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Perversions of the Free-Floating Fiat Money Regime, Swiss Edition

At one time the Swiss Franc was actually the last currency on the planet to be fully backed by gold. This is but a distant memory today. Having read a few papers put out by the Swiss National Bank last year, we can confirm that its leaders and economists are fairly typical products of a modern-day economic mainstream education, in other words, they're a bunch of witch doctors dressed up as "scientists." As Murray Rothbard once remarked, the only good thing about Marx was that he wasn't a Keynesian. The same can unfortunately not be said of the SNB. In very un-Swiss-like fashion, these geniuses have decided a while back that they will buy as many euros as it takes to stop the Swiss Franc from appreciating.

Admittedly, since they preside over a fiat currency in a world of free-floating fiat monies (the abomination that is undoubtedly headed for a crash of biblical proportions at some point down the road), they probably felt it was their duty to soften their currency in view of the massive inflows occasioned by its "safe haven status." Ironically, this very act means that its safe haven status is becoming rather undeserved. After all, how does a central bank buy foreign currency in "unlimited amounts"? By printing its own currency in unlimited amounts of course. Although we don't calculate the true Swiss money supply (we probably should start doing so), we can tell from a quick glance at the very neat statistics put out by the SNB that deposit money in Switzerland has exploded into the blue yonder along with its foreign currency reserves.

Presumably the idea is to eventually unwind all this activity, once the crisis is over. But what if we are actually witnessing a crisis that won't end until everything well and truly blows up? No one seems to have considered that possibility, since we keep getting assurances from monetary bureaucrats everywhere that the current "unusual circumstances" are strictly transitory.

Among the perversions of the free-floating fiat money system inter alia demonstrated so glaringly in Switzerland is the fact that the country's entire yield curve out to five years has recently been submerged below the "zero bound" as frantic buyers continue to panic into Swiss bonds. So here we have a central bank inflating the money supply at warp speed and financial market participants in their unerring wisdom seem to think that this shouldn't be counted against the government's bonds sporting negative nominal yields to maturity out to five years. We're not particularly fond of John Kenneth Galbraith, but this calls for a paraphrase of one of his better bon-mots: "There is more money out there than there is intelligence to guide it."

Naturally, the Swiss central bankers are not totally out of their minds, and so they are trying to get rid of their growing pile of euros as quickly as they can by buying crosses. Who wants to hoard a currency that might not even exist anymore in a few years (or maybe even in a few months), even if everybody promises it is "irreversible"? This is bad for a great many other countries in the "beggar-thy-neighbor" race to fiat oblivion, as their currencies are now rising sharply against the euro due to the SNB hoovering up everything from Swedish Krona to Australian dollars.

As an analyst at UBS remarked according to the FT (UBS is the large Swiss bank that has an astonishing knack for regularly losing gigantic gobs of money in its non-core activities):

“Sweden will need to set monetary policy now with the SNB in mind,” said Geoffrey Yu, foreign currency analyst at UBS.”

Analysts also warned that SNB’s half-year results, released on Tuesday, indicated that the central bank was struggling to rebalance its holdings as it appeared to be buying euros more quickly than it could exchange them for other currencies.

Figures showed a drop in the maturity of the SNB’s bond holdings from four years to 2.8 years, which analysts said indicated that the bank was taking shorter term positions because it did not know how long it would carry on accumulating euros at the current rate.

“The picture is one of a central bank that’s not coping with how much money is coming in,” said Kit Juckes, foreign currency analyst at Société Générale. The SNB declined to comment on its foreign exchange management strategy.

(emphasis added)

Not only the Swedes, but also many others will have to keep that mountain of euros held by the SNB in mind. Of course the Swiss Franc is indeed horrendously overvalued considering the prices one pays in Switzerland these days – Zurich has replaced Tokyo as the most expensive city on the planet recently - and considering the fact that the money supply has been inflated so egregiously.

There is also an incipient property bubble under way, with the UBS "Swiss Real Estate Bubble Index" recently reaching its highest level in 20 years. A chart of Swiss house prices can be seen here (note that prices plunged in the early 1990's as a previous housing bubble broke in the late 1980's). Here is a prediction we can make with apodictic certainty: this isn't going to end well.

The latest SNB balance sheet can be seen here (pdf). We would direct the attention of readers to two items: foreign exchange reserves and the growth in sight deposits at domestic banks. It is enough to make one dizzy.

Source: Switzerland's Money Printing Orgy