Pierre Ortlieb — Central Banks and the Folk Tales of Money

On the other hand, a number of central banks have taken the dangerous approach of simply tailoring their message based on their audience: when speaking to technical experts, say one thing, and when speaking to the public, say another. The janus-faced SNB is a case in point. This rhetorical duplicity is important as it allows central banks to both assuage popular concerns over the stability of money, by fostering the illusion that they maintain control over price stability and monetary conditions, while similarly soothing markets with the impression that they possess a nuanced and empirically accurate framework of how credit creation works. For both audiences, this produces a sense of institutional commitment which sustains both public and market trust in money under conditions of uncertainty.

Yet this newfound duplicity in central bank communications is perilous, and risks further undermining public trust in money should they not succeed in straddling this fine line. Continuing to play into folk theories of money as these drift further and further away from the reality of credit creation will inevitably have unsettling ramifications. For example, it might lead to the election of politicians keen to exploit and pressure central banks, or the production of crises in the form of bank runs.

Economic Questions

Central Banks and the Folk Tales of Money

Pierre Ortlieb

Euro headed back down again after Monday's SNB-driven gains

Well, the euro is slinking back down again. At the moment it's given back more than 60% of Monday's Swiss National Bank driven gains. Talk in the market was that the SNB was buying euro and selling Swiss on Monday and that affected all Swiss franc and euro crosses.

As an aside just consider what a bunch of morons are over there at the SNB. They put on a peg, they take off the peg causing disaster for themselves and dealers and now they're back intervening again? Seriously? Guys and ladies...MAKE UP YOUR MINDS!

I've said it a zillion times: how do these people get these jobs?

Anyway, euro headed lower. Will be choppy all the way down, but eventually--maybe by September--we'll see parity (1:1) against the dollar and further down after that.

Europe's got problems. You don't need me to tell you that. The only way for Europe to stay solvent is for net exports to continue growing and with austerity in the U.S. and with Japan and China competing with Germany for the same export markets, you're going to see price cuts/lower  prices and that is a de-facto devaluation in the euro.

#SellRallies

Frances Coppola — The Swiss Have Eliminated The Zero Lower Bound

So, this is fun. Via Zero Hedge comes this report from a Swiss website, Schweizer Radio und Fernsehen (SRF). It seems that a Swiss pension fund tried to evade negative rates on deposits by withdrawing a very large amount of physical cash with the intention of vaulting it. But the bank refused to allow it to withdraw the money in the form of physical cash....

This could have far-reaching consequences. The monetary policy of the last few years has been hampered by the supposed existence of the “zero lower bound”, at which (it is assumed) everyone would opt for physical cash instead of bank deposits and bonds. We already know that the lower bound (if it exists) is actually slightly below zero, since it is the point at which the cost of negative rates on deposits and bonds starts to exceed the cost of holding physical cash (vaulting charges, theft risk and so on). But if investors simply cannot obtain large amounts of physical cash because banks won’t issue it to them, the slightly-below-zero lower bound cannot bind. In which case negative rates could be very negative indeed and no-one would be able to do much about it. There would be no need to abolish or tax cash, as Citi’s Willem Buiter suggests. It could simply be ignored. Welcome to the negative-rate universe.

Forbes
The Swiss Have Eliminated The Zero Lower Bound
Frances Coppola

Does anyone else have the feeling that the wheels are coming off?

Swiss National Bank rising up the ranks of Biggest Policy Maker Idiot list

Swiss National Bank broadened negative interest rate policy by reducing the class of entities that were formerly exempt. This meant deposits related to government, such as pensions. Now they'll have to pay interest to the central bank.

How many ways can you say, "idiots?"

The Swiss National Bank, formerly a relatively obscure institution, is now rapidly rising up  the ranks of the list of Biggest Policy Maker Idiots of All Time.

It abruptly ended its EURCHF peg in January, wrecking innocent brokerage firms in the process who were just custodians of customer accounts. (They had no position.)

And why did it end that peg? Your guess is as good as mine, but there is ZERO inability for a central bank to credit users of its own currency. Hong Kong's been doing it for a long time against the dollar. Saudi Arabia, too.

Now the SNB is expanding its negative rates program like that other idiot central bank the ECB (which still sits atop the Policy Maker Idiot rankings). Negative rates are a tax--a confiscation of money--so what is stimulative about that?

Maybe a) they believe this will weaken the Swiss franc and; b) "need" the cash to pay out their traditional dividend payments to the Swiss cantons. (But that's like taking from the cantons and giving it back.)

Suffice it to say none  of this makes any sense in a normal world, but in the Bizarro world that we live in today, it all makes perfect sense.

Amending article about Swiss National Bank losing money in gold. We said it first here on MNE.

Maybe I ought to read the comments more on my own blog.

Matt Franko brought to my attention the fact that WE at MNE were FIRST to point out that the SNB lost money on gold in 2013, It was discussed in the comments section of my blog post on January 16.

Both Cullen Roche and Business Insider put out that information on January 19 and I stupidly posted it up here even though we had been the first out with this information right here on MNE.

These other guys are reading us and not giving attribution.

Anyway, here is the link to my blog post from Friday, Jan 16. You can read the discussion in the comments. Pertinent parts are posted below.

Says they "made 38B" last year.... looks like almost all of it from their USD holdings gaining on the CHF.... (this is how they "make money"???)

BUT, says they "lost" 9B in 2013.....

"After failing to receive money for 2013, cantonal budget chiefs earlier this month urged the SNB to give them more money for 2014 to offset shortfalls in revenue from other sources."

Link given in the comments: Read.

Here's why the SNB broke the peg: they took a bath on gold

We've been speculating that the SNB was showing balance sheet losses (negative equity) and panicked and pulled out of the EURCHF peg. We figured that it was related to those euro purchases.

The SNB pays dividends to the Swiss cantons. It has done so uniterruptedly for the past 100 years, however, in 2013 it couldn't make those payments.

Why?

Because it took a bath in gold. (Peter Schiff's favorite investment.)

This was posted on the BusinessInsider website.

So the people running the Swiss National Bank are even more stupid than I originally thought. Loading up on gold at the top or, near the top. You see the idiots running these institutions and by corollary, our freakin' lives?

Bill Mitchell — SNB decision tells us that the crisis is entering a new phase

Switzerland – home of the secret bank vaults, which house treasures stolen from people (particularly the Jewish victims) by the Nazis during WW2 and ill-gotten cash by capitalists who wish to evade scrutiny of prudential and tax authorities of their domiciled nations. Now it is the canary, which has just sung to tell us that all the hubris about Eurozone recovery cannot cover up the reality that the crisis is not yet over and requires root and branch reform to the policy ideology that exposes the floored design of the monetary union. The – Decision – last week (January 15, 2015) by the Swiss National Bank (SNB) to both break the peg of the Swiss franc to the euro and cut its interest rate on sight deposits to -0.75 per cent signals the surrender by that nation to the reality surrounding its borders. The interest rate decision was required after it decided to scrap the exchange rate peg, given that it didn’t want a credit crunch killing the domestic economy. The appreciation of the exchange rate, which has been held artificially low by the peg, will already undermine domestic spending. The SNB said its decision as reversing its previous “exceptional and temporary measure”, which “protected the Swiss economy from serious harm” as the exchange rate became overvalued. But the decision itself was rather extraordinary given it was seemingly so surprising for most and central bankers are meant to be cautious types. 

But the decision has a logic that is easily understood by those who are not trapped within the Euro Troika narrative.…

Bill Mitchell – billy blog
SNB decision tells us that the crisis is entering a new phaseBill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at the Charles Darwin University, Northern Territory, Australia

What the Swiss National Bank did yesterday was nothing short of financial terrorism. FXCM blown out!

The fallout is starting to pour in...

It's bad enough when the banks and traders of Wall Street are left to blow up our financial system with their irresponsible behavior, but central banks are created and tasked to prevent unecessary bankruptcies and insolvencies.

I guess the Swiss National Bank doesn't think so. Their action yesterday--the abrupt and untelegraphed end to their euro/swiss peg--was nothing short of financial terrorism. The result is that now we see entire, healthy, viable, firms have been blown up. FXCM has been blown up and there are reports of many other firms starting to trickle it.

FXCM was a true success story. Founded by four young entrepreneurs they built the biggest U.S. retail forex firm. It is now destroyed and seeking a rescue thanks to the SNB.

Wall Street has done a lot to shatter the confidence of investors over the year, but a central bank??? It's pretty much time to take your chips and walk away from the table for good.

My podcast for today.

Here's my podcast for today.

I get into the SNB, Russia, crude and all the rest of a wild day.

Miles Kimball — The Swiss are now at a negative interest rate due to the Russian ruble collapse

Unintended consequences in an interconnected global economy.

Quartz
The Swiss are now at a negative interest rate due to the Russian ruble collapse
Miles Kimball | Professor of Economics, University of Michigan

h/t Lambert Strether at Naked Capitalism

Woj — Swiss Struggle To Maintain Currency Floor

NGDP targeting crowd wrong about SNB and expectations?

Read it at Bubbles and Busts
Swiss Struggle To Maintain Currency Floor

by Woj

(h/t Woj in the comments)

Ramanan — The Accommodating Item In The Swiss Balance Of Payments

For the BOP wonks who are following this. Comments welcome here since Ramanan's place doesn't facilitate dialogue in the comments. He generally comments here.

Read it at The Case for Concerted Action
The Accommodating Item In The Swiss Balance Of Payments
by Ramanan

Daniel H. Neilson — When will Switzerland exit the euro?

By fixing the exchange rate, Switzerland has, in a way, unilaterally joined the euro. As a haven destination, Switzerland faces problems not unlike Germany's. Just as the Bundesbank's claims on TARGET2 swell, so too are the SNB's euro-denominated assets....

Read it at INET | The Money View

When will Switzerland exit the euro?

by Daniel H. Neilson

(Dr. Neilson earned his B.A. from Bard College of Simon's Rock in 2001 and his Ph.D. from Columbia University in 2009. In addition to his work for INET, he teaches economics at Simon's Rock.)

(h/t Perry Mehrling at The Money View)

Swiss National Bank: Totally corrupt and arrogant!

Back in August, Kashya Hildebrand, the wife of Swiss National Bank Chairman, Philipp Hildebrand, put on a sizeable long USD/CHF position. That was a little more than a week before the SNB sold massive amounts of Swiss francs.

So far, the SNB Chairman has had little to say about this other than to comment that the media reports about his wife's activities were "partially incorrect."

What arrogance.

His wife obviously knew of the SNB's intention to lower interest rates to zero and sell billions of Swiss francs. She was tipped off.

Another blatant example of central bank corruption. (Like the Fed's trillions $$ in loans to banks and other financial sector cronies.)

Meanwhile as they profit obscenely from this cronyism, these central bankers scold governments on the need for further fiscal consolidation, austerity and similar measures designed to take public wealth away from working people and hand it over to the financial elite.

Read entire article here.

In case you were wondering who sets exchange rates...

Governments that issue currency set the exchange rate of that currency if they so desire. They can easily devalue their currency as the Swiss National Bank did over the weekend. The SNB pegged the Swiss franc to the euro at 1.20. Literally, within minutes, the Swiss franc dropped 10% against the euro and it probably happened with nothing more than a statement from the SNB. On the flip side governments can make their currency dear by taxing heavily and issuing (spending) very little, a deflationary approach.