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The Swiss Franc Will Collapse
By Keith Weiner
I have worked to keep this piece readable, and as brief as possible. My grave diagnosis demands the evidence and reasoning to support it. One cannot explain the collapse of this currency with the conventional view. “They will print money to infinity,” may be popular but it’s not accurate. The coming destruction has nothing to do with the quantity of money. It is a story of what happens when interest rates fall into a black hole.
Yields Have Fallen Beyond Zero
The Swiss yield curve looks like nothing so much as a sinking ship. All but the 20- and 30-year bonds are now below the water line.

Look at how much it’s submerged in just one week. The top line (yellow) is January 16, and the one below it was taken just a week later on January 23. It’s terrifying how fast the whole interest rate structure sank. Here is a graph of the 10-year bond since September. For comparison, the 10-year Treasury bond would not fit on this chart. The US bond currently pays 1.8%.

The Swiss 10-year yield was as high as 37 basis points on Friday January 2. By the next Monday, it had plunged to 28, or -25%. By January 15—the day the Swiss National Bank (SNB) announced it was removing the peg to the euro—the yield had plunged to just 7 basis points. It has been nonstop freefall since then, currently to -26 basis points.
What can explain this epic collapse? Why is the entire Swiss bond market drowning?
Drowning is a fitting metaphor. In my dissertation, I describe several harbingers of financial and monetary collapse. The first is when the interest interest rate on the long bond goes to zero. I discuss the fact that a falling rate destroys capital, and that lower rates mean a higher burden of debt. If the long bond rate is zero then the net present value of all debt (which is effectively perpetual) is infinite. Debtors cannot carry an infinite burden. As we’ll see, any monetary system that depends on debtors servicing their debt must collapse when the rate goes to zero.
I think the franc has reached the end. With negative rates out to 15 years, and a scant 33 basis points on the 30-year, it is all over but the shouting.
Not Printing, Borrowing
Let’s take a step back for a moment, and look at how the recent chapter unfolded. It began with the SNB borrowing mass quantities of francs. Most people say printed, but it’s impossible to understand this unprecedented disaster with such an approximate understanding. It’s not printing, but borrowing.
Think of a homebuyer borrowing $100,000 to buy a house. He never gets the cash in his bank account. He signs a bunch of paperwork, and then at the end of the day he has a debt obligation to repay, plus the title to the house. The former owner has the cash.
It works the same with any central bank that wants to buy an asset. At the end of the day, the bank owns the asset, and the former owner of the asset now holds the cash. This cash is the debt of the central bank. It is on the bank’s balance sheet as a liability. The bank owes it.
This is vitally important to understand, and it can be quite counterintuitive. If one thinks of the franc (or dollar, euro, etc.) as money, and if one thinks that the central banks print money, then one will come to precisely the wrong conclusion: that there is nothing owed, and indeed there is no debtor. In this view, the holder of francs has cash, which is a current asset. End of story.
This conclusion could not be more wrong.
Certainly, the idea of the central bank repaying its debt is absurd. By law, payment is deemed made when the debtor pays in currency—i.e. francs in Switzerland. However, the franc is the very liability of the SNB that we’re discussing. How can the SNB pay off its franc liabilities using its own franc liabilities as means of payment?
It can’t. This is a contradiction in terms. Thus it’s critical to understand that there is no extinguisher of debt in the regime of irredeemable paper currency. You may get yourself out of the debt loop by paying in currency, but that merely shifts the debt. The debt does not go out of existence, because paying a debt with an IOU cannot extinguish it. Unlike you, the central bank cannot get itself out of debt.
However, it can service its debt. For example, the Federal Reserve in the U.S. pays interest on reserves. Indeed, the bank must service its debts. It would be a calamity if a payment is missed, if the central bank ever defaulted.
The central bank must also maintain its liabilities, which is what it uses to fund its assets. If the commercial banks withdraw their deposits—and they do generally have a choice—the central bank would be forced to sell its assets. That would be contrary to its policy intent, not to mention quite a shock to brittle economies.
Make no mistake, a central bank can go bankrupt. This may seem tricky to understand, as the law makes its liability legal tender for all debts public and private. A central bank is also allowed to commit acts of accounting (and leverage) that would not be tolerated in a private company. Regardless, it can present misleading financial statements, but even if the law lets it get away with that, reality will have its revenge in the end. The emperor may claim to be wearing magnificent royal robes, but he’s still naked.
If liabilities exceed assets, then a bank—even a central bank—is insolvent and the consequences will come soon enough. The cash flow from the assets will sooner or later become insufficient to pay the interest on the liabilities. No central bank wants to be in a position where it is obliged to borrow, not to purchase asset but to service a negative cash flow. That is a rapid death spiral. It must somehow push down the interest rate on its liabilities (which are typically short term) to keep the cost of financing its portfolio below the revenue generated on the assets.
This becomes increasingly tricky when two things happen. One, the yield on the asset goes negative. Thus, the even-more-negative (and even more absurd) one-day rate of -400 basis points in Switzerland. Two, the issuance of more currency drives down yields even further (described in detail, below).
Events force the hand of the central bank. It goes down a path where it has fewer and fewer choices. That brings us back to negative interest rates out to the 15-year bond so far.
The Visible Hand of the Swiss National Bank
So the SNB issued francs to fund its purchase of euros. Next, it spent the euros on whatever Eurozone assets it wished to buy, such as German bunds.
It’s well known that the SNB put on a lot of this trade to keep the franc down to €0.83 (the inverse of keeping the euro down to CHF1.2) l. It also helped push down interest rates in Europe. The SNB was a relentless buyer of European bonds.
That leads to the question of what it did in Switzerland. The SNB was trading new francs for euros. That means the former owner of those euros then owned francs. These francs have to stay in the franc-denominated domain. What asset will this new franc owner buy?
I frame the question this way deliberately. If you have a 100-franc note, you can put it in your pocket. If you have CHF100,000, you can deposit it in a bank. If you have CHF100,000,000 (or billions) then you are going to buy a bond or other asset (depositing cash in a bank just pushes it to the bank, who buys the asset).
The seller of the asset is selling on an uptick. He gives up the bond, because at its higher price (and hence lower yield) he now finds another asset more attractive on a risk-adjusted basis. Risk includes his own liquidity risk (which of course rises as his leverage increases).
As the SNB (and many others) relentlessly push up the bond price, and hence push down the yield, the sellers of the ever-lower yielding bonds have fresh new franc cash balances.
The Quantity Theory of Money holds that the demand for money falls as the quantity rises. If demand for money falls, then by this definition the prices of all other things—including consumer goods—rises. It is commonly held that people tradeoff between saving money vs. spending money (i.e. consumption). The prediction is rising consumer prices.
I emphatically disagree. A wealthy investor does unload his assets to go on an extra vacation if he doesn’t like the bond yield. A bank with a trillion dollar balance sheet does not dole out bigger salaries if its margins are compressed.
So what does trade off with government bonds? If an investor doesn’t want to own a government bond, what else might he want to own? He buys corporate bonds, stocks, or rental real estate, thus pushing up their prices and yields down.
And then, in a dysfunctional monetary system, you can add antique cars, paintings, a second and third home, etc. These things serve as surrogates for investment. When investing cannot produce an adequate yield, people turn to non-yielding non-investment assets.
The addition of a new franc at the margin perturbs the previous equilibrium of risk-adjusted yields across all asset classes. Every time the bond price goes up, every owner of every franc-denominated asset must recalculate his preferences.
The problem is that the SNB does not create any more productive investment opportunities when it spills more francs into the Swiss financial system. Those new francs have to chase after the existing assets.
Yields are falling. They necessarily had to fall.
An Increasing Money Supply and Decreasing Interest Rate
The above discussion describes the picture in every developed economy. Interest rates have been falling for 34 years in the U.S., for example.
In a free market, the expansion of credit would be driven by a market spread: available yield – cost of borrowing. If that spread is too small (or negative) there will be no more borrowing to buy assets. If it gets wider, then banks can spring into action.
However, central banks distort this. Instead of the cost of borrowing being a market-determined price, it is fixed by the central bank. This perverts the business model of a bank into what is euphemistically known as maturity transformation—borrowing short to lend long. It’s not possible for a bank to borrow money from depositors with 5-year time deposit accounts in order to buy 5-year bonds. The bank has to borrow a shorter duration and buy a longer, in order to make a reasonable profit margin.
If the central bank sets the borrowing cost lower and lower, then the banks can bid up the price of government bonds higher and higher (which causes a lower and lower yield on the long bond). This is not capitalism at all, but a centrally planned kabuki theater. All of the rules are set by a non-market actor, who can change them for political expediency.
The net result is issuance of credit far beyond what could ever happen in a free market. This problem is compounded by the fact that the central bank cannot control what assets get bought when it buys bonds. It hands the cash over to the former bond holders. It’s trying to accomplish something—such as keeping the franc down in the case of the SNB, or preventing bankruptcies, in the case of the Fed—and it has no choice but to keep flooding the market until it achieves its goal. In the US, the rising tide eventually lifted all ships, even the leaky old tubs. The result is a steeper credit gradient, and the bank can eventually force liquidity out to its target debtors.
The situation in Switzerland makes the Fed’s problems look small by comparison. Unlike the Fed, which had a relatively well-defined goal, the SNB put itself at the mercy of the currency market. It had no particular goal, and therefore no particular budget or cost. The SNB was fighting to hold a line against the world. While it kept the franc peg, the SNB put pressure on both Swiss and European interest rates.
Something changed with the start of the year. We can understand it in light of the arbitrage between the Swiss bond, and other Swiss assets. The risk-adjusted rate of return on other assets always has to be greater than that of the Swiss government bond (except perhaps at the peak of a bubble). Otherwise why would anyone own the higher-risk and lower-yield asset?
Therefore, there are three possible causes for the utter collapse in interest rates in Switzerland beginning 10 days prior to the abandonment of the peg:
1) the rate of return of other assets has been leading the drop in yields
2) buying pressure on the franc obliged the SNB to borrow more francs into existence, fueling more bond buying
3) the risk of other assets has been rising (including liquidity risk to their leveraged owners)
#1 is doubtful. It’s surely the other way around. It’s not falling yields on real estate driving falling yields on bonds. Bond holders are induced to part with their bonds on a SNB-subsidized uptick. Then they use the proceeds to buy something else, and drive its yield down.
One fact supports conclusion #2. Something forced the SNB to remove the peg. Buying pressure is the only thing that makes any sense. The SNB hit its stop-loss.
The rate of interest continued to fall even after the SNB abandoned its peg. Why? Reason #3, rising risks. Think of a bank which borrowed in Swiss francs to buy Eurozone assets. This trade seemed safe with the franc pegged to the euro. When the peg was lifted, suddenly the firm was faced with a staggering loss incurred in a very short time.
The overreaction of the franc in the minutes following the SNB’s policy change had to be the urgent closing of Eurozone positions by many of these players. The franc went from €0.83 to €1.15 in 10 minutes, before settling down near €0.96. For those balance sheets denominated in francs, this looked like the euro moved from CHF1.20 to CHF0.87, a loss of 28%. What would you do, if your positions instantly lost so much? Most people would try to close their positions.
Closing means selling Eurozone assets to get francs. Then you need to buy a franc-denominated asset, such as the Swiss government bond. That clearly happened big-time, as we see in the incredible drop in the interest rate in Switzerland. Francs which had formerly been used to fund Eurozone assets must now be used to fund assets exclusively in the much-smaller Swiss realm.
In other words, a great deal of franc credit was used to finance Eurozone assets. This is a big world, and hence the franc carry trade didn’t dominate it. When those francs had to go home and finance Swiss assets only, it capsized the market.
And the entire yield curve is now sinking into a sea of negative rates.
The Consequences of Falling Interest
Meanwhile, unnaturally low interest is offering perverse incentives to corporations who can issue franc-denominated liabilities. They are being forced-fed with credit, like ducks being fatted for foie gras. This surely must be fueling all manner of malinvestment, including overbuilding of unnecessary capacity. The hurdle to build a business case has never been lower, because the cost of borrowing has never been lower. The consequence is to push down the rate of profit, as competitors expand production to chase smaller returns. All thanks to ever-cheaper credit.
Artificially low interest in Switzerland is causing rising risk and, at the same time, falling returns.
The Swiss situation is truly amazing. One has to go out to 20 years to see a positive number for yield—if one can call 21 basis points much of a yield.
It’s not only pathological, but terminal. This is the end.
In Switzerland, there is hardly any incentive remaining to do the right things, such as save and invest for the long term. However, there’s no lack of perverse incentives to borrow more and speculate on asset prices detaching even further from reality.
Speculation is in its own class of perversity. Speculation is a process that converts one man’s capital into another man’s income. The owner of capital, as I noted earlier, does not want to squander it. The recipient of income, on the other hand, is happy to spend some of it.
We should think of a falling interest rate (i.e. rising bond market and hence rising asset markets) as sucking the juice (capital) out of the system. While the juice is flowing, asset owners can spend, and lots of people are employed (especially in the service sector).
For example, picture a homeowner in a housing bubble. Every year, the market price of his house is up 20%. Many homeowners might consider borrowing money against their houses. They spend this money freely. Suppose a house goes up in price from $100,000 to $1,000,000 in a little over a decade. Unfortunately, the debt owed on the house goes up proportionally.
With financial assets, they typically change hands many times on the way up. In each case, the sellers may spend some of their gains. Certainly, the brokers, advisors, custodians, and other professionals all get a cut—and the tax man too. At the end of the day, you have higher prices but not higher equity. In other words, the capital ratio in the market collapses.
To understand the devastating significance of this, consider two business owners. Both have small print shops. Both have $1,000,000 worth of presses, cutters, binding machines, etc. One owns everything outright; he paid cash when he bought it. The other used every penny of financing he could get, and has a monthly payment of about $18,000. Both shops have the same cost of doing business, say $6,000. If sales revenues are $27,000 then both owners may feel they are doing well. What happens if revenues drop by $3,500? The all-equity owner is fine. He can reduce the dividend a bit. The leveraged owner is forced to default. The more your leverage, the more vulnerable you are to a drop in revenues or asset values.
Falling interest, and its attendant rising asset prices, juices up the economy. People feel richer (especially if their estimation of their wealth is portfolio value divided by consumer prices) and spend freely. Unfortunately, it becomes harder and harder to extract smaller and smaller drops of juice. The
marginal productivity of debt falls.
Think about it from the other side, the borrower. The very capacity to pay interest has been falling for decades. A declining rate of profit goes hand-in-hand with a falling rate of interest. Lower profit is both caused by lower interest, and also the cause of it. A business with less profit is less able to pay interest expense. Who could afford to pay rates that were considered to be normal just a few decades ago? It is capital that makes profit, and hence capacity to pay interest, possible. And it is capital that’s eroded by falling rates.
The stream of endless bubbles is just the flip side of the endless consumption of capital. Except, there is an end. There is no way of avoiding it now, for Switzerland.
How About Just Shrinking the Money Supply?
Monetarists often tell us that the central bank can shrink the money supply as well as grow it, and the reason why it’s never happened is, well… the wrong people were in charge.
I disagree.
To see why, let’s look at the mechanism for how a central bank expands the money supply. It issues cash to an asset owner, and the asset changes hands. Now the bank owns the asset and the seller owns the cash (which he will promptly use to buy the next best asset). A relentlessly rising bond price is lots of fun. It’s called a bull market, and everyone is making profits as they reckon them (actually consuming capital, as we said above).
How would a contraction of the money supply work? It seems simple, at first. The central bank just sells an asset and gets back the cash. The cash is actually its own liability, so it can just retire it. And voila. The money supply shrinks.
Not so fast.
There is an old saying among traders. Markets take the escalator up, but the elevator down. Central bank buying slowly but relentlessly bid up the price of bonds. Tick by tick, the bank forced it up. What would central bank selling do? What would even a rumor of massive central bank selling do?
Bond prices would fall sharply.
The problem is that few can tolerate falling bond prices, because everyone is leveraged. Think about what it means for everyone to borrow and buy assets, for sellers to consume some profits and reinvest the proceeds into other assets. There is increasingly scant capital base supporting an increasingly inflated—as in puffed-up with air, without much substance—asset market. A small decline in prices across all asset classes would wipe out the financial system.
Market participants have to be leveraged. Dirt cheap credit not only makes leverage possible, but also necessary. How else to keep the doors open, without using leverage? Spreads are too thin to support anyone, unlevered.
Banks are also maturity mismatched, borrowing short to lend long. The consequences of a rate hike will be devastating, crushing banks on both sides of the balance sheet. On the liabilities side, the cost of funding rises with each uptick in the interest rate. On the asset side, long bonds fall in value at the same time. If short-term rates rise enough, banks will have a negative cash flow.
For example, imagine owning a 10-year bond that pays 250 basis points. To finance it, you borrow at 25 basis points. Well, now imagine your financing cost rises to 400 basis points. For every dollar worth of bonds you own, you lose 1.5 cents per year. This problem can also afflict the central bank itself.
You have a cash flow problem. You are also bust.
The Bottom Line
The problem of falling rates is crushing everyone, but raising the rate cannot fix the problem. It should not be surprising that, after decades of capital destruction—caused by falling rates—the ruins of a once-great accumulation of wealth cannot be repaired by raising the interest rate.
I do not see any way out for the Swiss National Bank and the franc, within the system of irredeemable paper money. However, unless the SNB can get out of this jam, the franc is doomed. I can’t predict the timing, but I believe the fuse is lit and the powder keg could go off at any time.
One day, a bankruptcy will happen. Soothing voices will assure us it was unexpected. Then another will happen, perhaps triggered by the first or perhaps not. Then the cascading begins. One party’s liabilities are another’s assets. ABC’s bankruptcy wipes out DEF’s asset. Since DEF is leveraged, it cannot absorb much loss until it, too, is dragged under.
Somewhere in the midst of this, people will turn against the franc. Today, it’s arguably the most loved paper currency. However, I don’t think it will take too many capital losses in Switzerland, before there is a selling stampede. The currency will fall to zero, in a repeat of a pattern that the world has seen many times before.
People will call it hyperinflation (I don’t prefer that term). Call it what you will, it will be the death of the franc. It will have nothing to do with the quantity of money.
Two factors can delay the inevitable. One, the SNB may unwind its euro position. As this will involve selling euros to buy francs, the result will be to put a firm bid under the franc. Two, speculators will of course know this is happening and eagerly front-run the SNB. After all, the SNB is not an arbitrager buying when it can make a spread. It is a buyer by mandate (in this scenario) and must pay the ask price. Even if the SNB does not unwind, speculators may buy the franc and wait for it to happen. And of course, they could also buy based on a poor understanding of what’s happening, or due to other perverse incentives in their own countries.
Bankruptcies aside, the franc is already set on a hair-trigger. Something else could trip it and begin the process of collapse. There is little reason for holding Swiss francs in preference to dollars. The interest rate differential is huge. The 10-year US Treasury pays 1.8%. Compare that to the Swiss bond which charges you 26 basis points, and the difference is over 208 points in favor of the US Treasury. Once the risk of a rising franc is taken out of the market (by time or price action) this trade will commence. A falling franc against the dollar will add further kick to this trade. A trickle could become a torrent very quickly.
I would not be surprised if the process of collapse of the franc began next week, nor if it lingered all year. This kind of event is not susceptible to a precise prediction of when.
What is clear is that, once the process begins in earnest, it will be explosive, highly non-linear, and over quickly (I would guess a matter weeks).
I plan to publish a separate paper revisiting my Gold Bonds to Avert Financial Armageddon thesis in light of the Swiss crisis. I will save for that paper my assessment of whether or how gold bonds can provide a way out for the Swiss people trapped in the terminal phase of irredeemable paper money.
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Moron. Keith Weiner is a GD moron. This asshat claims to have a PHD. I want to see his transcripts. This article is as stupid as when he tried to explain why everyone should sell gold because of his misunderstanding of how futures traders worked and his cobasis stupidity.
Is this something that the Fed wrote, to justify their madness? The gambles they took? I think that if they wanted to save the system, they could have printed real cash. Built Infrastuctures that would have put people to work. When this FED experiment fails, there is not enough Cash to pay off debts and a depression will occur. The write talks about making the Banks reasonable profits.....For What? Non productive work that rapes the average person. The monies that flow from the Fed, that are Owned by Private Banks seems almost like a conflict of interest.....BUT not unlawful as there is no law in place to stop them. The Swiss bank now has hard decisions and after given a chance may show the WORLD a better way? Just pumping the American System which potencially is Robbing the World , profits going to a Few is destroying opposing systems...............The Writer is a Banker?.....His payment for this article should be a Nail Gun, just on load as others require it's use as well.
This is the dumbest article ever put on this site.
Agree completely. The Swiss have plenty of practice at Banking and I expect them to come out battered & bruised but still in control.
no central bank on this planet has experience in global unbacked fiat set against digital currency creation and flows set against a quadrillion in derivatives. No one.
You may well do just as good a job were you in the post.
Agree. waste of time readin it. The author simply is clueless. Central banks are NOT constrained by the interest they pay on reserves (excess or not). The SET the interest rate! They can set a negative rate (as the Swiss just did). This REALITY blows the entire article out of the water. Zero hedge should be careful about printing bullshit. It reduces the value of the many other quality articles it publishes.
Yes, but the article does prove that brevity is the soul of wit!
An article filled with cliches eg dysfunctional economic systems, CB active roles, etc. We know all that. Conflating these malises to a collapse of Swiss Francs is shallow.
A bond/currency market exists practically 24/7 in an arguably currency war btw CBs. Arbitrages, Speculations, Hedges, etc take place. The SF has its place dependent of faith in it relative to the whole universe of investments.
By far other fait currencies have to fail first and the S Fr is not the first in line to be the catalyst of currency collapses nor the major currency to be demolished in a meltdown.
A stunninshingly stupid piece of drivel.
The appreciation of negative yields clearly means that the market (to the degree it exists) believes theat CHF will be the last fiat standing.
Another stupid article on ZH. For this guy to compare somebody buying a house with a central bank is just crazy. When you are granted a loan, you put a down payment. Even knowing the basics of FRS, which banks operate, tells you that even if you don't pay one cent on the house, the bank is fine. They got from you the margin necessary for the loan. Plus they have the collateral which they will eventually sell and get the most; all; or even more than the loan. Now the allegation that the SNB was "borrowing" not printing is so pathetic that it deserves no answer. But...... anyways. The CHF was appreciating because of high demand. High demand makes things scarce.So the way the SNB choose to tame the raise was to make more of it available. Since paper currency requires no collateral ( other than the trust people put on it, and some legal rights) the SNB was basically making more of it available ( printing) and exchanging it for other currencies. The band available for the printing spree, was directly proportional to the demand. So as long as there was demand to the new printed CHFs the SBN would print it ( around the 1.20 band). With the foreign currency the SBN accumulated ( 80% of the GDP at some point) they bought bonds, real state etc around europe. Some thought they should buy some gold with it but as people know the referendum failed. Anyways the author of this article wrote it from his momma basement.
I think there are some pretty harsh criticisms against the author's thesis that in my opinion is simply this: CB's and governments aren't printing as much as they are borrowing and that the effects of catching some one short on the resulting carry is quick and efficient absolute carnage. And under these circumstances there is simply not enough collateral to cover. This result is a much different outcome from outright printing. And I am prestty sure this is what Santelli was talking about months ago - that actual available collateral is drying up, other than the FED say issuing more and more - which is akin to withdrawing money from the system further. A post ponzi ponzi so to speak.
At any rate - I thought the article was good.
Your piece is long winded and repetitive, as much Ivory Tower work is.
Speculators are GOOD for Capitalism, they maintain the balance of profit, risk and price discovery in truly free markets.
Free, honest Capitalist markets have not existed in the United States of America for a very long time, if indeed, they ever did exist.
The United States Federal Government has been suppressing speculators for years by smoothing volatility in markets and preventing NEEDED speculators from making REAL profitable investments to prevent the malinvestment of zero risk, which the United States Government has fostered by pumping up the stock market and preventing real risk discovery.
Very wrong thing to do.
The real laws of honest supply and demand will eventually reassert themselves.
But you are right that worldwide governments have massively distorted ALL asset classes.
But, ahem, I've said that for years now... and it's relatively common knowledge on ZH.
The conclusions are substantially correct, but a few remarks were way off base.
"People will call it hyperinflation (I don’t prefer that term). Call it what you will, it will be the death of the franc. It will have nothing to do with the quantity of money."
No, the entire problem is a consequence of the SNB creating vast quantities of francs to buy euros to maintain the peg. Absent that, the francs presently flooding into the Swiss bond market causing all kinds of mayhem would not even exist.
As to the argument against higher rates as a cure - well of course it would be painful. All the misallocations wrought by the inflation would have to liquidated (read: bankruptcies, layoffs, fund manager suicides), but to continue on the present course only makes the misallocations larger and the inevitable bust that must worse.
He's also wrong in calling outstanding francs liabilities of the SNB, or suggesting that the SNB (or any other CB) can become insolvent, but that's just semantics really - it doesn't affect the analysis.
This article probably makes sense to those whose minds are similarly ring-fenced by economic theory. I see some cognitive dissonance.
First, the SNB was combatting the rise of the Franc by purchasing Euros. The rise of the Franc was caused by the purchase of Francs by Euro-holders, and holders of other currencies, who saw the Franc as a safe haven against the collapse of the Euro and other currencies. When the SNB purchased Euros with printed money, the SNB did not only "create debt" by printing Francs, the SNB received Euros for that printed money - the net effect on the SNB balance sheet was even (assets received equalled Francs spent). The SNB suffered no loss by buying Euros until the SNB abandoned the 1.2 peg and the Franc rose against the Euro, causing the SNB's Euro holdings to be devalued as against the Franc by about 20%. Why did the SNB trigger this loss against itself? - because it saw Draghi and the ECB going full bazooka on printing Euros to reduce the value of the Euro and attempt to re-inflate the deflating EU nations' economies. To maintain the 1.2 peg, the SNB would have had to buy far more Euros and watch them fall as the ECB QE proceeded, so the SNB decided to take a short-term loss to avoid a greater loss later.
Second, by printing currency, a central bank does not, per se, create debt. In a system of central banking such as the US Federal Reserve, debt is created not by the creation of currency, but by the government issuing debt instruments in the form of Treasury Bonds and Treasury Bills to purchase the currency created by the Federal Reserve.
Thirdly, the fall of interest rates on Swiss government bonds is the result of 2 factors - (1) the choice of the SNB to try to deter the flow of funds into the Swiss Franc by imposing a cost on purchasers, and (2) the massive purchasing pressure on Swiss GBs that has pushed the purchase price so high that purchasers are paying more than the face value plus stated return rate, resulting in a net negative return. Similarly, the recent flow of carry trade money into the relative safe haven of government bonds in the US and EU has driven up the market price of bonds and depressed the effective rates of return to near zero in the US and into negative territory on some bonds in Germany. Similarly again, for some years now, the flow of low-borrowing-cost carry trade money into such risky GBs as those of the PIIGS depressed return rates to ridiculously low levels, as if no default risk existed.
The fall of the rate of return on Swiss bonds into negative territory does no harm at all to the SNB or the Swiss government. What is happening is that purchasers/depositors are paying more for those bonds or Swiss Francs than the Swiss government or Swiss banks will ever pay back to them. This is a Swiss win-win from the currency standpoint. But from an international competitiveness standpoint, the rise in the exchange rate of the Franc will hurt Swiss industries dependent upon exports.
To say that the Swiss Franc is in danger of collapse is no more true of the Franc that it is of any other fiat currency. The Franc seems to be in better shape, and hence a better risk for holders, than other fiat currencies.
I suspect the writer's game is given away by his final paragraph, where he promotes gold bonds. Great, paper (allegedly) backed by gold to replace fiat currency. Any takers?
I think this article is bullshit and scare tactics.
The Swiss may have some rough patches but they will come through.
The word 'collapse' is hyperbole.
since when is PAYING someone when you give them your money a good thing?
you give an entity money expecting 1. the return of your money 2. with interest for the privilege
anything else literally means your 'money' is 'worth less'
this article is so simple a sixth grader can understand it. problem is i only hv a fifth grade education
What about gold backwardation?
Surely the monetisation of the entrire Franc bond market is the perfect case?
exactly how i took it...kinda
My point was, the death of the Swiss Franc should be proceeded by gold backwardation, in Franc terms. That is if everything Fekete, Weiner et al has been saying for many years now is correct.
Yet there's no mention of gold backwardation in this article.
I am sympathetic to the idea that as the long bond approaches par, or zero yield, the monetary system will be on its last legs, which bring us back to gold backwardation. A 30 year bond trading 'money good' is preposterous, but so is a Ponzi scheme, and they are known to go on, & on &........
I'm not stupid but I could not understand this article and that which I did understand seemed to be completely wrong,
Ah well.......
Swiss rates are declining because the demand for their debt is very high. Suisse is becoming a money safe haven since decoupling from the EU.
weiner is a dick
This author understands nothing about central banking. When the central bank (CB) issues money, it does so by purchasing an asset held by the public. The CB then has the asset and the seller has the money. The money (usually in the form of an electronic entry) is an asset of the seller and a liability of the CB, this much is correct. However, there is no unherent need for the CB to pay interest on the money. Only recently, for example, has the Fed paid interest on bank reserves held at the Fed. Before that, there was no interest paid by the Fed on money used to purchase assets. The money issued by the CB to buy an asset generates bank reserves. When these reserves are spent, they just end up at another bank as reserves. The only way that the level of reserves is reduced is if the CB sells assets in its portfolio and retires the money received in payment. Currently, the Fed recycles received payments on its assets as they mature or are paid off, so the level of reserves stays the same. The process is totally under the control of the CB, and the authors notion that it can lead to a CB default is nonsense.
Can someone (who read and supposedly understood this juggernaut) pls make a 2 sentence summary of the main argument? Thanks.
Yup. Tha authors say that they know and you don't. Then they try to explain what they know. They fuck it up teriibly. In fact they don't kow and neither do you. Go to next article.
Best comment ever.
duplicate
"It must somehow push down the interest rate on its liabilities (which are typically short term) to keep the cost of financing its portfolio below the revenue generated on the assets."
Provided by the scheme of theft by manipulation of money and credit.
How can the SNB pay off its franc liabilities using its own franc liabilities as means of payment?
And there's the con. They can pay debt for debt. Who has standing to sue?
Checkmate.
Btw electronics credits don't Have the legal status of notes either.
Double checkmate.
How can the SNB pay off its franc liabilities using its own franc liabilities as means of payment?
They never do and never will, just like the US Government will never pay back 18 ++ T USDs.
Can the system be fixed?
That would be impossible.
All issued currencies and bank reserves, on a planet-wide basis, come into economic existence IN EXCHANGE for government debt (directly or indirectly). And such debt is the process by which one generation of tax consumers financially cannibalizes following generations of tax payers.
Thus, probably all nations on the globe are, figuratively, eating their children in order to sustain their political and economic systems – perhaps we should call them murderous systems.
Accordingly, I humbly suggest that such systems cannot survive – and do not deserve to survive.
When such currencies collapse, what’s the alternative… what will happen to gold’s price?
And, who will provide such alternatives?
fear porn.....lol
If the Swissie tanks I will be buying to hold. Wealth is pouring into that country at the moment.
The Swiss can get away with 'paying' negative interst rates because people are DESPERATE for a place to PROTECT thier wealth. They see their wealth disappearing in economies where government corruption is stealing it directly or through inflation. Better to PAY the Swiss a little to hold (and protect) their wealth than lose it all. AND ther's less risk in holding Swiss Francs than buying art of questionable value or some other 'asset'.
I expect that the Swiss will have one of the few currencies left standing when all blows up. When Yugoslavia fell apart pepople held German Marks. In Zimbabwe, people held Rands or US Dollars. What do you hold when nobody will take US dollars - or Euros? There aren't enough 'safe havens' in the world to accommodate the demand that will arise when things start falling apart.
It seems like this is a piece of propaganda to scare people AWAY from the Swiss - more MOPE designed to prop up the US dollar.
Your analysis is spot on. What's the best way to protect wealth (not earn income as the author mistakeningly focuses on). Well something you think will stand the test of time-gold and swiss francs would be (and are) my bet. And of course, food, medicine, energy stores etc. Its all about confidence and trust. When its broken in places like Greece, Spain and Italy you'll pay someone to guard whatever wealth is still safe from the looters (i.e. the government). In physics, this is called a critical point and the that's where a phase transion occurs (e.g. water vs ice). We're getting to see this in real time in our lifetimes.
Keith, I liked the article, thanks. I'm not educated enough to agree or disagree, but it certainly got people thinking based on the comments above. What would happen if the CHF reverted back to its April 2000 standard of being pegged 40% Au? Or just 5%?
The Swiss Gold Initiative failed November 2014 and a mere two months later the SNB divorced the ECB. I'd love to know what's going on behind the scenes. Too bad Tom Clancy isn't around to write the book.
-MQS
Fiats gonna crash.
No doubt about the work going into the preparation and analysis of this piece.
However, the only thing you didn't mention at all was:
"What is George Soros' bet"???
Tell us that and we can all head out for an early 'weekend' that will last all of us the rest of our leisurely lives.
Some great posts on this thread. Blithering idiocy in an article brings out the best here. Was talking to a couple of prof friends who are mostly sports nuts, but will occasionally sober up and think.
What is the right question? I think it is who is bidding on Swiss bonds? It is not insurance companies, pension funds, widows and orphans, or any of the usual suspects. At this point, it can only be:
Currency speculators, who love the leverage they can get with bonds, and
Carpetbaggers, fleeing from home banks they don't trust, as in Italy, Spain, Portugal, Greece, and just about everywhere.
So, it's HOT MONEY. Welcome to the new normal, and fasten your seat belts. It's show time.
Glad to see all the negative comments on this article. While I was wasting my time reading it I was thinking, "What the fuck is this guy talking about?"
I thought it was just me. I grabbed a beer - rotated some food stocks and made a run to the gun store.
For a frame of reference here, can you show us another currency "depegged" from a hyperinflationary nightmare similar to the Euro in modern history? No? Then shut the fuck up.
He is confusing the domestic currency with the Bond Market where Switzerland is basically back in Bardepot territory where forex traders are hedging in one of the few non-bloc currencies left now Japan is on the hara-kiri trail.
The Bond Market is committing suicide globally because it has been socialised by the Central Banks into surrendering Capital to Government by holding Contingent Insolvency Losses in return for negligible yield.
The article talks of Banks without mentioning the Insurers.......when Lehman folded so did AIG.....it is the PIMCOs and Allianz and AIG and Travelers and Axa and Fortis and Tokio Marine and Met Life and Generali that will bite the dust
Simple remedy don't buy bonds and use the strong currency to by PM. Yes the price may go up, but believe it or not a kg Gold today will be a kg Gold tomorrow, in the next year in the next decase in the next century. It just will lay around unchanged. If all the fiat-currencies of today will be burned, the Gold or other PM just will lay around. It's just a question of waiting. If you do youself are leveraged as made you will not make it past the end.
So even if the incentives are to not save you better do. You better get rid of all your debts and buy something without any counterpart risk. World may tumbe, currencies will die but still after all this milleniums the PM are still asked and searched for. They may not be perfect but they are better then any promise any states on earth had issued or ever wil issue.
I wrot about the fault not to bind the CHF to gold, even if just partial. No let them get what they asked for....
How do Bond Funds keep their maturity spectrum then ?
My simple answer: I do not care. Every bond of a state you buy prolonges the suppression of exactly that state. Don't give them your money voluntarily. If you do, well it should be your loss.
Or pension funds, or insurance companies, or anyone dependent on interest income? They don't.
How do banks keep from going upside down on their loan portfolios? They don't.
What the fuck?
No, the Swiss currency will not collapse. The interest rates are not negative due to insane central banking but due to market forces. People are buying Swiss bonds because they are perceived to have value. That makes the value of the franc INCREASE. It's simple supply and demand. The same thing is happening to the US dollar. People are afraid, so they buy US bonds denominated in US dollars. This causes the dollar to rise while interest rates fall. Duh.
thanks to all the commentators for making some sense out of this verbosity
"I think the franc has reached the end. With negative rates out to 15 years, and a scant 33 basis points on the 30-year, it is all over but the SHOOTING."
There, fixed it for you ...