How to Lose Friends and Make Enemies

Bruce Krasting's picture

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. They will sell the unwanted reserves for US dollars, Yen, Canadian/Aussie $’s. In the process, they will influence global exchange rates and there will be consequences to the countries that are on the receiving end. I wonder if the recent strength in the A$ 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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Mediocritas's picture

Nailed it with the last paragraph pretty much, although Switzerland ain't China in terms of impact. Europe can let it slide.

forrestdweller's picture

this article is complete nonsense.

switzerland is surrounded by the richest countries in europe; germany, austria, france and italy. Northern italy is very rich and has a very healthy economy, the italian problems are in the south. south-east france is rich and has a healthy economy, the french problems (if there are any) are not in this region. above that; south germany is a lot richer than the rest of germany.

the alpine regions are the most wealthy and economically healthy regions in europe.

switzerland had very low unemployement before the peg.

the snb can print as many franks as they want. there is still an enormous reservoir of foreign gold and money in the swiss banks. everybody is willing to buy swiss franks.

there is really no problem there, and there wont be any in al long time. the swiss will make sure of that.



davidgdg's picture

"At some point, the SNB will have to give this up".


the tower's picture

""it is well known that the bulk of Europe's sovereign gold is also contained deep under downtown Manhattan"

something tells me the gold is NOT there...

barliman's picture



An honest suggestion - step back, take deep breaths and then flow chart out a path forward for the major economic players (You are going to need a BIG whiteboard!) based on THEIR individual self interests.

It will take a while ... but it might give you a better analysis of where things are likely to end up than just positing:

"The Swiss cannot maintain the peg against the euro."

You have been doing that for 11 months now and you are coming across more and more like a blind squirrel looking for an acorn. You may be proved right one day but no one will give you credit for it.

There is NO reason the Swiss cannot take their pile of euro's and buy gold if they want to ... but if I were them ...

I'd copy China and go buy commodities with all those euro's while they are still worth something.

My analysis is the same today as it was 11 months ago. The Swiss wanted to send a real public FUCK YOU to Ben Bernanke and the SCOAMF's administration efforts to make their currency a safe haven and strip the Swiss banks of anonymous holding accounts.

I don't see any change in that message from the Swiss so far.


pashley1411's picture

"This has mucked up the European bond markets as it results in a huge spread between German and Spanish yields."

Kind of tired of reading about countries who operate in what they preceive as in their own best interests, and someone else wants to put a moral spin on it.  The Swiss are hoarders, I'm okay with that.    Greek are beggars, and it works for them (beats working).  Germans are imperialists, because they are surrounded by perceived lazy dolts.    The US are the real imperialists, because we ran out of new land to homestead, and can't sit at home and enjoy the view.  

More clarity would lead to better, and faster, resolution. 

Big Ben's picture

In uncertain times, pegging your currency to the currency of your major trading partners might not be such a bad decision. Of course, if the ECB decides to print, the CHF would catch that inflation. However if the Swiss had done nothing, the CHF appeared ready to soar to extremely high values and kill Swiss exports. If a central banker has a choice between inflation vs. export fueled depression, you know which one he is going to pick.

The Swiss decision allows them to retain relatively normal trading with Europe, perhaps (probably!) at the cost of inflation down the road. Trading partners won't strongly object to a currency peg as long as it is at a semi-reasonable rate. Switzerland is fairly small. Germany and the other European states have bigger fish to fry. There may be a bit of grumbling about the Swiss peg, but I don't think it will amount to much.

malek's picture

 if the ECB decides to print

That was a good one!

silverserfer's picture

currency wars bitchez?

MillionDollarBoner_'s picture

All of your Euros are belong to us !:O)

Getting Old Sucks's picture

And when the Euro disappears, they'll say "You can have them, no problem."  I can just see it now as country after country reverts back to their own currency.  Those holding Euros will go from country to country trying to cash out.  Uh, Germany, France, you guys better wake up!  Last one out is left holding the bag. 

kaiserhoff's picture

You're working too hard at this, Bruce.  The Swiss are making enemies because they are workers and savers.

They have money, while the lazy, corrupt sods to the south don't.

Therefore, the poverty of the south must be the fault of the "rich" in the north.

They are enemies of the State....

Well, at least the last part is true.



Haager's picture

The situation in the south gave a comfortable role for the swiss, so:

It is not the south, it is the west where the long-range valuta cannon is pointing at.

fredquimby's picture

It cracks me up seeing all these Chinese tourists here buying sack loads of tat that is mostly made in China, and then paying Swiss air to take it all back there! The hoards of Indians here too are also keeping the economy bowling along nicely. And believe me, they are staying in The Palace, The National and other top level hotels. The Ruppees are a flowin.

IMO I think we will find the SNB is just BTFD of the Euro (vs. the dollar.) When we see the dollar crash Vs Euro, they will let go the peg as Euro soars and buy dollars with their valuable EUROS to keep CHFUSD in check. Switz is then cheap for Euro visitors to splurge too.



malek's picture

 Swiss unemployment would be substantially higher (and the economy much weaker) if there were not an artificial floor under the CHF.

I say "utter Rubbish." The Swiss unemployment would be at 5.5% at worst, maybe a catastrophic number in Swiss' minds and depending on your spin "substantially" higher, but in absolute terms no problem.

I see the “Peg Policy” as economic warfare by the Swiss against its neighbors.

Bullshit. It's economic warfare against the Swiss savers.

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.

After mocking the opposition you haven't provided even a hint of a reason why it can't continue.
I have stated before: The SNB can maintain its peg for exactly as long as it is willing to devalue the purchasing power of its CHF.

The Swiss intervention is adding to the stress in Euro funding markets.

Duh. Every intervention adds to stress in other spots.

- Bruce, that might be an excellent propaganda piece, but as factual information it was crap.

fredquimby's picture

Bullshit. It's economic warfare against the Swiss savers.

First rule of life. Do not save your wealth in a transactional currency. Most Swiss I know have gold reserves that they have accumulated after making their paper profits.

When the SNB pegged to teh Euro and the CHF devalued 10% instantly, gold in CHF terms also went up 10% instantly!!!! (from 47,000chf a kilo to 52,000chf a kilo if IRC).

So you could almost say that for they who save in gold nothing was really lost by the CHF devaluation!


malek's picture

I think you meant "Do not save your wealth in a fiat currency."

Well, 5 years ago when I was still living in Switzerland, I never dreamed of thinking that way.
And by my anecdotal evidence, while the number of Swiss owning physical gold is likely higher than US, I would still put it at 5% tops.
So I think I can still talk about "Swiss savers" under the assumption that those overall hold a negligible part of their net worth in gold.

And I don't even know if there is a way to hold your BVG and Freizügigkeitskonto balances in gold.

defencev's picture

I disagree. The major reason why the printing cannot be indefinite is the threat of inflation. While Swiss Central bank officials claim that inflation is not on the horizon, I think they are absolutely wrong. They accumulate Euro and it is quite clear that the only way out of Euro crisis is printing the Euro. Therefore debasement of Euro will eventually lead to the debasement of Swiss franc (which depends more and more on value of Euro). This should be combined with deteriorating conditions of Swiss banking industry which is losing the status of offshore haven due to rising regulations and debasement of franc.

   The only way to fight inflation is to raise interest rates which is hardly an option  under the peg and the rest of Europe in recession.

malek's picture

You are looking at the current very uncommon situation, and then trying to use textbook examples as "solutions."

What Swiss Central bank officials claim is completely useless, as they also apply Juncker's logic when it gets serious. The SNB is currently already printing vast amounts of CHF to hold the peg.
That means they are already debasing the Swiss Franc, effectively in an effort to try to stay up with Euro debasement.

Swiss savers are therefore withheld the increase in value of their savings compared to foreign currencies. And that matters to them, as Swiss buy a lot from outside their country.
But most don't get it, as everyone is pointing to the Swiss exporters as the beneficiaries.
In this direction, there are no technical limits to the SNB's intervention. And as long as the people don't get it -and you can successfully "lie to all the people for some of the time"-, the SNB can keep printing without hesitation.

Will the Swiss revolt sometime before the CHF hits absolute zero? Yes. But currently the SNB only wants to keep up with Euro devaluation, which they can do endlessly as long as the Euro doesn't hit or approach absolute zero.
So for all means and purposes there is no limit to this current SNB devaluation of the CHF!

And in this current scenario, we don't need to apply Friedman, the way to fight inflation in Switzerland is simply for the SNB to stop printing.


logicalman's picture

If the Swiss ever revolt, it won't take long to sort out.

If conditions in Switzerland ever get bad enough to force a revolt, no Guillotines will be required

Just about every male (and lots of females) own weapons (required to!).

How long will the Swiss 1% last?



Months? (unlikely}

Years? (No chance)

the tower's picture

I don't think the Swiss will ever revolt, it's not in their nature, not do they need to.

Of course there is pressure: wages ar no longer going up, but rents/property sure are. For a normal Swiss person it's almost becoming impossible to move as their rent would go up massively. This in turn drives up prices even more.

In Switzerland renting is the norm. Rents are set when you sign the contract and only go up - or down - when the interest rates change (Leitzins). In order to buy you need a lot of cash.

In a new area of Zurich some very average flats are being built at the moment: 68 sq.m. for 1.2 million CHF... These are NOT luxury flats.

A small flat in a very average location is going for 2000-2500 CHF rent a month... A nice place will set you back 4500 a month...

So, the Swiss don't move and are - currently - happy with that, and find solace in the fact that prices are low in the shops, and enjoy lots of holidays and cheap loot from neighboring countries.

guidoamm's picture

"The SNB can maintain its peg for exactly as long as it is willing to devalue the purchasing power of its CHF"

... and therein lies the problem. Thanks to the law of diminishing marginal utility, the purchasing power of a currency is a finite amount... that is the reason it can't continue.

spfoo's picture

If you look at what the SNB is actually doing with those Euros you may be surprised. They're buying Eurozone equities. Not a bad idea compared to holding the Euros. Later then let the CHF fall and how nice will those equities look like again...

carbon's picture
According to the Hollywood Reporter, Clooney will entertain 150 European elites at a swanky Swiss reception, “which will be followed by a more intimate — and expensive — dinner at which the star will be the guest of honor. Tickets for the latter event will go for $20,000 for singles and $30,000 for couples.” As Reuters reported at the time, Clooney spearheaded a similar event in Geneva, “one of the world’s most affluent cities,” in 2008. “Some 170 contributors paid $1,000 a head to hear him speak at a cocktail party held at a museum in Geneva’s Old Town. And 75 high-rolling supporters spent $10,000 each to attend ‘an intimate seated dinner’” with the actor.


Swiss money for thee, but not for Romney, eh, Democrats?

otto skorzeny's picture

gotta be the first time a schwartze has ever been the guest of honor-unless you count whichever african dictator in a commodity-rich country they are supporting at the moment

SmittyinLA's picture

I think the Swiss unemployment rate has more to do with their border guards with machine guns and zero tolerance of illegal immigration than their monetary policy.

BKbroiler's picture

umm... no military to pay for.

Carl Spackler's picture

Yes...Canoes, sail boats, and paddle boats on Lake Geneva.

It rivals the German naval flotilla on Lake Konstanz.

guidoamm's picture


The way I see it, the Swiss have a much more pressing problem. Let me premise that I moved to Switzerland in 2006 because at that time the cost of living was lower than in neighboring countries except Germany. Last April I sold my little abode for a not insignificant 50% gain in five years. But the entirety of this gain was earned in the past two years only. 

What happened in Switzerland is that whilst the rest of the Western world was participating in an inflationary orgy, Switzerland just plodded along its long term trend. 

Today, in light of the SNB's decision to suppress its currency, Switzerland is belatedly embarking on its own inflationary orgy. I know for a fact that today banks are falling over each other to extend loans to all and sundry for whatever reason. 

The way I see it, now that the Swiss economy is undergoing acute financialization, the SNB's job will be to maintain the financial value of assets once the Euro peg, for whatever reason, may no longer hold.

Moreover, Switzerland has yet to deal with the albatross that is the loans that Swiss banks have extended to Eastern Europe.

Can Switzerland by dint of being monetarily independent avert the usual ramifications of a crack-up boom brought on by aggressive credit expansion?


q99x2's picture

Good to see low unemployment somewhere.

PatientZero's picture

On a side note, Switerland is probably the most secure place in the world. They've got underground and mountain fortresses out the ass.

fredquimby's picture

And most of us here would say having 6,000 rounds in reserve is running low.



Thisson's picture

Bruce, the Swiss central bank is not concerned about "losing billions" - central banks PRINT their currency, and use that to buy debt.  If that debt goes bad, they have no REAL losses.  They've only lost the currency they've printed themselves, and they can replace it by printing more. 

Panafrican Funktron Robot's picture

You kinda figure he just doesn't get it when he says shit like this:

"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."

Bruce:  name me a central bank that doesn't manipulate currency.  Dumbshit.  And this guy trades forex!  lol

Gromit's picture

Who does Switzerland serve?

The neutrality gig has worked well for hundreds of years but is it still useful to its powerful neighbors today

Dareconomics's picture

Brce, are you there?

Why do the Swiss eventually have to stop printing francs and buying euros? It seems to me that this can and will go on until the Euro crashes. Of course, then the SNB will be fucked all at once, but that's the way these things tend to work out. 

"If the music is playing, then we have to get up and dance." Chuck Prince

kaiserhoff's picture

But if feels so gooooood, and Uncle Ben says bean stalks really do grow to the sky;)

DeadFred's picture

For me the Swiss peg has seemed like one of the situations where there is great danger of unintended consequences. I'm not sure which is my favorite end-of-the-system trigger, the war with Syria/Iran/China/Russia or that "oops" that the Swiss throw into the machine when they try to tweak things just a skosh.

TheFourthStooge-ing's picture


I'm not sure which is my favorite end-of-the-system trigger, the war with Syria/Iran/China/Russia or that "oops" that the Swiss throw into the machine when they try to tweak things just a skosh.

Oh, they're both excellent choices. Perhaps when choosing a favorite you'd like to consider the following points.

The war with Syria/Iran/China/Russia is one of those things where the exact outcome isn't known, but the results are pretty much guaranteed to be horrible and long lasting for everyone. This is why the few sensible people left in positions of authority or influence are very much opposed to it.

The Swiss tinkering with the machine, trying to tweak it just a little bit more, is one of those things that humans have a difficult time wrapping their brains around. The machine is a non-linear dynamic system (chaotic in popular terms). Tweaking could be done 98 times with no ill effects and yet the 99th time, no greater in magnitude that any of the previous tweaks, could send it spiraling irretrievably out of control with a cascade of unimaginable, even incomprehensible consequences.

Efficiency has a downside. A maximally efficient system is also a minimally robust system. Normalcy bias will prompt the tweakers to continue to fine tune things because nothing bad has ever happened before. The tweaking will continue to happen. One of those tweaks inevitably will push the chaotic system toward a different equilibrium which is far removed from anything anyone thought possible.

Tao 4 the Show's picture

Interesting topic, Bruce. When thinking about the overall picture, do not forget that the Swiss are free of the Euro bureaucracy dead weight (and expense) around their necks. Corruption in Switzerland is about 3 orders of magnitude less than Italy and probably considerably lower than even Germany. The level of conservatism about spending is phenomenal. Really different worlds. The hippest city in Switzerland seems like a quiet evening at Grandma's compared to a place like Berlin, where prostitutes are so common and out in the open as to hardly be noticed (many are purportedly girls working their way through the university). Switzerland is boring, and the people like it that way (other than the youth for a few years until they get with the program).

Switzerland is a little island of (perhaps temporary) sanity amidst Europe which is in the throes of wild gamesmanship, illegitimate Euro officials, super indebtedness, etc., etc, etc. I agree that the currency peg will come back to haunt them, but it is difficult to find another solution for the moment. And besides, countries around the world are printing or imposing currency controls as needed. Do you doubt the Italians and Spanish would be printing if they could? The U.S. has done QE, bailouts, Twist, and a hundred other hidden forms as you point out.

The safe haven status of the CHF is accentuated by the current idiotic policies of the Euro ringleaders. Should the Swiss suffer because of that?

PKF's picture

I would love to be happily bored in Geneva eating fondue and chocolate. 

It's been a long time since I visited Switzerland, do the shopkeepers still wash the sidewalks in front of their stores with soap and water every morning?  Or have the multinationals taken over with Taco Bells and McDonald's?

Geneva was a great city filled with all nationalities. 

But I do think there is another way to end this mess...Mother Nature gets even. 

fredquimby's picture

do the shopkeepers still wash the sidewalks in front of their stores with soap and water every morning? 

Oh Yes. And they all still use the old Witches broomstick to sweep everywhere outside! Wierdly, I even saw a guy this morning sweeping a grassy bank he had just strimmed with one???

But I do think there is another way to end this mess...Mother Nature gets even.

My tinfoil prediction is that the tri-plate tectonic boundary at The Azores will pop and unleash a mega tsunami at Portugal/Spain/France (and probably a ripple or two at NYC). It has been eeirily quiet there whilst the rest of the world has been rumbling substantially the last coupla years.



Votewithabullet's picture

Brilliant Tao...I'd rather a goat than groveling PIIGS.

Itch's picture

What about a central bank hedging currency exposure with options, does it occur? Couldnt they stealthily load up on 1.000 EUR/CHF puts? They are in complete control of the timing after all; they could keep an eye on the option market and buy up everything on the cheap...while the market is busy guessing wongly. The quicker they do it, the more chance they have of making some francs back.

the tower's picture

Bruce, you state "At some point, the SNB will have to give this up", but I wonder, do they?

And what if they don't just buy other currencies, but also gold?

And what if - through invisible channels - much of the money is funneled to swiss investment firms who buy stocks, mines, commodities?

Ned Zeppelin's picture

Yes, what is the exit plan?

PontifexMaximus's picture

SNB is holding already now 9 % in stocks via ETF's, check their reports! And by the way, if Swissi will weaken in the "time" ahead, that's what Jordan wants. Nothing against the author, he obviously has a CH passport but his name is not Swiss .

Mercury's picture

Is there an optimal course of action?  Seems like there are some nasty trade-offs with other options too...and I'm sure the ECB would like nothing better than if Switzerland actually joined the Euro!

I still wonder if hoarding wealth (gold) and letting the CHF appriciate isn't the best, long term strategy even though the short/medium term pain would be considerable.