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The Swiss Franc Will Collapse

Monetary Metals's picture




 

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.

Swiss Yield Curves

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%.

 Swiss 10-year History

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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Wed, 01/28/2015 - 10:50 | 5715584 kaiserhoff
kaiserhoff's picture

Complete idiot.

He gets the difference between borrowing and printing right, then loses his mind.

It is bonds that are toast, worldwide, because central banks are a criminal cartel.   The Swissy will do just fine.

Wed, 01/28/2015 - 10:42 | 5715552 Bagbalm
Bagbalm's picture

Bullpucky - IOU's are not engraved on indestructible metal. They are extinguished all the time. When the IOU is satisfied and handed back they can burn it. It's dead.

As for - "any monetary system that depends on debtors servicing their debt must collapse when the rate goes to zero."

Re-write that as: Any ISOLATED monetary system that depends on debtors servicing their debt must collapse when the rate goes to zero.

Wed, 01/28/2015 - 15:50 | 5717035 hendrik1730
hendrik1730's picture

Finally, ALL monetary systems are isolated - they are interlinked worldwide now. And collectively isolated - the low ( and dropping ) yields are a global problem.

Wed, 01/28/2015 - 10:28 | 5715517 sTls7
sTls7's picture

Smoke and mirrors rampant across the globe. No one knows what to believe.

 

Wed, 01/28/2015 - 10:28 | 5715515 andrewp111
andrewp111's picture

When the zero limit bound ceases to exist - as it does when most currency is no longer physical - interest rates can approach negative infinity. Hyperinflation with positive interest rates is virtually identical to hyperdeflation with unbounded negative rates. In both cases the currency is completely destroyed. In the first case the unit of currency is inflated away to worthlessness, and in the second case all units of currency are taxed away by ever increasing negative rates until nothing is left.

Wed, 01/28/2015 - 22:43 | 5718633 Pareto
Pareto's picture

+1 most cogent response on this article yet.

Wed, 01/28/2015 - 15:51 | 5717045 hendrik1730
hendrik1730's picture

Correct. That's why a gold-backed currency WORKS over time as shown in the 19th century. Money bought you MORE over time and saving made sense, it preserved your wealth.

Wed, 01/28/2015 - 12:10 | 5715955 RaceToTheBottom
RaceToTheBottom's picture

OK, now I am depressed.  Is it too early to start drinking?

Wed, 01/28/2015 - 13:17 | 5716301 Yancey Ward
Yancey Ward's picture

It is certainly too early to stop.

Wed, 01/28/2015 - 10:16 | 5715455 livestrong
livestrong's picture

Bond prices to infinity and beyond! Yields to -100%. All money eventually gets sucked into a black hole and never sees the light of day again. The last CB standing will eventually own nearly every asset on the planet. Death of money...press the reset button!

Wed, 01/28/2015 - 22:56 | 5718664 Irishcyclist
Irishcyclist's picture

Is that you, Lance?

Wed, 01/28/2015 - 10:14 | 5715442 TrulyStupid
TrulyStupid's picture

This is great news for the holders of Franc denominated mortgages and other debt in Eastern Europe...they'll be able to pay off their mortgages with their now more valuable local currencies....NOT!

Great piece of thinking Mr. Weiner

Wed, 01/28/2015 - 10:12 | 5715440 sharkbait
sharkbait's picture

...If the long bond rate is zero then the net present value of all debt (which is effectively perpetual) is infinite...

 

Better check your math on that one.  simply incorrect.  At zero rates, the npv equals the notional amount. 

Stopped reading after that, the error is too egregious to ignore and continue to read.

Wed, 01/28/2015 - 18:05 | 5717646 USGrant
USGrant's picture

No the author is correct. Fekete shows that the discounted cash flow can be represented by a geometric progression where 1 dollar of cash flow per period  is 1 + q + q^2 + q^3 + ... + q^n for indefinitely many periods n. If q is the discount factor q= 1-P/100 where P is the discount rate (or interest rate not to quibble over the difference) then the cash flow is equal to 100/P. As P goes to 0 the cash flow goes to infinity.

Wed, 01/28/2015 - 15:58 | 5717070 hendrik1730
hendrik1730's picture

No. The author means that at zero interest rates, borrowing is for free and principal will never ever be repaid. Any investment will go, also the most idiotic ones. Thus the debt level keeps climbing at an ever faster rate while the accumulated "buying power" ( the NPV ) of these loans effectively goes to infinity because the depreciation rate is ZERO and no principal is ever paid back..

Wed, 01/28/2015 - 11:25 | 5715746 me again
me again's picture

He's a moron. A page clicker.  well, I clicked. whoopee.

Wed, 01/28/2015 - 10:23 | 5715487 farmboy
farmboy's picture

Indeed I also found that, it is an overinflated dumbo.

Wed, 01/28/2015 - 10:09 | 5715423 falak pema
falak pema's picture

Fact of the matter is : Swiss is QUALITY LAND in a sea of fiat mediocrity.

But Swiss being small must protect its quality; both in industry/services as well as financial safe haven; by doing a balancing act with its money in this currency war period. They are good at it since they invented the cuckoo clock!

I wouldn't worry too much about the Swiss. They have William Tell and we have the apple! 

Wed, 01/28/2015 - 10:05 | 5715415 Usurious
Usurious's picture

 

 

''any monetary system that depends on debtors servicing their debt must collapse when the rate goes to zero.''

 

just about sums it up

Wed, 01/28/2015 - 09:52 | 5715365 Jack Daniels Esq
Jack Daniels Esq's picture

Screw the CHF - worried about mirror-image USD

Wed, 01/28/2015 - 09:31 | 5715300 LawsofPhysics
LawsofPhysics's picture

Once again this fucknut Marc confuses promises to pay with money and wealth.

Thu, 01/29/2015 - 01:53 | 5718967 Livermore Legend
Livermore Legend's picture

"......confuses promises to pay with money and wealth......"

Precisely.....

Wed, 01/28/2015 - 09:29 | 5715295 Its_the_economy...
Its_the_economy_stupid's picture

"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."

 

Thus wages cannot go up. Ever.

Wed, 01/28/2015 - 09:20 | 5715266 Gold_Spot
Gold_Spot's picture

I really hope it will not collapse. I live in South Africa and for me, the de-pegging of CHF was excellent. I earned 22% over night. I still have some CHF into an account (even at zero interest CHF is in my opinion a safeguard against Euro which is dying or USD wich will evaporate, etc. I believe that evil machinations are at work, but the franc will survive. Euro is a financial aberation - it should not exist and USD value should be divided to 18 trillion and then buy a loaf of bread for 100 million. Obomber must pay a visit to his bro Mugabe to learn a thing or two about fucking up an economy.

Wed, 01/28/2015 - 11:27 | 5715755 me again
me again's picture

You;ll be alright; of course you'd be even more secure in Silver Bullion; which is available. vaulted and audited here; bullionvault.com / you can google it and read all about it. I gain nothing from this suggestion; it's offered in the hope it may be useful.

Wed, 01/28/2015 - 09:15 | 5715251 Irishcyclist
Irishcyclist's picture

Agree with @limecat, buddha and ghordius.

Bonds with negative yield suggests that there is very high demand from investors for Swiss bonds. So much so that they're paying Switzerland for the privilege of buying one of their Swiss bonds. Or am I missing something?

Wed, 01/28/2015 - 09:34 | 5715310 LawsofPhysics
LawsofPhysics's picture

Not at all.  Real capital is going to the Swiss (again).  As far as bullshit paper promises go, what part of all fiat will die don't people understand?

Wed, 01/28/2015 - 09:06 | 5715234 readyforit
readyforit's picture

Maybe this is the clue? " 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."

Wed, 01/28/2015 - 11:31 | 5715772 me again
me again's picture

Yes. It's a complicated example of talking his book. spread a little fear and confusion and get some customers. bullionvault.ccom would be a better choice.

Wed, 01/28/2015 - 09:10 | 5715237 old naughty
old naughty's picture

I believe so...and eagerly awaiting to  read it.

Wed, 01/28/2015 - 08:54 | 5715196 Vol_so_Hahd
Vol_so_Hahd's picture

Really enjoyed that article.  Thanks

Wed, 01/28/2015 - 08:53 | 5715195 Greenspazm
Greenspazm's picture

When ?

Wed, 01/28/2015 - 08:45 | 5715170 falak pema
falak pema's picture

You mean Draghi is King of Swiss franc?

Who would have thought that.

Return of the boomerang. Swiss franc getting squeezed between USD and Euro currency war! 

Wed, 01/28/2015 - 08:36 | 5715149 Uchtdorf
Uchtdorf's picture

My head hurts.

Wed, 01/28/2015 - 08:03 | 5715086 justinius1969
justinius1969's picture

Utter garbage again from another gold bug..

Wed, 01/28/2015 - 09:36 | 5715316 LawsofPhysics
LawsofPhysics's picture

It is utter garbage, but has nothing to do with gold asshat.  Real capital and wealth is pouring into Switzerland (again).

Wed, 01/28/2015 - 09:41 | 5715334 Ghordius
Ghordius's picture

Laws, yes, and a lot of it comes from that new "savings glut" region called... eurozone

Wed, 01/28/2015 - 14:36 | 5716664 LawsofPhysics
LawsofPhysics's picture

Well then, the E.Z. better figure out what to do with Greece. The capital is coming from all over the world asshat.

Wed, 01/28/2015 - 08:41 | 5715155 Fíréan
Fíréan's picture

The message of the article, in one sentence at the end, is not even selling gold : quote

"There is little reason for holding Swiss francs in preference to dollars."

Wed, 01/28/2015 - 08:30 | 5715136 greatbeard
greatbeard's picture

I may have missed it, was gold mentioned in the article?

Wed, 01/28/2015 - 11:34 | 5715780 me again
me again's picture

Yes. it was.

Wed, 01/28/2015 - 11:00 | 5715634 holgerdanske
holgerdanske's picture

"I may have missed it, was gold mentioned in the article?"

 

Not at all. But it should have been, especially since the lies by Jordan helped change the outcome of the Swiss referendum.

I have never thougt of the Franc as doomed in particular. However the ship of  salvation is surely made of gold.

Whatever Mr Armstrong might say and think.

Wed, 01/28/2015 - 14:04 | 5716532 Soul Glow
Soul Glow's picture

A lot of gold runs through Switzerland.  They have a grip on that monetary metal in those mountains.

Wed, 01/28/2015 - 07:42 | 5715056 limecat
limecat's picture

Maybe I'm not understanding this article, but I don't see how a collapsing Swissie would be a problem for the SNB? It has 500 yards of ammo by way of foreign currency to unleash. If Swiss goes back down to say 1.60 where it was when the Euro started, that would mean between 100 and 200 yards profit for the SNB. Yes, please!

Wed, 01/28/2015 - 10:28 | 5715507 Captain Willard
Captain Willard's picture

I think you understood it better than the author. The SNB presumably has Euros stacked to the roof.

Meanwhile, he writes 20 pages on monetary policy and never mentions the Swiss banking system. In a fractional reserve banking system, the banks merit at least a passin analysis.

The SNB has been thrashing the Swiss banks to raise capital ratios and reduce footings all along. This is not stimulative, to say the least.

 

Wed, 01/28/2015 - 13:10 | 5716265 Yancey Ward
Yancey Ward's picture

The SNB presumably has Euros stacked to the roof.

 

Do they?  The SNB reportedly made a massive profit in 2014- they certainly didn't make it by holding the Euros they bought since the Euro was flat vs the Franc all year long.  I am guessing the Euros were spent buying Eurozone bonds at ever increasing prices.  Should they want to start selling those bonds to support the Franc, do you think they can get back what they paid?  I certainly don't, unless they are unloaded back to the ECB and its minion CBs.

Wed, 01/28/2015 - 10:57 | 5715428 Anasteus
Anasteus's picture

I don't perhaps either as the article doesn't seem to fit in the definition of central bank as decribed on Wiki

"In contrast to a commercial bank, a central bank possesses a monopoly on increasing the monetary base in the state, and usually also prints the national currency, which usually serves as the state's legal tender... Central banks create money by issuing interest-free currency notes and selling them to the public (government) in exchange for interest-bearing assets such as government bonds."

No single word about printing = borrowing in this context. But central bank printing = lending/selling to outer entities does make sense. Central bank is the creator of currency hence it cannot have liabilities with respect to the currency it itself issues by definition. At most, we could say it has liability to itself but that's effectively equal to not having liability at all. The liability is transfered to the entities who borrow from the bank. Central bank can issue as much currency as it wishes as long as there is reasonable demand that can be paid off some time later. Technically, central bank cannot go bankrupt. All other entities can, including governments.

Wed, 01/28/2015 - 17:59 | 5717624 Not My Real Name
Not My Real Name's picture

You are correct, if you equate currency with money. However, the reality is, fiat currency is NOT money. And therein lies the rub. Eventually, the sheeple will realize this -- and then the game is over. Technicalities notwithstanding.

Wed, 01/28/2015 - 09:24 | 5715282 swissaustrian
swissaustrian's picture

His concern seem to be asset bubbles caused by negative nominal interest rates. A strong currency per se should not concern a gold bug whatsoever.

The real estate market was/is driven by immigration and (on the high end) by money laundering. Many banks have put spreads on mortgage offerings so that interest rates are nominally positive.

On a real basis interest rates on Swiss bonds in many durations and especially interest rates for private credit are positive as well. We are having price deflation here.

Wed, 01/28/2015 - 09:45 | 5715351 SWRichmond
SWRichmond's picture

Sounds like he is short Francs...

As to his point, I agree that the regime of forced steadily falling interest rates is a lot of fun while you're doing it, and that it is a one-way ticket off a cliff.

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