Sep 062011

The Swiss National Bank’s surprise decision Tuesday to try to prevent the Swiss franc from rising beyond SF1.20 to the Euro may well turn out to be a key miles-marker on the road to a global depression.

The Swiss franc had become one of two leading refuges for investors seeking shelter from money printing, especially in the U.S. (Gold is the other.)

But the franc’s strength raises the price of Swiss exports, which threatens to plunge Switzerland into recession. “Helicopter” Ben Bernanke’s promise of free money (interest rates at 0%) until 2013 has unintended consequences, not least higher prices for gold and for presumed “safe havens” such as the Swiss franc.

The Swiss National Bank, which already has lost a bundle buying Euros and dollars to try to keep the franc from appreciating, decided not to stand pat. On Tuesday, it said it was aiming for “a substantial and sustained weakening of the Swiss franc.” It said it was prepared to buy other currencies in “unlimited quantities” to peg the franc at SF1.20/Euro. The Swiss franc immediately fell more than 8% against the Euro and almost 9% against the dollar.

The significance? “The start of full-on currency wars has begun in earnest,” Maurice Pomery, chief executive at Strategic Alpha, told the Financial Times. “After currency wars come trade wars, and as we see the exporting world pressured as the developed world contracts, tensions will rise.”

Be afraid, friends, be very afraid. If you are not sure why, Google the”Smoot-Hawley Tariff Act of 1930.”

Switzerland is tiny, representing, the Financial Times reminds, less than 1% of global output. Its national bank is — or has been — globally respected. So it is distressing to read the verdict of the Financial Times Lex column, which opines of the Swiss National Bank that it “has now provided intellectual cover for self-interested policies elsewhere.” In case you didn’t get the point, Lex adds: “And few things would make the global economy less stable than a currency war of all against all.”


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