Swiss National Bank Cruelly Puts a Bull's Eye On Switzerland's Economy

In Switzerland right now, a dollar that used to somewhat dwarf the Swiss franc no longer does. A once relatively inexpensive country has become very expensive in recent years thanks to two clueless presidential administrations, several bewildered Treasury secretaries, and a Ben Bernanke-led Federal Administration.

John Tamny
1/23/2013 @ 8:00AM
Forbes

St. Moritz, Switzerland – Nosebleed gasoline and food prices, a financial crisis, and an austere jobs picture has been the “reward” for Americans laboring under the dollar-cheapening policies of George W. Bush and Barack Obama since 2001. And then for Americans lucky enough to travel outside the country, the horrors of our devaluationist policies in the States follow us wherever we go.

In Switzerland right now, a dollar that used to somewhat dwarf the Swiss franc no longer does. A once relatively inexpensive country (once dollars were converted to francs) has become very expensive in recent years thanks to two clueless presidential administrations, several bewildered Treasury secretaries, and a Ben Bernanke-led Federal Reserve that tragically believes devaluation is the path to prosperity despite centuries of evidence revealing the opposite.

All of the above in mind, news from the Wall Street Journal that the Swiss National Bank (Switzerland’s central bank) “is engaged in a high-risk strategy to protect its export driven economy, literally betting the bank in a fight to contain the prices of Swiss products sold abroad” would presumably cheer me. A weaker Swiss franc would – to believe the mainstream commentariat – mean a stronger dollar that would buy me more “stuff” while in St. Moritz. Wrong.

In truth, and as the last 12 years have cruelly revealed to Americans beleaguered by the dollar’s decline, when we devalue stateside it’s always a global event. Since 2001 gold has risen 580% against the dollar, and during that time the Swiss franc has similarly risen against the dollar. But gold makes plain that the Swiss franc has only been strong insofar as the dollar has been intensely weak; gold having risen 260% against the franc since 2001.

Considering the more recent efforts of Switzerland’s central bankers to weaken the franc, dollar holders won’t gain. Instead, monetary authorities stateside, having created the global inflation, will also mimic any weakening efforts by global central bankers vis-à-vis the dollar; the end result that Americans get clipped even more for global central bankers merely copycatting our horrid monetary errors.

What’s interesting about Switzerland is that back in the ‘70s when dollar-cheapening policies similarly caused a global inflation, Switzerland’s central bank properly avoided our errors. Though Americans wrongly to this day talk about “oil shocks” in the ‘70s that were really just weak dollar shocks that drove the price of crude higher (the last 12 years have been a repeat), the price of oil actually fell in Swiss francs in the late ‘70s owing to the correct desire of its monetary authorities to protect the currency.

That the Swiss National Bank protected the franc meant the country’s citizens were somewhat shielded from the price shocks that eviscerated paychecks in parts of the world that followed our dollar-weakening lead, plus Switzerland’s strong country currency meant that it enjoyed investment inflows from those interested in avoiding the monetary errors being made around the world. Very sadly, it’s apparent that Switzerland’s monetary authorities have chosen to copy Bernanke et al, and the reward for the country’s citizens will be a much weaker economy. It seems bad economic ideas never die…

Easily the worst economic idea of all is the one that says a country can devalue its way to prosperity. The idea here is that if the country currency is devalued, then it will be easier for its producers to sell their goods overseas.

The above presumption fails very quickly. Indeed, lost on the devaluationist mindset that has thoroughly polluted the discredited economics profession is that trade is a two-way street. To export one must import. To discourage imports with a weaker franc is to discourage exports. More on this later, but devaluation is anti-investment, subdued investment is anti-productivity, and subdued productivity (we can only consume if we produce) is anti-production. Devaluation discourages trade altogether for discouraging production.

Anecdotally, the export argument underlying the mercantilist/devaluationist mindset similarly fails. Figure Japan allowed its currency to powerfully rise against the dollar after 1971, yet a major story of the ‘70s and ‘80s was voluminous Japanese exports to the United States. Since 2005, China’s yuan has risen over 20% against the dollar with no loss in the rising country’s exporting capabilities to the U.S.

The reasons why are basic. Lest we forget, money is a veil. It doesn’t change the real price of anything. Of course if the franc, yen or yuan are rising, then the nominal cost of imports necessary to make that which they produce declines in currency terms. So does shipping, and for that matter, wages. Conversely, if a currency is cheapened, the nominal cost of everything rises. Imported input costs increase, shipping costs do to, and then workers rarely sit back and watch the value of their paychecks decline; instead they ask for raises.

Applying all of the above to Switzerland, inflation unquestionably steals any presumed benefits of devaluation. Sadly for the Swiss, the story gets worse. Indeed, investors allocate capital based on presumed returns. When they invest in the U.S. they’re buying future dollar returns, and in Switzerland they’re buying future franc returns. But if monetary policy is explicitly leaning toward devaluation, investors know the value of their returns will decline. That’s why devaluation throughout the history of mankind has regularly correlated with trying economic times. There are no jobs and innovative companies without investment first, yet devaluation tells investors they’d be foolish to commit capital for returns that will come back – at best – in soggy money.

Considering Switzerland, if some of its exporters are having trouble moving goods, the logical answer is for them to lower prices to the level at which buyers come in to clear their inventory. This way the successful don’t have to suffer the weaknesses of the unsuccessful.

As we know, that’s not what’s happening. Instead, the Swiss National Bank is very cruelly devaluing the Swiss franc, and in doing so it is devaluing the income streams of all Swiss companies, all Swiss workers whose paychecks will increasingly buy less, plus its monetary machinations will serve as a repellent to the very investment that drives all economic activity. Chances are it already has.

Indeed, as explained earlier, though the Swiss National Bank’s stated policy is somewhat recent, the Swiss franc has been in decline for twelve years. Once again, when we devalue in the U.S., it’s often a global – and very cruel – phenomenon. As a result of the devaluation, Switzerland’s economy is relatively weak.

Lost on the country’s monetary authorities is that the economy is weak precisely because of the decline of the franc in the new millennium. Rather than acknowledge this and reverse course in favor of the very franc strength that would serve as a magnet for economy-boosting investment, the Swiss National Bank is harshly pouring gasoline on the franc-devaluing fire. If you don’t like Switzerland’s economy now, you definitely won’t like it if its central bank’s devaluationist policies continue.

Neither does this American writer exchanging increasingly weak dollars for weak francs. This is the stuff of economic decline for both countries, and is a throwback to failed ideas that have never worked. Dollar destruction already gave the U.S. a financial crisis. Is the Swiss National Bank setting up Switzerland for something similar?

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