The Swiss National Bank (SNB) announced recently that it will devalue the Swiss Franc. This can in no plausible way end well. The only way they can of course devalue the Franc is through inflation. And the way the modern banking system is designed, it can only do so through the banking system in the form credit expansion. It means more debt will be taken on and since banks make money through loans, this measure will lower the interest rate and lure businesses into investing. Now since this lowering of the interest rate will not come through an increase in savings by the people but rather by monetary expansion, it is by definition necessary that all these investments will not be completed. People are spending the same or more, saving the same or less, and yet more investment is being undertaken. This cannot be, it is unsustainable. At a certain point, some of these investments will have to stop. Businesses will need to fail and the banks that fund them will be in trouble. Sound familiar?
At this point, the government can do two things. It can either let the recession and liquidation process run its course and let the economy heal or it can bail out the banks, create more credit and inflation. And we all know how that story ends...
Another myth out there is that the strengthening Franc is somehow bad for the Swiss economy. Is it really? Let's look and see. When a currency strengthens, it means it has more purchasing power. It means you get more for the same amount of money. So on the face of it, it would seem at least weird to claim that it is bad for the Swiss to have their money buy more stuff. Truth be told, there are some sectors of the Swiss economy that might be having some trouble, such as exports, but it is not specifically because the Franc is rising, that's just a corollary and I'll get to that in a minute. First, you have to remember what the Franc is gauged against, which is always another currency. So if the Franc is going up, by necessity, another, and in this case, most (or all) other currencies are losing value. And this is the true underlying trend. It's not so much that the Franc is gaining, rather the value of other currencies like the Euro and the US dollar is plummeting. Compare the Franc to the New Zealand dollar and it is not anywhere near as bad, the Franc is flat to slightly rising. Compare it to gold and you will see the Franc flat to falling, depending on which time horizon you are looking at. So it might be that exporters are having a tough time (though I'm not entirely convinced) but importers on the other hand are positively thrilled. Their imports are getting cheaper and cheaper as the Franc is gaining value. And to the extent that the exporters are in trouble, it is because the rest of the world is losing its purchasing power, not specifically because of the Franc. Besides, it's a more or less open world for trading, Switzerland imports as much as it exports (their trade surplus is less than 0.5% of the GDP), so every single exporting business in Switzerland is enjoying the benefits of a strengthening Franc as much as it is lamenting the downsides. Also, as the Franc has been going up during the past 5 years, so has the Swiss trade surplus! On the other side of the pond, the US has been devaluing its dollar for decades and the last time they had a trade surplus was in... um... hang on... well, the chart I have only goes back to 1992. It's not that you can prove or disprove a point by pointing at statistical data, but it lends some illumination nevertheless.
Now let's examine what will happen to the Franc and the Swiss businesses after the Swiss central bank starts devaluing. Inflation will cause rising prices in Switzerland and stop (or else slow down) its strengthening against other currencies. Foreign goods and services will also start rising in price just like they are for the rest of the world – US dollar denominated commodity prices have doubled (!) in the last two and a half years – and if the Franc stops outpacing the USD, imports will get more expensive and this will start squeezing the profits of the exporters. Now of course, if the Swiss businesses want to drop their profit margins, they can do so at any moment. They need only to lower their prices and voila, there it is (I wonder why they don't do that?). I have a hunch they will not be happy with lower profits or losses. They will have to raise prices and the problem reemerges. On top of that they will have rising domestic consumer prices, an ailing economy and a wave of bad investments ready to spoil whatever is left of the party.
This is not, however, an unexpected turn of events. If one has an exclusive right to print money, it's impossible to expect them not to take advantage of it and inflate. The only question in my mind is how they were able to resist it thus far, as much as they did. Either way, at long last, as if any further proof was needed, we find that all politicians are red under the skin and wicked to boot, even the Swiss.
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