
What the Swiss Franc Appreciation Means - kposehn
https://foreignpolicy.com/2015/01/16/what-the-wild-swiss-franc-appreciation-really-means-currency-wars-federal-reserve/?utm_content=buffer0ea36&utm_medium=social&utm_source=facebook.com&utm_campaign=buffer
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sandstrom
# It was expected

I think it was expected from the outset that this would be a temporary
peg/floor. There has been recent hints on this.

# It's not a war

Also, this isn't a 'currency war' in anyway. If there is any adjustment that
other countries typically dislike it's devaluations, since that'll make their
currency relatively more expensive, causing a short-term disadvantage for
exporters [whom often line politicians pockets]. This was the opposite, a
revaluation (or correction).

Inconsistently people called this a 'currency war' when the floor was
introduced too[1].

# Losses

Sure, a few companies were bankrupted because of risky speculation, that
happens all the time. It was foolish to believe that this floor would exist
indefinitely, and thus any position making that assumption would obviously be
very risky.

Interestingly people lost money[2] when the floor was introduced only 3 years
ago. Sometimes memory is short.

[1] [http://citywire.co.uk/money/have-swiss-won-currency-war-
with...](http://citywire.co.uk/money/have-swiss-won-currency-war-with-shock-
and-awe-franc-move/a521772)

[2] [http://www.dailymail.co.uk/news/article-2037632/Kweku-
Adobol...](http://www.dailymail.co.uk/news/article-2037632/Kweku-Adoboli-
Swiss-bank-UBS-unaware-blew-whistle-HIMSELF.html)

~~~
cynicalkane
My impression is that economists generally thought the Swiss central bank
would keep the peg, because why wouldn't they? There's no economic law
stopping them and it was obviously good for the Swiss economy.

The fear of central banks with large balance sheets is a powerful political
force, one that economists don't really appreciate. The rational thing would
be to keep the peg (or even better, target inflation or NGDP) but an
unfortunate majority of politicians and voters are fearful of "printing
money". Just as central banks around the world keep making the mistake of
allowing falls in the inflation rate during a recession, economists keep
making the mistake of assuming the next central bank will listen to them.

~~~
fla
Keeping the peg means buying more and more euros. It's not sustainable.

~~~
tormeh
It was. The Swiss central bank just had to print francs to sell for euros. It
wasn't like the rest of the world didn't want those francs. Remember that this
floor was about keeping the franc down.

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rsync
"To put the Swiss franc move in perspective, in the currency cross rates for
free-floating major foreign exchange currencies — like the Swiss franc or the
U.S. dollar, the euro or the British pound sterling — a 2 or 3 percent move
would be considered big. A 20 percent move is outlandish, a freak black swan
event without precedent."

It's not a black swan event if it was predicted, widely, well in advance.
Smart, reasonable people declared the policy unsustainable from day one. One
good example being Mike Shedlock at globaleconomicanalysis.blogspot.com.

~~~
junto
Genuine question then. If you had money to burn (I.e. gamble) where would be
the smart place to put it over the short to medium term, and see a tidy
return?

~~~
dia80
not somewhere someone in internet comments told you to put it

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lisa_henderson
Anyone who thinks the that the peg was unsustainable should remember a basic
bit of supply of demand.

Assume the demand of Swiss francs is "x".

Assume the supply of Swiss francs is "y".

If the price of francs is higher than what Switzerland wants, then:

x = y + z

where z is the amount needed to match supply with demand.

In that circumstance, Switzerland can print z amount of francs -- that is
entirely sustainable. And that is what it was doing for the last few years.
Keeping the price stable is the same as saying that it was printing z amount
of francs, so that y+z equalled x.

Anyone who says this was unsustainable is simply not thinking clearly.

~~~
Kenji
No it's not that simple. Since Switzerland was fixating 1EUR = 1.2CHF there
was a new problem arising when the US dollar went up: Arbitrage. People could
exchange USD into EUR and then into CHF (source: Official statement of the
Swiss central bank). The result: The Swiss Franc was pegged to the USD as
well. Now that's some serious pressure, and that's why the Swiss central bank
decided to give up on this unsustainable endeavour. And your calculation is
nice and dandy, but if z grows too large then you get a massive inflation
which is very damaging.

~~~
lisa_henderson
About this:

"if z grows too large then you get a massive inflation which is very damaging"

No! No! No! I am surprised there are so many people on Hacker News who are bad
at math. You can not get inflation unless:

x < y + z

but what I wrote was:

x = y + z

you can not get inflation while that is true. Remember, you face deflationary
pressure for as long as:

x > y + z

and that is what Switzerland was fighting. Not inflation, but deflation.

~~~
Kenji
You are mixing two concepts. One is the "outside" value of the currency, that
is, for how much foreign currency you can exchange it for. The other is the
value inside the country. For example, the Swiss frank may appear 20% stronger
but croissants in Switzerland still cost exactly the same. If you just print
money you will get an inflation inside the country and the prices will go up.

~~~
lisa_henderson
About this:

"You are mixing two concepts."

You have no idea what you are talking about. This creates deflationary
pressure:

x > y + z

So long as x is greater than y plus z, then it is cheaper for the Swiss to
import their croissants from Italy or Germany or Austria, or anywhere else.
And also their microtechnology, hitech, biotechnology and pharmaceutical
goods. That is why every article written about this so far says that dropping
the peg is bad for Swiss industry, and therefore bad for the Swiss economy. So
long as this is true:

x > y + z

then it is easier for the Swiss to import things, because everything outside
of Switzerland appears to be cheaper. And that, of course, puts downward
pressure on prices from domestic producers as well. Thus, the pressure is
deflationary, not inflationary -- the problem is that prices will fall, not
that prices will rise.

~~~
Kenji
Inflation is measured with the price of a basket of goods. Inflation is not
measured in terms of the CHF-EUR exchange rate. If you keep your equation x =
y + z then yes there will not be an inflation in terms of EUR but the basket
can (and will!) still be subject to inflation. Because the EUR is not equal to
basket of goods. Nobody is going to import croissants because then they'd be
days old and taste like shit.

~~~
lisa_henderson
You really have no idea what you are talking about.

------
ScottBurson
Paul Krugman's take: [http://www.nytimes.com/2015/01/16/opinion/paul-krugman-
franc...](http://www.nytimes.com/2015/01/16/opinion/paul-krugman-francs-fear-
and-folly.html)

------
valas
Someone: can you explain why Swiss National Bank could not sustain keeping the
value if Frank low against Euro? It seems like the only thing they need to do
is to purchase more Euros with Francs they print, right?

I usually see the opposite, where the country, like Russia for example, is
unable to keep its currency high, because they don't have enough foreign
currency reserves to buy their own national currency.

~~~
vegabook
Seigniorage, the ability of an institution to print a worthless piece of paper
that other people believe is worth something, is a very valuable power, one
which is earned over decades, even centuries, of prudent policy. You don't
want to mess with this by printing billions, at the risk of destroying your
reputation (resulting in inflation, and/or speculation against your currency,
as others have pointed out).

More prosaically, also, every time the SNB prints a swiss franc, that piece of
paper is marked as a liability on its balance sheet (and the corresponding
euro amount purchased is the asset). So they optically "lose money" if their
assets decline in value versus their liabilities, as happened last week. Of
course, they could then print more CHF to cover the loss, but then we're back
to my first point.

Finally, and as an aside, the biggest loser in this whole thing was of course
the SNB itself, at least on paper. It has CHF liabilities and foreign currency
(and gold) assets to the tune of 500bn dollars. On paper then that was a 75bn
USD loss. Conversely, and this is worth keeping in mind amidst the frenzy of
headlines about broker losses, remember that markets must net off, so all
those swiss francs that the SNB sold to defend against appreciation, were held
by the market (individuals, brokers, funds, corporates, other governments).
Thus it is likely that there are some huge winners out there, whose net wins
are greater than the net losses to the tune of about 200bn * 15% (the amount
that they intervened in the past 2 years * the percentage move).

~~~
anonymousDan
Just trying to understand why when the SNB prints CHF it becomes a liability.
Is it because whoever they sell it to (in return for some asset such as Euros)
can at least in theory redeem the CHF as gold?

~~~
vegabook
Like any liability of any entity, when you possess a swiss franc, you have a
claim against the assets of the SNB. The assets of the SNB include a lot of
gold and many foreign currencies. These assets have been accumulated in
various ways, but are generally the foreign assets of the country in question
(held on behalf of the people of the country by their central bank), plus the
accumulated profits of the central bank over the years on this capital.
Crucially however, just like "goodwill" in a company balance sheet (often a
much larger ledger entry than any tangible assets), there is a large
proportion of the value of the issuer's paper (be it equity or in this case,
money) that is made up of intangible assets. Those intangibles essentially
amount to the credibility of the entity, that is, the fact that _other people_
believe that the piece of paper that it issues has value. Thus you have a
claim against some of their assets, yes, but you're also hoping, just like
with equity, that the value of the goodwill stays high (similarly for GOOG,
AAPL or FB or any other company). The value of the goodwill is determined by
the strategy and actions of the entity being seen as sound, and ultimately
profitable, by the market.

Long story short, I don't personally know of any central banks who explicitly
promise gold back against their liabilities anymore (this disappeared at
Bretton Woods). Thus your claim is (mostly) on the credibility (goodwill) of
the bank which is highly dependent on it not issuing too much paper.

As far as your claim on the tangible assets is concerned (the foreign
currencies and gold), you will not be able to walk into the SNB with a 100CHF
note and ask for the tangible share of what that represents. In practise, if
the CHF loses value, the SNB will (amongst other measures such as raising
interest rates and trying to put pressure on its government to spend less),
protect your 100 CHF by selling its foreign currencies and gold into the
market, "defending" your asset. That's how your claim on the tangibles works
out in practise: the assets are paid back out to the market if there is
pressure on the currency. Of course, again, only a small portion of the value
of the CHF will be backed by gold and FX. The rest of the value comes from the
fact that it is accepted by merchants and people in exchange for real goods
and services. That's goodwill, otherwise known as "credibility" in monetary
economics.

------
kephra
I wont call the Swiss decision a currency war. Swiss decided for itself, that
it wanted to float the Franc again.

But we had a currency war at 16th December 2014 when Rubel dropped by nearly
40% on one day, and went up again next day. This was a currency war against
Russia that failed. Russia had to push about US$100 billion on the market at
that day, to win this currency war. The other side therefor was likely also a
state owned player.

~~~
pas
It was most likely investors pulling out even more money from Russia and
Russians buying foreign currency.

------
alfonsoramos
No problem if ths swiss bank had continued printing francs. E1, E2, E3 and so
on in USA make clear the hyperinflation risk doesnot exist in this case. But
there will be much harm in swiss companies. Exports in Swisszerland means 70%
of GDP. And much harm in Poland and other countries with households buying
their homes n swiss franck. So, problemes for their financial systems.

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gonvaled
This is funny:

> Central banks are political entities which exist at the behest of
> government. And as such, they will always need to be mindful of politics if
> they are to maintain political favor and to keep their independence.

So, to remain independent they need to be dependent of politics.

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notatoad
Good news for ski racers - FIS prizing just got significantly more valuable.

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kchoudhu
Finally, news about financial markets from a source that knows what it's
talking about.

