While Congress argues about how many trillions of dollars to create in the new coronavirus bill to pay for things like basic income or a new $1.75 billion FBI building, the Swiss National Bank posted a quarterly profit of $43 billion for the second quarter. As Reuters reports:
Although making a profit is not part of the SNB’s mandate, Switzerland’s federal and regional governments appreciate the payout it makes, which increased to 4 billion francs this year.
We can be sure the government appreciates the windfall. But to make the year even better, the central bank’s (Schweizerische Nationalbank, SWZNF), quarterly filing statement showed that its US equity portfolio now stands at a whopping $118 billion, up by approximately $24 billion from last quarter!
Reading through the list of 2,438 companies is impressive, especially to see that many of them pay strong dividends, like Apple, or that some of them are gold companies, like Kirkland Lake, which may offer a substantial upside in the years to come. Even more impressive is what Switzerland is getting away with. Most other central banks, like those in South America, Africa, and Asia, would surely suffer from runaway inflation if they made purchases of US equities with money created out of thin air. This “Swiss privilege” is unique to say the least, but how did it come to pass?
Switzerland has done a lot of things “right,” such as having a population smaller than New York City, avoiding wars and invasion, and having a central location in the heart of affluent Europe. On top of that, they do something integral to success that remains lost on mainstream economists: they produce goods and services. Whether it’s watches, chocolate, banking, or gold, coupled with a relatively strong embrace of economic freedom, Switzerland remains one of, if not the most, wealthy nations on the planet.
Very much like the Fed, whose $7 trillion balance sheet hasn’t (yet) led to a complete currency collapse, the Swiss are in a league made for only a handful of countries. Ironically, their lack of economic understanding and hubris rival that of the Fed. As Swiss chairman Thomas Jordan explains in his last speech when discussing foreign exchange markets:
Interventions prevent an excessive appreciation of the franc, but also expand the SNB’s balance sheet and thus increase the financial risks. However, they are currently indispensable, together with negative interest, in order to ensure appropriate monetary conditions in our country.
Unfortunately, this is 2020 and the world we live in. The chairman can talk about how their money creation scheme is simply a by-product of the desire to weaken the franc, as if they knew what the price of the franc should be, and as if it were not stealing from those both at home and abroad. The Swiss planner will say inflation is low and that therefore negative rates are okay, yet Switzerland is one of the most expensive countries in the world to live in. And they won’t tell you about having the most expensive Big Mac in the world at $6.91. They will talk about policy and the difficult choices they have to make to take the economy somewhere that can hardly be articulated. However, there is no mystery beyond the workings of the Swiss National Bank. Like the Fed, the man behind the curtain is revealed to be nothing more than a charlatan, exposed the instant commonsense questions are considered.
Swiss production created both wealth and demand for their currency. That they inflate their franc from time to time is “relatively” okay, because everyone else is doing it, and so far it seems to be working. As the balance sheet expands, asset prices rise, purchasing power continues to erode, and the bank wins while society loses. This cannot continue indefinitely, but so long as the game isn’t figured out, it will continue, and the portfolio will always get bigger.
