will fail. People say this all the time but the never ever say why. just that they will fail. Most people just don’t seem to really understand that the SNB can print as much money as they desire and inflationary it may be, it isn’t at the moment, so no worries there.
Also, they then mention that the SNB will take a loss on their FX reserves, and of course this would be true if the EUR/CHF were now trading at 1.0000 for example. But it isn’t. And not only that, their ‘loss’ is no a real loss as you or I might face on our savings since the majority of this money was printed for ‘free’. Yes it is an ‘accounting’ loss, but if I gave you $100 right now, this is $100 you never had. And then if I took back $20 of it leaving you with $80, you are still better off than before I had given you the $100 and although you are worse off since I took back $20, you are still on the whole better off, so it becomes a matter of perspective.
The SNB is printing francs to keep it pegged (weak) vs the Euro. China has done the same with the yuan to the USD for how long and you never hear people saying the Chinese can’t keep this pegged, they’ll fail. If by fail you mean stop intervening then yes, at some point if they ever let the yuan float 100% freely, then they will ‘fail’. Same goes for the SNB they will only fail when the decide to stop intervening.
Only in the situation where one seeks to weaken their domestic ccy can they basically do this forever. As mentioned above, China is a great example of this as they basically obtained their vast $3.2 or whatever trillion dollars the same way the Swiss are amassing hoards of FX reserves – printing yuan. (C/A surplus, trade surplus all based on this).
The Swiss should steal a play from China and start buying up real companies and resources with their funny money rather than investing it in German schatz for no return.
Hi Bruce,
Offtopic: what is your take on this ?
http://www.bloomberg.com/news/2012-08-15/hsbc-credit-suisse-sacrifice-staff-to-placate-u-s-lawyers-say.html