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Kevin Brekke will give us an update on the Swiss
franc. While gold has been acting as a flight to safety in the recent
sell-offs, so has the Swiss franc. Though a small currency, it’s an
interesting one to keep in mind as an alternative to the USD for savings.
“Unlimited” Spelled
Backwards Is “Zimbabwe”
By Kevin Brekke
With the possible exception of those truly off the grid, everyone by
now is aware that the Swiss National Bank (SNB) announced with a
Matterhorn-sized megaphone that it will no longer tolerate the franc trading
below 1.20 to the euro. The reaction of the markets was predictable: The
EURCHF cross zoomed higher and ruined a perfectly respectable day for forex traders caught on the wrong side of that trade.
Predictably, the move in the franc reached its price apogee at just
above the SNB’s announced tolerance threshold of 1.20 per euro. The
move signaled that currency traders had renounced a belief in free-market
gravity for the gospel of currency intervention and a belief that the SNB can
keep the exchange rate in a higher orbit.
During the SNB’s short sermon, and to let everyone – everyone
– know that there is some backbone behind its confessed impatience, it
was commanded that unlimited quantities of euros be purchased to achieve the
mission’s objectives.
Unlimited. Some words just seem to possess powerful latent tendencies
that, when triggered, can cause all manner of, well, unlimited nonsense.
The SNB had barely exited the pulpit before unlimited speculation
ensued about what “unlimited” might mean. The franc had yet to
complete a single rotation when talk of the SNB buying $300 billion, $400
billion, or more, was breaking across the news.
For a country with a population smaller than Los Angeles and a GDP of
roughly US$525 billion, those are really big numbers. And
“unlimited” is even bigger than that… so big that it will
likely grab the attention of a political party or two and further annoy one
party in particular.
In reaction to the SNB’s July revelation that it lost US$36
billion attempting to weaken the franc, the SVP (the largest political party
in Switzerland) has launched a legislative campaign to limit the autonomy of
the SNB, among other changes. The announced re-intervention in the currency
markets by the Swiss central bank will probably add to momentum behind the
initiative.
Beyond politics, though, lies the question of legality. The conduct of
the SNB is codified in the Swiss Constitution, where its primary mandate is
to pursue a monetary policy that ensures price stability.
History teaches that when a country pursues a policy of money printing
to cure whatever ails, the outcome is never that of a stable price level, no
matter how noble the intent or grand the design. But who knows? Maybe this
time it will be different. Maybe the SNB will successfully chart a path to a
new era in currency protection. Whatever the plan, they aren’t going to
let a barbarous relic like their constitution get in the way.
In the meantime, if anyone is planning a vacation to Europe now looks
like as good a time as any to convert some dollars into francs. I know I will
be. And whether you’re enjoying a fondue in Bern or a baguette in
Barcelona, don’t forget to keep one eye on the heavens. When the
SNB’s Operation Unlimited inevitably fails and the franc loses its
orbit, the show will be worth watching.
[Fiat currency manipulations will
continue – even escalate – as the race to not be the first to
fail begins in earnest. Long the world’s reserve currency, the US
dollar is arguably the most besieged currency today. Learn how you can protect
yourself from its slow demise by attending a free, online event: The American Debt Crisis will be
held at 2 p.m. EDT on September 14. Register now for this life-changing presentation.]
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