Every quarter this past year I’ve provided updates on the stock holdings of the Swiss National Bank (SNB). Comment sections, internet chat boards, social media, and various articles about the bank reveal many people don’t understand the significance of its anticapitalist actions nor the problems this creates.
Understand, the SNB is not a “bank” in the traditional sense of a deposit-taking institution open to the general public. Rather, it’s Switzerland’s central bank, where profits are derived, much like at the Fed, with a variety of inflation (i.e., money creation) schemes. Regarding their US equity holdings, they ultimately create francs which are converted to USD to buy US stocks in the open market.
Those who champion a free market maintain that a central bank shouldn’t be in the profit-making business, if it should exist at all. Its activities lead to price distortion, interest rate manipulation, currency expansion, and the boom/bust cycle, to name just a few ill effects.
According to the SNB’s June 2021 Q2 statement:
The profit on foreign currency positions totalled CHF 44.5 billion.
The notes say just over half of their profit is due to price gain/loss on equity securities and instruments. But there is an additional benefit. Many of these holdings pay dividends, as explained:
Interest and dividend income amounted to CHF 3.8 billion and CHF 2.0 billion respectively.
Not only can the bank buy equities with newly created money but they stand to earn dividend income from the stocks, practically in perpetuity.
Their recently filed 13F statement shows the bank amassed $162 billion in US stocks, up from $150 billion from last quarter.
This is no cause for celebration. This legal counterfeiting can and has only been defended using the equivalent of Fedspeak, but by Swiss central planners. In his latest official public address in June, Chairman Thomas Jordan unapologetically said the SNB will
remain willing to intervene in the foreign exchange market as necessary.
Meaning he’s willing to debase the franc for as long as he sees fit. His rationale is that
[t]he Swiss franc remains highly valued. Our expansionary monetary policy provides favourable financing conditions, contributes to an appropriate supply of credit and liquidity to the economy, and counters upward pressure on the Swiss franc.
The failure is this continued belief that the franc is valued too highly in relation to other world currencies. The SNB either thinks the market is valuing the currency incorrectly, so they must fix this error, or that the market price is correct but they’re looking for a way to game the market to win what they consider an advantage. Both require the bank to “intervene in the foreign exchange market as necessary.”
Their expansionary monetary policies, which currently includes a negative 0.75 percent deposit rate, provides ideal financing conditions, apparently. Of course, there is no calculation to prove this.
Similarly, that the SNB knows the “appropriate supply” of credit/liquidity required to value the franc below what the market dictates follows the same problem of using impossible calculations.
They may claim these are their reasons. But they’re actually excuses used to give an air of legitimacy to their inflationist policies, as if a handful of planners knew what’s best for an entire nation and the course of action they must take on its behalf. Unfortunately, the SNB’s interventionism not only impacts those living in Switzerland but also those holding US stocks, who must compete with the relentless buying pressure only a central bank can afford to create.
Luckily, when you’re a central bank with a stock portfolio of $162 billion, you’ll find very few people bothered by your actions. And so, another quarter concludes; the value of their holdings increases, the open market purchases continue, and there is no end in sight, not now, not any time soon, and maybe not ever.
