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"The Consequences Of The SNB Decision Will Not Be Limited To Switzerland"
Authored by Markus Brunnermeier and Harold James, originally posted at Project Syndicate,
Since the European sovereign-debt crisis erupted in 2009, everyone has wondered what would happen if a country left the eurozone. At first, the debate focused on crisis countries – Greece, or maybe Portugal, Spain, or Italy. Then there was a rather hypothetical discussion of what would happen if strong surplus countries – say, Finland or Germany – left.
Through it all, a consensus emerged that an exit by one country could – like the collapse of Lehman Brothers in 2008 – trigger a wider meltdown. Now, in Switzerland, we have a demonstration of just some of the risks that might emerge were a surplus country to leave the eurozone.
In September 2011, Switzerland pegged its currency to the euro to set a ceiling to the Swiss franc’s rapid appreciation in the wake of the global financial crisis that erupted in 2008. The country thus became a temporary adjunct member of the European monetary union. But, on January 15, the Swiss National Bank (SNB) suddenly and surprisingly abandoned the peg.
Obviously, exiting a real currency union is far more complex and legally fraught than ending a temporary exchange-rate arrangement; the effects of such a move would be greatly magnified. Nonetheless, the Swiss move reveals at least some of the uncertainties that a full-fledged exit could create.
The SNB was not forced to act by a speculative run. No financial crisis forced its hand, and, in theory, the SNB’s directorate could have held the exchange rate and bought foreign assets indefinitely. But domestic criticism of the SNB’s large buildup of exchange-rate reserves (euro assets) was mounting.
In particular, Swiss conservatives disliked the risk to which the SNB was exposed. Fearing that eurozone government bonds were unsafe, they agitated to require the SNB to acquire gold reserves instead, even forcing a referendum on the matter. Though the initiative to require a fixed share of gold reserves failed, the prospect of large-scale quantitative easing by the European Central Bank, together with the euro’s recent slide against the dollar, intensified the political pressure to abandon the peg.
Whereas economists have modeled financial attacks well, there has been little study of just when political pressure becomes unbearable and a central bank gives in. The SNB, for example, had proclaimed loyalty to the peg just days before ending it. As a result, markets will now hesitate to believe central banks’ statements about future policy, and forward guidance (a major post-crisis instrument) will be much more difficult.
There is historical precedent for the victory of political pressure, and for the recent Swiss action. In the late 1960s, the Bundesbank had to buy dollar assets in order to stop the Deutsche mark from rising, and to preserve the integrity of its fixed exchange rate. The discussion in Germany focused on the risks to the Bundesbank’s balance sheet, as well as on the inflationary pressures that came from the currency peg. Some German conservatives at the time would have liked to buy gold, but the Bundesbank had promised the Fed that it would not put the dollar under downward pressure by selling its reserves for gold.
In 1969, Germany unilaterally revalued the Deutsche mark. But that was not enough to stop inflows of foreign currency, and the Bundesbank was obliged to continue to intervene. It continued to reduce its interest rate, but the inflows persisted. In May 1971, the German government – against the wishes of the Bundesbank – abandoned the dollar peg altogether and floated the currency.
Politics had prevailed over central-bank commitments. Within three months, the fallout destroyed the entire international monetary system, and US President Richard Nixon took the dollar off the gold standard. The credibility of the entire system of central bank commitments had collapsed, and international monetary policy became extremely unstable. The Deutsche mark appreciated, and life became very hard for German exporters.
Today, the global ramifications of a major central bank’s actions are much more pronounced than in 1971. When the Bundesbank acted unilaterally, German banks were not very international. But now finance is global, implying large balance-sheet exposures to currency swings.
Big Swiss banks fund themselves in Swiss francs, because so many people everywhere want the security of franc assets. They then acquire assets worldwide, in other currencies. When the exchange rate changes abruptly, the banks face large losses – a large-scale version of naive Hungarian homeowners’ strategy of borrowing in Swiss francs to finance their mortgages.
Though the SNB had given many warnings that the euro peg was not permanent, and though it had imposed a higher capital ratio on banks, the uncoupling from the euro came as a huge shock. Swiss bank shares fell faster than the general Swiss index.
The risks created by the SNB’s decision – as transmitted through the financial system – have a fat tail. The negative effects for the Swiss economy – through the decreased competiveness of its export industries (including tourism and medicine) – may already be showing that abandoning the euro peg was not a good idea.
But the consequences will not be limited to Switzerland. After years of wondering whether the exit of a small, fiscally weak country like Greece could undermine the euro, policymakers will have to deal with an even bigger shock stemming from the exit of a small, fiscally strong country that is not even a member of the European Union.
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Hong Kong should end the peg to USD
That's just a matter of time I'm thinking.....I would guess they will wait until the US econonomy is on it's knees....when it will inflict the most damage.
Once Chinese peg to the USD ends, it's all over for the Fed.
Yep....apparently we have a Bankster in our midst....
LOL
'Once Chinese peg to the USD ends, it's all over for the Fed."
It will be almost over, as the guillotines will still need to do their work.
The banksters need to repay us.
In the end, the banksters will have three choices: Wall, tree or guillotine.
yah there is a reason why there was so many suicides and strange deaths of bankers last year.
funny how bankers take the "game" so seriously and will end up misserable. If you consider having money, sex with who ever you want and doing what ever you want then the winners to me are guys like Russle Brand and David Choe. And they got the money sex and freedom cus they did not take the game seriously and see the whole thing as a joke. I love the insane drama of David. Artist turned millionaire, Sex addict with harems at the Casinos, hitch hike through china, what character.
https://www.youtube.com/watch?v=saINV8usboQ
Who wants a cold chop when they can have a hot stake?
Ynuck, ynuck!!
There is plenty of open speculation in the financial community that this will happen.
But are you sure the HK$ would go down?
No, I expect the HKD will perform in similar direction as Singapore dollar but of course different magnitude.
Media not making big deal about it. Why do I have this queasy feeling about Monday/Tuesday?
Maybe not Monday or Tuesday, but we have not seen the fallout end. A 'world order' pillar is knocked loose and it is not reasonable to expect the consequences to end at a few currency exchange houses.
It is reasonable to expect that this event will deepen the current tendency for the dollar to strengthen. This has important consequence in the price of things...like oil.
It feels like we have a whole flock of black swans circling overhead right now, and getting tired enough that they will all be landing at once. SNB's actions may have been the first.
I'm waiting for Samuel L. Jackson in Pulp Fiction II to address some preppy white kid about to get shot.......
"Hey you flock of black swans...."
Then ya know The End is close baby, real close.
I wish they had called it a white crow instead of a black swan though. Not only are they kind of creepy looking:
http://kitcampbell.com/wp-content/uploads/2013/01/White-Crow-image.jpg
Because then I could have said "It feels like we have a murder of white crows circling overhead..."
Perhaps a 'world order' pillar was set loose in exactly the way it was supposed to fall. I figured a year or so ago the AUD would sink towards 75 (yeah got slapped for that comment)... looks like 70 is possible, but in a few months, I'm wondering if it may end up possibly appearing to be a cleaner shirt in the hamper for a moment?
Any thoughts?
I'm not a betting man but the people who are, are betting against commodity-based economies and currencies. In our world, the people who make things continue to take a beating. In Switzerland, it will be the exporting manufacturers who will take a hit for months.
In the broken casino pinball markets today, the AUD widget is seen as a commodity currency. Ie, it is extremely correlated to commodity prices regardless of other actual issues.
It is possible to exploit this behavior.
Indeed.
A few months back the visionary geniuses in here, and elsewhere, were claiming Australia's "mining boom is over", not understanding even the basics, that the investment in mining CONSTRUCTION was slowing down in a planned and fully expected way (i.e. we knew this was going to occur, 4 years out), and that the MINING boom, i.e. the new long-term production ramp was just getting started. Long-term supply contracts into huge markets with almost all the new production projects.
So revenue stream moves into mild-flood, from here, and will keep growing. Asia now has its dream of open access to excess and cheap high-grade resources, while the AUD has plummeted and Tapis is down ~60%. So Australian energy and minerals are becoming an irresistible bargain once again in Asia. Get ready for the buying frenzy to follow, and the new massive wave of investment to come.
And just as all those major free-trade tariff reduction deals with Asia are kicking-in.
Hunter valley coal miners don't quite agree.
As far as Iron Ore, just wait until FMG goes care and maintenance.
Unless your argument is based in the assumption that a duopoly (BHP, RIO) is a healthy industry.
WTF? Just what argument do you 'think' I'm making? Do you even understand what I wrote?
A statement of the prevailing situation is not an 'argument'.
What the hell has Hunter Valley coal got to do with it? They can close the pit down and stop feeding the power generators any time they like. they will go broke and someone will buy them out and reopen it.
And Hunter valley miners are not forced to work in a coal mine, they can go work mowing lawns or delivering milk if it makes them happy, who cares what they decide to do? Just what the hell are you on about?
RE FMG, an individual player's survival or failure in business is up to them to make the smart competitive choices and operate their company accordingly, or fail and go away. If Andrew Forrest ends up out on the bones of his arse out the door I'll actually laugh, he's had it coming for a long time now.
And there are far more than two iron ore miners in Australia, as you again inaccurately implied. If they work hard and have a smarter boss than Forrest, they may get bigger one day as well.
You have a serious chip on your shoulder Prisoner, your comments are uninformed, inaccurate, inapplicable, often warped and generally a bit retarded. How you got that way and what you plan to do about it is all your problem though.
EDIT: I think I just got it, you were one of the "visionary geniuses", mentioned above, going around zh and saying the "mining-boom is over", right? ROFLMAO! You moron! You don't have a damned clue ... and you even live here!
"The Deutsche mark appreciated, and life became very hard for German exporters."
.. but the rest of Germany continued to do very well ... until the Globalists dragged the once conservative German Banks into Fiat Oblivion.
I was there when we had 12 DM / 1 GBP ... i.e. the German Exporters were literally giving the stuff away ... much like China does today.
Not Hungarian homeowners??!!!
I mean seriously...the Swiss Franc is worthless. We dont have negative rates in the USA...people are just acting weird when they hold Swiss francs let alone denominate anything in that money.
The money is backed by nothing.
Maybe a cow.
Some "cow bell" maybe.
A "German Euro".... Bwhahahahahaha. That's a good.
Run to the Yen! Even more hilarious.
None of this paper provides anything to the holder of it.
IT IS WORTHLESS.
They are all derivatives of USD's which are worth nothing.
What difference,at this point, does it make ?
WE DO NOT CHARGE FOR
DEPOSITS IN THE USA.
The Bank....cough,cough, "earns" interest simply by putting the money there. The Banks then turn around and "lend" at 18% interest.
That is called MINTING monies. USURY!
Using DOLLARS?
CRIMINAL in my view.
And what does the Government do? SPEND DOLLARS LIKE THEY OWN THE PLACE AS PRICES GO THROUGH THE ROOF!
Bwhahaha. Now you're lending to a municipal authority at 18...well, okay ...12 percent.
WITH THE TAXPAYER AS YOUR BACKSTOP.
CRAZY!
In the meantime you have the Marcellus and Utica shale....INFINITY DOLLARS.
Why own ANY DEBT PERIOD?
Darn right those treasuries are soaring in value. "Last Asset Standing." Its the only hedge against the annihilation of all fiat monies AND THE DEBT TOO.
No, we pay banks for their reserve deposits here (how you say that isn't negative rates is beyond me).
And though the balance reserve reqs are 60-80B, they all seem to have $2.5T stashed there.
Wake up and smell the real criminals and not just their patsies.
We have voluntary negative rates. Example: Suntrust got the urge to start dinging my business checking account for $10 a month as some kind of BS "fraud protection" service.
Adjusted for inflation. You are losing money sitting at the bank. Wealth destruction.
The only swiss francs that I hold happen to be 20 franc coins with a picture of Heidi on one side and a cross on the other. If it's paper then the only people who want it are the Venezuelans as the banana peel wipes are starting to get old.
More Cowbell
https://www.youtube.com/watch?v=GCd0OjjCz88
"I'd like to be a cow in Switzerland"
https://www.youtube.com/watch?v=gBLRLWzRdgQ
your opinion is worthless too. :-P
You are right, all fiat money is really nothing but paper. Well...maybe having a dozen aircraft carrier groups helps ;-)) some paper. I have always thought we should replace George's image on the dollar bill with that of a Nimitz-class super-carrier.
<img src="http://en.wikipedia.org/wiki/File:USS_Nimitz_in_Victoria_Canada_036.jpg" border="0" style="border:none;max-width:100%;" alt=Nimitz -class"" /></a>
"... we should replace George's image on the dollar bill with that of a Nimitz-classsuper-carrier"
Since the US made the deal with the Saudis: protecion if you only sell oil in US Dollars. Thereby the "petro dollar" nickname. It may be more appropriate to decorate the US Dollar with Saudi oil rigs.
As will the 'dollar' be, very soon?
US are pushing Putin towards a war, because he along with China, want out of the 'Petrodollar', as this will hurt US they now need a war to hide the 'collapse' behind!
http://beforeitsnews.com/economics-and-politics/2014/12/paul-craig-rober... < reason China weren't sanctioned!
It has been rather humorous to hear commentators and traders in the U.S. and Europe get angry at the SNB for getting rid of the peg and not "telegraphing" their move.
Imagine that! Someone in government coming to their senses and protecting the taxpayer instead of the FX trader and the equities casino gamblers!
+ 1 for sure
The SNB "knows" which way the Euro is going, and already polluted thier currancy with more than enough Euros
The Swiss took a beating with FATCA, & with too many Euros...
Time to wave "by- by" & try to save it's self.
The dominos are starting to fall, and it looks like the Swiss made it out alive. They'll sell a few less watches & chocolate...Good for them
With all the people who shorted the Swiss and lost big, it appears the banksters thought the Swiss Euro-peg was bad for them too. The only surprise was that the Swiss decided not to play their part as victims. I love it when banksters lose money!
"Someone in government coming to their senses and protecting the taxpayer"
Spoken like a true dupe.
Perhaps, but at least they stopped the peg and didn't telegraph it to the casino.
If they really come to their senses they will shut down the National Bank.
When it is a fiat, it is just politics and smoke and mirrors.
I LOL at seeing FX traders getting fucked.
Wait till the Greek election and the CDS blow up.
The real hilarious part is the doom and gloom (from a pulpit yet!) that was preached should the Swiss pass the gold referendum.
Greek election next week. Will they do the right thing? Are Greek people asleep or awake?
One thing from the article above stands out as laughable: "...markets will now hesitate to believe central banks’ statements about future policy." < How should one respond to a statement like that? Facepalm.
When I was a kid, I always wanted a Swiss Army knife, but could never afford one. I guess they are now well and truly out of reach for me, damn it!
http://www.amazon.com/Victorinox-Swiss-Army-SwissChamp-XAVT/dp/B000QGF98...
You do not return our gold, fine.
We took the ball and headed out of the field, we go home ...
The "ball" is ours!
Niinguêm see, no one speaks.
They are sucking fiat ATMs and returning Euros.
There is another logical consequence in the whole thing, is much more expensive for those who do not reside in Switzerland go there, involves all kinds of immigrants dropped only and only with this play.
Swiss with hard currency can buy anything they need, its export industry involves a lot of precision technology that, who needs pay for it, do not adhere only to cheeses and chocolates.
Switzerland did not like that leveraged its currency, who did get fucked.
Wait for more accidents with nail gun in the West ...
hehe.
Send the boys from Vicenza north and get the gold back.
Park it all in Italy (provided Switzerland even has any) and THEN see how much its worth.
That just gets you back to green shoots bitches, and we all how well that ended last time.
Any illiterate in Switzerland speaks three languages e atira muito bem.
hehe.
I don'tunderstand your reference to immigrants. The SNB move makes Switzerland much more attractive for immigrants, both those in situ and those planning to roost there.
My first thought on the SNB move is, "Who will be next?"
The banksters need to repay us.
One day I will emulate the Hunger Games with banksters.
What's the hand say to the face? *SLAP" bitchez!
We're gonna' need plenty of rope.
uh, maybe baskets?
The negative effects for the Swiss economy – through the decreased competiveness of its export industries (including tourism and medicine) – may already be showing that abandoning the euro peg was not a good idea.
Swiss Tourism and medicine dropped in the last 48 hours? These guys havebeen listening to the bankers and exporters only. The average Swiss just had their household wealth increase by 30%, in relative terms. Of course, we're not to concern ourselves with the state of the actual residents of any given country. You know, the "country" is made up of bankers.
HUGE has happened before!
Fixed rate, for about 25 years, ending 1971 -- was 4.3 Swiss francs to buy 1.00 U.S. Dollar.
The subsequent floating rate has been as little as about 0.75 Swiss francs per one U.S. dollar.
HUGE has happened before!
Not overnight
point taken, NoTTD, but if you're a Swiss who works for Roche ...or Swatch,say, and your job is about to be exported to China where they're been making perfect copies of Swiss prestige watches for years [effectively the Chinese product counterfeiters have passed their audition and are about to be rewarded with juicey contracts from Switzerland] then you'll need the increase in savings you mention to pay the bills.
There will be winners and losers in such a tumultous change. If Swiss exporters start to wind back then the demand for foreign guestworkers (from nearby Eurozone countries such as Italy) will plummet and the knock-on effects in those countries will be dire -- exacerbating the effects of their terrible homegrown unemployment. Many families in Italy, Slovenia, etc rely on the money sent back from family-members working in Switzerland.
Re: "perfect copies of Swiss prestige watches for years..." < I beg to differ, and I have the souvenirs to prove it. They may look the same, but they are not the same. hahaha
Lateral Thinking exercise: The 30% instant Wealth Effect is mathematically equivalent to Gold prices dropping accordingly -- but only for the Swiss.
Sounds of trucks heard in CH: beep, beep, beep...
SNB decision was a direct consequence of reality, the Russian reality.
SNB was an effect not a cause.
The Swiss reflect reality.