Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
US Housing Market House Prices Momentum Analysis - 26th Feb 21
FOMC Minutes Disappoint Gold Bulls - 26th Feb 21
Kiss of Life for Gold - 26th Feb 21
Congress May Increase The Moral Hazard Building In The Stock Market - 26th Feb 21
The “Oil Of The Future” Is Set To Soar In 2021 - 26th Feb 21
The Everything Stock Market Rally Continues - 25th Feb 21
Vaccine inequality: A new beginning or another missed opportunity? - 25th Feb 21
What's Next Move For Silver, Gold? Follow US Treasuries and Commodities To Find Out - 25th Feb 21
Warren Buffett Buys a Copper Stock! - 25th Feb 21
Work From Home Inflationary US House Prices BOOM! - 25th Feb 21
Man Takes First Steps Towards Colonising Mars - Nasa Perseverance Rover in Jezero Crater - 25th Feb 21
Musk, Bezos And Cook Are Rushing To Lock In New Lithium Supply - 25th Feb 21
US Debt and Yield Curve (Spread between 2 year and 10 year US bonds) - 24th Feb 21
Should You Buy a Landrover Discovery Sport in 2021? - 24th Feb 21
US Housing Market 2021 and the Inflation Mega-trend - QE4EVER! - 24th Feb 21
M&A Most Commonly Used Software - 24th Feb 21
Is More Stock Market Correction Needed? - 24th Feb 21
VUZE XR Camera 180 3D VR Example Footage Video Image quality - 24th Feb 21
How to Protect Your Positions From A Stock Market Sell-Off Using Options - 24th Feb 21
Why Isn’t Retail Demand for Silver Pushing Up Prices? - 24th Feb 21
2 Stocks That Could Win Big In The Trillion Dollar Battery War - 24th Feb 21
US Economic Trends - GDP, Inflation and Unemployment Impact on House Prices 2021 - 23rd Feb 21
Why the Sky Is Not Falling in Precious Metals - 23rd Feb 21
7 Things Every Businessman Should Know - 23rd Feb 21
For Stocks, has the “Rational Bubble” Popped? - 23rd Feb 21
Will Biden Overheat the Economy and Gold? - 23rd Feb 21
Precious Metals Under Seige? - 23rd Feb 21
US House Prices Trend Forecast Review - 23rd Feb 21
Lithium Prices Soar As Tesla, Apple And Google Fight For Supply - 23rd Feb 21
Stock Markets Discounting Post Covid Economic Boom - 22nd Feb 21
Economics Is Why Vaccination Is So Hard - 22nd Feb 21
Pivotal Session In Stocks Bull Bear Battle - 22nd Feb 21
Gold’s Downtrend: Is This Just the Beginning? - 22nd Feb 21
The Most Exciting Commodities Play Of 2021? - 22nd Feb 21
How to Test NEW and Used GPU, and Benchmark to Make sure it is Working Properly - 22nd Feb 21
US House Prices Vaccinations Indicator - 21st Feb 21
S&P 500 Correction – No Need to Hold Onto Your Hat - 21st Feb 21
Gold Setting Up Major Bottom So Could We See A Breakout Rally Begin Soon? - 21st Feb 21
Owning Real Assets Amid Surreal Financial Markets - 21st Feb 21
Great Investment Ideas For 2021 - 21st Feb 21
US House Prices Momentum Analysis - 20th Feb 21
The Most Important Chart in Housing Right Now - 20th Feb 21
Gold Is the Ultimate Reserve Asset - 20th Feb 21
Is That the S&P 500 And Gold Correction Finally? - 20th Feb 21
Technical Analysis of EUR/USD - 20th Feb 21
The Stock Market Big Picture - 19th Feb 21
Could Silver "Do a Palladium"? - 19th Feb 21
Three More Reasons We Love To Trade Options! - 19th Feb 21
Here’s What’s Eating Away at Gold - 19th Feb 21
Stock Market March Melt-Up Madness - 19th Feb 21
Land Rover Discovery Sport Extreme Ice and Snow vs Windscreen Wipers Test - 19th Feb 21
Real Reason Why Black and Asian BAME are NOT Getting Vaccinated - NHS Covid-19 Vaccinations - 19th Feb 21
New BNPL Regulations Leave Zilch Leading the Way - 19th Feb 21
Work From Home Inflationary House Prices BOOM! - 18th Feb 21
Why This "Excellent" Stock Market Indicator Should Be on Your Radar Screen Now - 18th Feb 21
The Commodity Cycle - 18th Feb 21
Silver Backwardation and Other Evidence of a Silver Supply Squeeze - 18th Feb 21
Why I’m Avoiding These “Bottle Rocket” Stocks Like GameStop - 18th Feb 21
S&P 500 Correction Delayed Again While Silver Runs - 18th Feb 21
Silver Prices Are About to Explode as Stars are Lining up Like Never Before! - 18th Feb 21
Cannabis, Alternative Agra, Mushrooms, and Cryptos – Everything ALT is HOT - 18th Feb 21
Crypto Mining Craze, How We Mined 6 Bitcoins with a PS4 Gaming Console - 18th Feb 21
Stock Market Trend Forecasts Analysis Review - 17th Feb 21
Vaccine Nationalism Is a Multilateral, Neocolonial Failure - 17th Feb 21
First year of a Stocks bull market, or End of a Bubble? - 17th Feb 21
5 Reasons Why People Prefer to Trade Options Over Stocks - 17th Feb 21
The Gold & Gold Stock Corrections Are Normal - 17th Feb 21
WARNING Oculus Quest 2 Update v25 BROKE My VR Headset! - 17th Feb 21
UK Covid-19 Parks PACKED During Lockdown Despite "Stay at Home" Message - Endcliffe Park Sheffield - 17th Feb 21
How to Invest in ETFs in the UK - 17th Feb 21
Real Reason Why Black and Asian Ethnic minorities are NOT Getting Vaccinated - NHS Covid-19 Vaccinations - 16th Feb 21
THE INFLATION MEGA-TREND QE4EVER! - 16th Feb 21
Gold / Silver: What This "Large Non-Confirmation" May Mean - 16th Feb 21
Major Optimism for Platinum, Silver, and Copper - 16th Feb 21
S&P 500 Correction Looming, Just as in Gold – Or Not? - 16th Feb 21
Stock Market Last pull-back before intermediate top? - 16th Feb 21
GAMESTOP MANIA BUBBLE BURSTS! Investing Newbs Pump and Dump Roller coaster Ride - 16th Feb 21
Thinking About Starting to Trade This Year? Here Are Some Things to Keep in Mind - 16th Feb 21
US House Prices Real Estate Trend Forecast Review - 15th Feb 21
Will Tesla Charge Gold With Energy? - 15th Feb 21
Feeling the Growing Heat and Tensions in Stocks? - 15th Feb 21
Morgan Stanley Warns Gasoline Industry Is About to Become Totally Worthless - 15th Feb 21
Debts Lift Gold - Precious Metal Prices Will Rise on a Deluge of Red Ink - 15th Feb 21
Platinum Begins Big Breakout Rally - 15th Feb 21
How to Change Car Battery Without Losing Power, Memory, Radio Code Settings - 15th Feb 21
Five reasons why a financial advisor can make a big difference to your small business - 15th Feb 21

Market Oracle FREE Newsletter

FIRST ACCESS to Nadeem Walayat’s Analysis and Trend Forecasts

Switzerland Frees the Swiss Franc

Currencies / Fiat Currency Jan 17, 2015 - 06:57 PM GMT

By: Frank_Hollenbeck

Currencies

You can fix your currency or you run independent monetary policy. But you cannot do both at the same time. In spectacular fashion, the Swiss government finally capitulated and decided control over the money supply was more important than a fixed rate against the euro. The Swiss franc rocketed up 30 percent in value minutes after the central bank’s decision to let the currency float.


Switzerland established the peg to the euro of 1.2 Swiss francs to the euro in September of 2011, in the midst of the European financial crisis. To keep the peg intact, the Swiss central bank has been forced to buy massive quantities of euros with newly printed Swiss francs which they promptly converted into Euro government bonds. The impact on the money supply has been devastating. M1 in Switzerland has surged over 20 percent in the last three years and nearly 130 percent since 2008. The Swiss national bank’s balance sheet increased nearly 50 percent since the establishment of the peg. Of course, this has led to a surge in asset prices and has made Swiss housing even more unaffordable.

Why Peg the Franc to the Euro?

One of the reasons the Swiss central bank established the peg was on the notion that its currency was overvalued and that exporters were being unjustifiably hurt by the appreciating currency. Of course, the term overvaluation is loaded language. The market determines exchange value. In a capitalist economy, prices are set by supply and demand where everyone who wants to sell will find a buyer who wants to buy. Exchange rates are also determined by supply and demand. Nothing, including currencies, is over or undervalued.

The notion that exporters were hurt is also somewhat suspect. Exporters now have a myriad of financial products available to hedge foreign currency risks. Swaps can even allow them to hedge these risks long term. Also, an exporter imports many of its inputs. Globalization has forced many exporters to span the globe for resources. An appreciation therefore has less of an impact on an exporter’s profits since it not only reduces an exporter’s revenues but also lowers the cost of the exporter’s imported inputs (video).

The Swiss central bank should have been more concerned with stability of the money supply. It should never have been involved in gearing monetary policy to benefit one group of society — exporters — at the expense of another — consumers — from an appreciating currency.

The Swiss action, because of its suddenness and unpredictability, actually hurt exporters. When a country pegs a currency, an exporter is unlikely to hedge his foreign currency risk. The appreciation of the franc caught most exporters flatfooted, since they trusted the floor and had simply stopped hedging export revenues and import costs. This action will cost some exporters dearly. Some may be forced into bankruptcy.

Exporters are now being forced to make drastic adjustments to a sudden change, instead of incremental adjustments that would have occurred under a free float — an incremental adjustment that could have been hedged. It is clear that the Swiss central bank has probably done more harm than good. Is that surprising?

We must remember that every action will have winners and losers. Swiss consumers will benefit from lower prices. Domestic firms that import their inputs and sell on the domestic market will also gain.

The Cost of the Peg

In theory, the Swiss could have held the floor. To keep your currency from appreciating, all you need to do is print, print print. Of course, this printing is not without consequences. With this bold move, the Swiss have crossed the Rubicon. They cannot go back. They have indicated to speculators there is a pain threshold, or monetary expansion, that the Swiss are not willing to bear. Any attempt to set a new floor would set up a one way bet for speculators.

By pegging your currency to that of a bigger neighbor, you are essentially letting your neighbor determine your monetary policy. Dubai fixed its currency, the dirham, to the dollar and imported the US’s excessive monetary policy which led to the same real estate bubble in Dubai as the bubble in the US. In other words, by fixing your currency, you have to follow your bigger neighbor’s irresponsible monetary policy.

With the increasing likelihood that the European Central Bank would violate the Maastricht treaty and purchase sovereign debt, the Swiss finally decided they had had enough. The talk now is that the ECB will purchase over a trillion euros worth of bonds. To keep the peg, the Swiss would have had to increase the money supply by the same percentage, which would have been irresponsible monetary policy for such a small country.

By letting the peg go, Switzerland did the right thing. It should now concentrate on eliminating most EU debt from its balance sheet. There is an EU storm brewing, and Switzerland will no longer be one of the innocent bystanders.

Frank Hollenbeck, PhD, teaches at the International University of Geneva. See Frank Hollenbeck's article archives.

You can subscribe to future articles by Frank Hollenbeck via this RSS feed..

© 2015 Copyright Frank Hollenbeck - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules