Monday, June 11, 2012

Switzerland's "stealth" fiscal stimulus to Europe

Ever wonder where Germany gets the endless money for bailouts?

This may answer that question.

In its ongoing efforts to peg the Swiss franc to the euro at 1.2, the Swiss National Bank has been buying billions of euro (around 150 billion since last September). These euro have been used by the SNB to buy European bonds (mostly German), which explains the collapse in German bond yields. The bond purchases are a form of de-facto “fiscal stimulus” to Germany and the rest of the Eurozone (when Germany extends credit or otherwise “lends” to other member states).

So the people of Spain should thank the Swiss for their largesse. The ECB should do the same, as it can sit back and do nothing thanks to the SNB’s currency operations.

Who gets hosed? The people of Switzerland, who see their currency weaker than it otherwise would be, which reduces their real terms of trade. In other words, Switzerland gets nothing in real terms out of this deal. Europe gets everything.

30 comments:

Matt Franko said...

Mike,

does Germany's banking system (either Bundebank and/or depository institutions) then end up with the Swiss Franc balances?

Rsp,

Neil Wilson said...

The Swiss get employment from the dominant export sector - but only because the Swiss system won't offset the savings desires any other way.

ted parker said...

Moody's has effected the German and Australian banks massively i must say...i just read another article in this relation...i would suggest a must to read... http://half-bridge.blogspot.com/2012/06/moodys-cuts-rating-of-german-and.html

Woj said...

The NGDP targeting crowd was recently trying to show how successful the expectations channel of monetary policy was based on the lack of action by the SNB (http://bit.ly/Lwsvwv). Oops...

Anonymous said...

Switzerland has a large export sector. A huge increase in the value of the currency isn't going to help it much is it?

Tom Hickey said...

Thanks, Woj. Promoted to a post.

Ralph Musgrave said...

Wherever there is demand for something that only one country can produce, that country ought to be able to profit from that demand. Switzerland needs to ensure that the real or “inflation adjusted” rate of interest on its national debt is negative. That way it profits from those wanting to hold Swiss Francs.

The UK has been doing this for the last two years, while in the case of the US, the real rate of interest on US government debt has averaged about zero I think.

Oliver said...

The real interest on its national debt is negative. And 1.20 CHF/EUR is already way beyond PPP, which is considered to be somewhere around 1.50 CHF/EUR. So any uniqueness of Swiss exports and its tourism industry is already being tested at the 1.20 mark. Anything below that would be extremely destructive to many sectors and thus to employment. Guesses are that with a full float the xchange rate would sink to 1/1 or below.

In any case, it isn't just a matter of offsetting saving desires. It's long-term structural and industrial policy and, with it, employment that's at stake.

The relentless 'float mantra' is beginning to sound rather Thatcherite. But unlike the UK, Switzerland actually still has sectors other than finance to defend. And an unemployment rate of below 3%... Buying more German cars isn't the main concern at the moment. A gradual adjustment to an impoverished Europe may wel be, with an emphasis on 'gradual'.

Oliver said...

And, leaving aside consumers for a a moment, the sector that would profit most from a free float is the already far too big finance sector.

Oliver said...

I'm also no sure whether it's correct to consider the one sidede peg & fiscal spending an either or proposistion. Why not just do both? Is that a contradiction?

Anonymous said...

"In any case, it isn't just a matter of offsetting saving desires. It's long-term structural and industrial policy and, with it, employment that's at stake."

Precisely. If the Franc gets too strong the Swiss can wave goodbye to exports, say hello to massive unemployment and collapsing industries.

Putting half the population on the JG isn't going to help much.

You're wrong about this one Mike.

Ramanan said...

Oliver:

Thatcherite and Friedmanite:

http://www.youtube.com/watch?v=PJWLt1TmAy4&feature=player_embedded#t=1434s

Oliver said...

Not that obnoxious critter, please!

Oliver said...

He makes my eyes bleed :-)...

Anonymous said...

When it comes to international trade, MMT seems to equal Milton Friedman + Job Guarantee.

i.e. if someone loses their job due to unmanaged free-floating exchange rates, that's not a problem as they can always get a government job picking up trash for minimum wage.

Hey presto, problem solved.

Tom Hickey said...

Ramanan: "Thatcherite and Friedmanite:"

Right. It was Hayek who provided the political-economic underpinning (The Road to Serfdom) and Friedmann who provided the economic-financial rationale in terms of neoliberal-monetarist economic theory that was designed to replace Keynesian fiscalism aka "socialism." New Keynesians responded by neo-liberalizing Old Keynesianism. Friedman's Freedom to Choose is complementary to The Road to Serfdom, replacing the road to serfdom (Keynesianism) with the path to freedom (Libertarianism).

Tom Hickey said...

Economic liberalism — free markets, free trade and free capital flow — sounds great as a political slogan, but adoption of these principles has inevitably led to problems that have resulted in governments' reversing course in the looming emergence of danger or onset of crisis. There is no invisible hand, but there is a fickle finger of fate.

MMT economists like Randy Wray say that governments have to watch both domestic price change and exchange rate fluctuation. Presumably, that means government has to intervene and take steps to correct imbalances before they result in economic distortion.

Anonymous said...

by purchasing foreign currency or selling foreign currency.

Tom Hickey said...

In Freedom to Choose, Friedman equates genuine democracy with individual freedom with market fundamentalism, which results in maximum prosperity and the most moral system, too.

Nothing could be further from the truth. Marke fundamentalism firmly establishes the privilege of wealth, most of which comes from economic rent, and provides for the transfer of this privilege by birthright, i.e., inheritance. It's a recipe for plutocratic oligarchy, based on the false premise that everyone has a more or less equal shot at the top.

Might as well be arguing for the lottery, in light of the facts about social mobility. It's a con for suckers, just like Ayn Rand, but a whole lot more clever.

Ramanan said...

"correct imbalances"

Tom, can't resist .. "Imbalances, What Imbalances?"

http://www.levyinstitute.org/pubs/wp_704.pdf

Also, Friedman argued that it should be unconstitutional for the government to intervene in the currency markets.

It will hurt MMTers also if the government intervenes in the fx markets isn't it?

Tom Hickey said...

Rmaman: "Tom, can't resist .. "Imbalances, What Imbalances?"

Touché. Perhaps I should have said "asymmetry" instead, which is where most "imbalances" arise.

Tom Hickey said...

I think we have to take it as a given that governments intervene in fx markets and use that as a theoretical assumption if we want to approximate reality.

paul said...

We also have to take it as a given that in the English language "imbalance" can mean many different things to many people.

So can "assymetry".

paul said...

"It will hurt MMTers also if the government intervenes in the fx markets isn't it?"

Nothing hurts MMTers.

Trolls bounce off like water off a ducks back.

Anonymous said...

As far as I can tell a government/ central bank can maintain a currency "floor" (stop the currency from appreciating too much) indefinitely. It simply involves "printing" more money.

Maintaining a currency "ceiling" can be more difficult, as foreign currency reserves can run out.

However, currency depreciation is probably only an issue if it is both very substantial and occurs suddenly/ rapidly. In which case it is probably good to have adequate foreign reserves on hand.

Tom Hickey said...

All governments influence their currencies to keep it within the desired band. What do you think all the complaining to the US to "maintain a strong dollar" is about. The US has not been doing that and letting the floor drop to gain export advantage.

Oil price due to USD devaluation? No problem. The Saudis have an arrangement with the US to buy US tsys and weapons.

Anonymous said...

"All governments influence their currencies"

A large part of that is using interest rates

Oliver said...

@ Ramanan

I think the point is that swings in exchange rates and current accout imbalances are not necessarily directly linked. Like the US, certain countries are in the situation where they can run permanent current account deficits without being more susceptible to large swings in their exchange rate because of it.

I don't think Switzerland is such a country because, while there might theoretically be a way for Switzerland to bring itself into such a position, it would neccessitate a large 'redomestication' of its output. There's no way in hell we're going to use all the pharmaceuticals we produce, wear all the watches we make and have our banks fleece our own population instead of foreign governments.

It doesn't add up and just isn't a realistic scenario for a small country with high mountains and absolutely no natural resources. MMT hardcore float is a special case.

Oliver said...

Upon second reading, that was not very clear. I'll try again:

It's not the current account flow as such, but rather large swings in exchange rates that are disruptive to output and thus employment.

The question remains whether filling in demand leakage resulting from current account deficits will lead to a: just even larger current account imbalance or b: also larger swings in exchange rates.

MMT claims there is no link from a to b. Thus > Imbalance? What imbalance?

And reconnecting to Switzerland, it is certainly so, that fx swings are more disruptive to an economy the more internationally linked it is. Thus its reaction to the large capital flows coming in from the EU zone. This must be filed under managing exogenously created exchange rate swings, not under managing domestic demand.

Tom Hickey said...

Anonymous said...
Tom: "All governments influence their currencies"


A large part of that is using interest rates


That the ordinary way under general circumstances, but governments do intervene in markets directly when they deem it in their interest to act decisively.