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How to Lose Friends and Make Enemies
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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There are many in Switzerland who belive that the excess Euro (and dollar) reserves should be converted to gold.
I doubt this will happen. It was the SNB who sold off the Swiss gold (at $430) in 2000.
Former Bundesrat Villiger stated, that he is not interested in where the Swiss gold reserves are stored nor does he want to know.
Good luck on getting back the gold from the US.
I think it boils down to long term vs. short term. Letting the CHF appreciate and even pushing it higher with gold purchases would kill export businesses, some loan portfolios etc. On the other hand, it’s pretty much a certainty that the Euro is going implode and you don’t want to be left holding that bag either.
When TSHTF the SNB could dividend out it’s massive gold hoard (or proceeds from it) to its citizens to get them through the rough patch until the dust settles, some new, stable currencies are in place and people can get back to business – like a rich ME principality distributing sovereign oil reserve revenues.
I don’t think they’ll actually do this either but I think I’m thematically correct in observing that a “fortress Switzerland” approach is closer to their core competency than tethering themselves to Europe’s disaster du jour and they should probably stick closer to the former in times of crisis.
Bruce is Swiss. He knows the banks are a black fucking lawless abyss there.
The SNB peg is the shit bucket of ill repute where government sponsored extortion, fraud and cronyism is to be buried in advance.
Nothing about Swiss banking is legitimate, never has been. It's the fascist's skeleton incenerator.
This clown car only goes faster and will ultimately crash with Swiss fatalities.
Some of what you say is true. But the same can be said of most countries. You tell me, what country is free of government sponsored extortion, fraud and cronyism?
And yes, I have a Swiss passport. And I'm worried about the squeeze that Switzerland is in. That's why I write about it.
Bruce,
"...if there were not an artificial floor under the CHF."
Didn't you mean to say "if there wasn't an artificial ceiling over the CHF." ?
I'm just an ordinary reader of ZH. Bureaucrat wage slave. Last Friday, I went to the airport on my way home and bought 700 in CHF. They are in my drawer just in case. That's a creepy feeling. I don't own a pitchfork or any firearms.
Iceland looks quite clean, actually.
What makes me wonder is if Swiss is responsible for the actual rates of Spanisch/Italian rates?
Point taken, US Fed is the bitch mother of fraud and the systemic enabler of lawlessness, all in the name of being apolitical (horse shit).
You should be worried with both passports.
END THE FED!
don't believe the Jew press on the Swiss -they have to keep up the "Evil Swiss Banker" facade so they can continue to extort "Holocaust" $ out of them. plus-the US govt villifies them-to extract even more taxes from the rich- with " 1% put their $ in Switzerland" to propogate class warfare
Make no mistake about it, the Swiss ran money guns for the third reich.
Bruce and the rest of die Schweiss profited handsomly as a society from the Nazi laundering, so yeah -- you got a point, 6 million apologies and the record bonuses are still clean 80 years later!
If I recall correctly the US pretty much bankrolled the Third Reich as well as the Soviet Union. Now we bankrolled communist China. BTW, even fellow Jews got into the game of making money off of the holocaust Jews (google George Soros). However, if you really want to compare the worst of the worst in terms of financial scoundrels......watch the olympics.
Note the location.
blah blah blah- why not 10 million 0r 20 million or 2 billion? so sick of the Holocaust lies that we hear about ad nauseum-yet never a peep about Stalin's 20 million. but we know who controls the flow of info to retarded american public-right?
Pay up, Goyim! 16 Trillion of G-d's Chosen died in to Holocaust!®©
http://i1.kym-cdn.com/photos/images/original/000/231/551/7db.gif
Every central bank with a printer is a currency manipulator. Somevare just more effective than others.
Every central bank with a printer is a currency manipulator. Somevare just more effective than others.
Dammit! I pressed the button once...I swear!
sorry. Considering the MiM analytics stack its amazing it doesn't stutter more.
We are watching you
Only once ? Of course, Old Scratch never prevaricates. Good one.
screw it-I sold all my phyzz gold and bought Sherwin Williams(Barclays says it can only go up!!!from $122 to $135 :0) ) and Expedia-at these prices I can's lose!!!!! I thought the swiss/templar knight descendants were a little smarter than this peg.
LOL at the graffity.... what is the original word in the picture? ...SNB...
So you can loose friends and make enemies by being a bad creditor as well as bad debtor?
and human nature being what it is, goodness doesn't last for long....
"Neither a borrower, nor a lender be"
So you can loose friends and make enemies by being a bad creditor as well as bad debtor?
and human nature being what it is, goodness doesn't last for long....
"Neither a borrower, nor a lender be"
Thanks Bruce as ever for your thoughts.
I was reading about Switzerland yesterday and here are some economic stats showing how remarkably well it is doing.
"surely the Swiss economy has been crippled?
And as we look forwards the Swiss are able to really buck the trend for 2012.
Although even they do have concerns for 2013.
The Balance of Payments must have collapsed
The latest data on the subject from the Swiss National Bank tells us this.
The overall current account surplus in the first quarter of 2012 was 19.5 billion Swiss Francs which is a better performance than for 2008 in total. So whilst it would be wrong to say that there has been no effect from the currency appreciation it would appear that so far Switzerland has pretty much shrugged it off."
http://bit.ly/RjYHri
When will everyone else catch onto this game?
Swiss wage-earners and dirt farmers do not make Swiss long-term strategy, nor are they cognizant of how global events/trends are setting-up unstopppable future forces/activities.
Swiss leaders are different. They certainly know how Swiss territory has been effected by radioactive particles from Chernobyl [and reinforced by Fukushima Daichi]. Thus, they know that future radioactive events during war and peace are now likely to originate from beyond Swiss borders and without any Swiss control.
Thus, for the first time in their history, Swiss leaders know their personal wealth is for naught against the threat of WW3 or even lesser releases of rarioactive particulates. You can bet this effects their thinking. And even rules it!
Now I address fellow readers of ZH, who generally have far advanced financial background than I. The pillars of money and privilege, that once could modulate risk, no longer are effective in any long-term planning to maintain status . And expansion of money/privilege no longer offers expansion of insurance against loss of privilege and wealth.
In short, the contest of privilege and power against truth and fairness is no longer a financial matter.
Thus, IMO, Swiss leaders are balancing lesser financial concerns against a new overwhelming threat. Namely, what can be done to stop the madness of approaching nuclear war. Narrow banking/financial interests play only a bit-part in the planning.
We are missing the greater actions of Swiss leaders that are just not apparent. E.g. Buying time to impose control on the nuclear game-over threat. They know "We are all in this together" propaganda has no lifeboats and no loopholes. It is fact..
Great thinking Anonnn, isn't it strange, the only thing which is really `real` and not simply a `Thought` which could just as easily be surplanted by another `Thought`is the immutable reality the aftermath of trying to "Win", will bestow on the survivors, it is crunch time although few can really see it! (Someone wants to "Win" yet "Winning" in this context, is now obsolete, no one can vanquish their foe without suffering a mortal blow themselves, the only winning now is not losing! Do you think we (humanity) have the wisdom not to lose? I am not optomistic!
Excellent article as always, Bruce-- thanks.
At some point, the peg has to become too inflationary..
It's time, it's time, it's time to hate the Swiss:
http://www.youtube.com/watch?v=i2XTuc6i1Uo
Got a problem with that, Belgium?
Where would our beloved Zooro be without this symbiotic support from the Swiss? 1.18?
http://www.youtube.com/watch?v=gu4Qmy2UGdA
Why can they not continue printing CHF indefinitely? Please copy Bernanke and Draghi with your response.
Also you didn't address the fact that, ultimately, printing CHF should be inflationary which should weaken CHF, So, not only can SNB not LOSE money on EUR so long as the peg is maintained, but it should also weaken the CHF allowing them to make a profit on Forex reserves. In the meantime, it can make a positive return on German Bunds and negative interest rates on CHF deposits.
Sounds like a good model to me?
You missed the part about where it unwinds and they lose billions, I think.
All fiat money using countries are currency manipulators and they all have a coordinated debasement policy.
Switzerland is debasing in the open while the G8 are using closed meetings.
The real shame is that all countries are destroying their economies and their citizens' wealth with the current monetary regime.
Yep. And the Swiss are missing an incredible opportunity. If, instead of buying foreign currencies they purchased Gold they could keep at this game forever. Buying gold reduces the toxicity of floods of foreign cash. They could also short the Euro and end up with all the world's wealth!
Swiss can't but gold because it would do the same as letting the Swissie rise naturally due to the influx of euros. They got rid of their former gold-backed Swissie for a reason.
Nonsense.
Not exactly. By buying trillions in gold they would be pouring Swiss currency into the markets driving the price of the Franc down. They don't have to tell anyone what they're doing. For every Franc they printed they would receive gold. I'd go for that deal.
I know the Swiss are into secrecy n' shit.....but no way are they gonna be hiding tht amount of gold. The CBs know where it is. All of it. They wouldn't let those pip squeaks get away with that shit.
Touche.
The CBs won't say a thing because their CEOs are all stashing their hidden hordes in Switzerland!
I wish it would be as you said. I don't know of any gold the Swiss purchased. Your source?
They are not buying gold YET. You can look it up here, data until june 2012.
SNB balance sheet items end of June 2012:
2012.01 33439.3311000000 2012.02 33439.3311000000 2012.03 33439.3311000000 2012.04 33439.3311000000 2012.05 33439.3311000000 2012.06 33439.3311000000Here the link: http://www.snb.ch/ext/stats/balsnb/txt/en/snbbil_A3_1_M15.txt
The moment they start buying gold, it will be time to SELL. They will be buying it from the rich hands of their masters, the ones that are accumulating gold NOW.
Isn't it beautiful? Just print money and have a good life.
Just look at the USA. The US$ is a reserve currency. So, America prints US$ and gets good and services from all over world maintaining its high standards of living America otherwise would not able to afford.
Swiss are doing lots of printing of their own currency trying to protect its export oriented economy as well as its domestic tourism industry. Swiss has to do it since its neighbors whose economies are in deep shit would not be able otherwise to afford Swiss products and services.
China is another story. Its economy completely relies on its export which is used to run its economy. Since China is a communist country, it does not give much of shit about its citizens’ standards of living at this time.
Well, isn’t really beautiful? Just print and print all troubles way. But something tells me that it is too good to be true:
· American debt is going sky high and the rest of world has a high inflation and not much for their goods and services. The US$ reserve currency status just cannot continue for too long any more.
· China is stuck with a huge US$ reserve it will never be able to redeem. Plus, it is just matter of time before a major US/China confrontation.
· Swiss is basically playing an American game with huge amount of Swiss Francs in foreign hands with Swiss economy providing its neighbors with “cheep” credit to buy its goods and services. It is not any different from Germany who gave away lots of its products to PIIGs Swiss will never be able to collect the payments back.
The bottom line is the USA and Swiss are doing well printing their way to prosperity but for how long? EU is also printing money but things are not becoming any better…
Once again, it's time to bring up the construction and purpose of the EUR...
Here is what will happen:
The EUR will devalue. But it won't disappear, or lose utility.
Ghordius so far has said it best (link to the comment below http://www.zerohedge.com/news/feds-gold-being-audited-us-treasury#commen... )
"it is well known that the bulk of Europe's sovereign gold is also contained deep under downtown Manhattan: we wish them all the best when they attempt to repatriate the physical when they need it, such as the day after the EUR finally collapses".
This is the other way round. First Nixon forbade repatriation on August 1971. Then europe had think through where all this was heading and concocted the EUR as a response to the situation, present and future.
This included expectations of future currency wars and great rounds of "competitive devaluations" in an environment that would make small currencies very, very fragile in view of huge waves of hot, speculative fiat looking for something to break for a quick profit. The CHF is already hiding under the EUR skirt, if this goes on we'll soon see other small currencies in some kind of trouble (the GBP's fate will also be very interesting). No financial pundit is currently ever thinking through (in the way of Bastiat) how this mess since 2008 would have looked like with 17 eu currencies all biting each other...
Ironically, the best way to get rid of the EUR would be the repatriation of the european gold, same as in 1971.
Fat chance. As long as the US Treasury/FED goes the fiat way and the USD is the global reserve currency (the two facts reinforce each other), I don't see how this "EUR collapse" could happen with an eurozone that is a net exporter, an ECB that values it's gold at market value and the European Fiscal Compact that is going to at least try to institutionalize nearly-balanced-budgets in the eurozone's future.
For all near-blind hate against all central banks that some here have, anybody looking seriously at the current situation should realize a few of those facts, that make btw the search for "understanding where the EURUSD is going" quite irrelevant, a mere short-term distraction. By now, we all have some proof that the ECB is really guided by the compromise between 17 national interests (yeah, call them mercantile, if you wish).
Parts of the gold markets are "getting it", eventually we'll talk here about "eurogold vs. usdgold", and more about "central banks FX reserves", etc.
And for all those that are expecting a "marriage of convenience" between the USD and the EUR - or even think this is a "grand plan": please remember East Asia's policies, expectations, demands (including SDRs), past currency manipulations and plans for the future. And how the current global trade flows function.
All I can think to add to what Ghordius wrote above (for now) is that the EUR is a supra-national currency, with no single nation in control of the issuance of currency (BIG difference between the ECB and the Fed, although it's clear the Fed is in collusion with the big banks).
Also, it uses the market price of gold to calculate it's reserves, with which it lends against. This gives it an enormous advantage over both a debt-based and a gold-redeemable currency.
This also has the effect of limiting the ability of any one Eurozone member from issuing unsustainable debt (Greece, Spain, et. al. are running up against this market limit right now).
This has the effect of in the long run, making the EUR the most stable of all transactional currencies in the world.
The USD could do the same, but to try and adopt the EUR model, it would create a price shock in gold (and the USD) that TPTB are clearly trying to avoid.
This IMO will result in the EUR becoming (at least in the West) the transactional currency of choice. Not a great store of value (unless you buy stable EU nation bonds, depending on the larger environment), but a superior medium of exchange than other currencies (owing to it's wide acceptance and greater stability).
Gold, bitchez.
lowprofile, this is very flattering but it raises the bar. Let's see some points of this article.
Dear Mr. Crasting, you are accusing Switzerland to manipulate it's currency, like China. This is heavy stuff, and IMHO unwarranted.
1. A basic/standard fiat currency is a national sovereign asset, in it's simplest form a tax collection "token" or unit of account. If it's not a global reserve currency, a "currency manipulation" does usually not impact directly other countries except the issuer.
2. China has "artificially depressed" it's exchange rate over a decade by buying up a couple of USDs. Trillions. For all fake protestations from the US Treasury, this has been allowed, unhindered. The result was an increase of production and export of Chinese goods to the US.
3. Switzerland is "artificially depressing" the CHF vs the EUR. The SNB and the 17 governments are "ok with it". Meanwhile, the Swiss (bless their little hearts) did not engage in an increase of production and export towards the eurozone, with which they are heavily integrated. They are not buying up additional Alps and multiplying their ski-resorts, and they are not dumping the eurozone with "cheap" chocolate, watches, chemical products, precision machinery, turbine blades, etc. They are just "keeping level". Your "the Swiss engaging in economic warfare" is utterly beyond the pale. The typical Swiss exports were expensive before the FX intervention and are still expensive - something that is only marketable because of this common characteristic that seems to escape many: quality. In this, Switzerland and China are two extremes in the spectrum.
4. The losses of the SNB in case they let the floor go are utterly irrelevant. A fiat Central Bank's accounting books are a galaxy apart from a normal corporation's. I suspect you know this, as I suspect you know why the SNB is not buying gold.
5. Your argument that the neighbors will look across and undertake a "response" is utterly unhistoric. The neighbors are used to Switzerland being "economically better/stronger" because, like Germany, they have quite sound (industrial and commercial) policies & governance coupled with a culture of producing quality while calculating hard prices - something that Austria, Northern Italy and parts of France do, too. In fact, all around and in Switzerland you have the highest concentration of quality small and medium companies of the world - with an high integration of component production - a fact that escapes many because they don't make financial news, since they are usually not on the stock market or in need of fancy financial products - all they need is sound money, or, if this cannot be, something similarly stable (enter the need for the EUR). Btw, in a way I have the feeling you are suggesting that the current neighbors would impose harsher terms, or be stupider or crasser than the last neighbors surrounding them, which were Hitler and Mussolini. In a way, I find this insulting for us europeans - or, worse - a bad sign of the current US worldview.
6. All in all, the SNB is stocking up FX reserves. The very word implies you stock up "ammo" or "something you might have to use, eventually". You are in FX since 40 years, I ask you: when was the last time that FX reserves were used? You may want to reconsider how much your whole life & work experience has prepared you to what might come ahead.
What an interesting conversation - and I hope it continues. I suppose this is what Mr. Sinclair (jsmineset "Mr. Gold") is speaking about when he says "do not write off the Euro" - that it will survive. Along those lines, I would hope the two of you would continue this exchange. Very illuminating!
I understand that LowProfile is trying to ignite a discussion on it - with no avail yet, I believe the matter is too broad for this format. Anyway, basically, it looks to me like there are several "EUR stories" being propagated.
One older that was being sold at the time when the US money market needed some income and the MegaBanks provided a cocktail of assorted european sovereign debt with a heavy dose of derivatives to get the taste of risk away. Hopelessly naive. Like the "Europe is fixed" idiocies.
One younger which somehow says "kill the EUR and everything will be fine" - that presumes a breakup and then a great devaluation of most of the 17 would change anything. This one ties with the older British skepticism. Well, yes, it would be a classic.
In between, you can hear several London City MegaBank branches literally screaming for either eurobonds or a breakup in 17 FXs or both, mainly because it would be new business. Churn makes bonuses.
What I tell is mainly what was being discussed before 1999/EUR's birth. Particularly in the 80's and 90's when the next financial disaster time was being discussed by people emotionally completely out of touch with the bubbly euphoria that started then.