Gold News

What is Switzerland Playing At?

The Swiss have tied their currency to the Euro. Are they mad...?!

HIGH UP on the list of lunatics in charge of the asylum must feature Philip Hildebrand, president of the Swiss National Bank, writes Sean Corrigan for the Cobden Centre

Having damn near bankrupted the institution in the course of 2010's disastrously?gameable forex intervention, he has once again succumbed to the mentality of the Russian Front by pegging the Franc to the ailing Euro — a move which offers anyone in the south of the Zone a free option to escape the worst effects of any ejection of their countries from the system at the cost of a potential destabilization of the entire monetary and financial structure of Switzerland.

Having been educated at Harvard, Herr Hildebrand presumably cannot be unaware that when you presume to sell a good at below its clearing price, demand for it will be vastly expanded. It will be bad enough if owners of PIIGS securities dump them on the ECB and take the money off to Basle to be changed, at a subsidized rate for Swissy. 

It will be worse yet if the sellers keep having their ammunition replenished, thanks to the manner in which the SNB disposes of its newly acquired Euros, and so this descends into the farce of what Fritz Machlup described as the act of a particularly stupid magician, who is no less surprised than his audience that he keeps pulling the same rabbits out his hat which he himself had earlier put there.

Oh, for a specie standard to keep both buyers and seller honest, in place of the limitless pools of fiat money which are at the disposal of our masters!

Even more incredible is the idea that all this is somehow justified because there have been some minor declines in goods prices in this most expensive, most highly cartelized of enclaves – reductions effected partly in response to public outrage at those same prices' cynical 'stickiness' and partly due to fears of business being lost to cross? border shopping trips to the Alpine confederation's cluster of less affluent and hence cheaper neighbors.

To the powers?that?be, this constituted a case of 'deflation' and, by implication, threatened a vicious circle of impoverishment which, left unchecked, might have sucked the beating heart out of the economy and which therefore justified any and all measures taken to ward off this incipient evil, no matter how arbitrary or ill?conceived they were.

Did no?one stop to think that a little re?adjustment might be useful in a land where a Big Mac cost — at the Franc's brief peak — 125% more than it did in its home territory, or where — even in the least pretentious establishments — beer was selling for at least double the UK price?

Yes, the rush to find a safe haven has indeed been tough on those trying to do business in Switzerland — especially those contributing to a tally of exports which amounts to an astonishing 60% of the country's GDP.

But what this simplistic approach overlooks is that imports to this resource poor, mountainous land account for almost 50% of that selfsame GDP — and hence for around three?quarters of the export bill. Given that these imports are generally of a more price?elastic, less?specialized nature — in marked contrast to the high?end, far less substitutable nature of many of its exports — the scope for a windfall gain here should have been evident, if only the indefensibly crass system of single?source, authorized import dealers and drastically?hindered grey markets for consumables and components were abolished forthwith and their prices set free to fall.

Thus, had the rise in the currency been allowed to reduce the cost of staples, there would have been an immediate boost to the purchasing power of a wage packet — freeing up monies to be spent or invested elsewhere (in cost?cutting innovations, for example!).

Instead, the good Swiss burger, having been relieved to see the cost of filling up his petrol tank fall briefly to a six?year low, has had to stand by as the political elite congratulate themselves on sending it soaring 40% higher again in the space of less than five weeks.

Had prices been allowed to fall — a state of affairs which can in no way constitute a 'deflation' unless the drop was being caused either by an outright shrinkage in the supply of money or by a partial abeyance in that money's use for the purposes of exchange, there would have been a major reinforcement of the means for achieving that flexibility in labor costs which was already voluntarily being explored between workers and management at any number of firms, as well as between firms and the federal and cantonal governments.

A Franc fort?delivered lowering of the overall cost of living would have made the scope for this all the greater, as well as much more equitable in that the pressures for adjustment to working conditions would have been the least where profit margins were at their greatest, rather than it being imposed as a transfer tax on all employees — which is what the devaluation comprises — irrespective of their individual circumstances.

But no, in place of such an unlocking — an Auflockerung — of rigidities and a removal of barriers to change, it was deemed far easier to issue a heavy?handed, top?down diktat, with scant regard to the potentially malign consequences which may yet occasion more suffering than it relieves.

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Stalwart economist of the anti-government Austrian school, Sean Corrigan has been thumbing his nose at the crowd ever since he sold Sterling for a profit as the ERM collapsed in autumn 1992. Former City correspondent for The Daily Reckoning, a frequent contributor to the widely-respected Ludwig von Mises and Cobden Centre websites, and a regular guest on CNBC, Mr.Corrigan is a consultant at Hinde Capital, writing their Macro Letter.

See the full archive of Sean Corrigan articles.
 

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