A surprise move from Switzerland’s central bank (SNB) sent European stock markets into panic today. Although a few months ago, the public voted no in a referendum demanding the SNB keep higher gold reserves, the Swiss are returning to a more traditional stance in their monetary policies. With a €500 billion QE program coming from the ECB, an off-limits Russian market, Greek elections and subtle talks of bailout, tumbling oil prices and all the other good things happening in Europe, the Swiss bankers could see investors flocking to the safer assets in their economy. So they slightly closed the easy-money floodgates. This morning, they suddenly terminated the policy of pegging the franc at 1.2 per euro (an exchange rate ceiling), which they had maintained for the past three years, in which time their foreign currency reserves had more than doubled.
In just a few minutes, the value of the Swiss currency rose 30 percent, FTSE 300 dropped 2 percent, Wall Street futures turned negative, and the recent feeble rise in commodity prices was reversed. The Swiss stock market also fell by 9% as the SNB dropped the excuse it had been using to defend the exchange rate ceiling, that the Swiss franc was “exceptionally overvalued”. That’s all it took for the carefully-engineered house of cards to lose an entire tower. Just one unanticipated decision of a central bank to move out of the market revealed how disconnected financial markets are from the real economy, and how dependent they are on fiat inflation. Dramatic declarations from traders have already flooded news sites, describing the move as a “tsunami”, a “huge confusion”, and no less than “carnage” for Swiss exporters.
The incident is however a good preview of what would happen to the dollar and the US economy if China were to make a similar move. It also highlights a point surely evident for anyone who has read Mises:
In speculative periods of the past, the very fact that the banks of the various countries did not work together systematically, and according to agreement, constituted a most effective brake [to fiat inflation]. With closely-knit international economic relations, the expansion of circulation credit could only become universal if it were an international phenomenon. […] By acting in unison, the banks could extend more circulation credit than they do now, without any fear that the consequences would lead to a situation which produces an external drain of funds from the money market (Mises 2006, 141-42).
When Mises was writing this in 1928, national central banks had not yet reached such monetary agreement, but they did so (implicitly and explicitly) especially after the Nixon shock in 1971. Today, the SNB’s unexpected move tampered with that agreement, even if just a little. And although it’s difficult to see this going further in the right direction, toward the dissolution of inter-bank cooperation, I would like to think that there’s hope.
