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Interesting the legendary Swiss National Bank doesn’t yet understand it’s own monetary system.
Seems their understanding has yet to move beyond the days of the gold standard.
SNB Moves Are Defense Against Deflation, Jordan Says
by Simone Meier
Mar 19 (Bloomberg) — Swiss central bank Governing Board member Thomas Jordan comments on the economic outlook, the SNBÃƒÂ¢Ã¢â€šÂ¬Ã¢â€žÂ¢s use of unconventional policy tools and deflation risks. He made the remarks in a speech in Zurich today.
On currency measures:
ÃƒÂ¢Ã¢â€šÂ¬Ã…â€œFrom the SNBÃƒÂ¢Ã¢â€šÂ¬Ã¢â€žÂ¢s point of view, the current currency-market measures are serving as an insurance against the threat of an unwelcome strong appreciation of the franc. At the same time, theyÃƒÂ¢Ã¢â€šÂ¬Ã¢â€žÂ¢re serving as defense against deflation.ÃƒÂ¢Ã¢â€šÂ¬Ã‚Â
Yes, the ‘deflation’ from lower costs of falling export prices that drive down domestic wages, profitability, and asset prices.
ÃƒÂ¢Ã¢â€šÂ¬Ã…â€œThe SNBÃƒÂ¢Ã¢â€šÂ¬Ã¢â€žÂ¢s currency purchases donÃƒÂ¢Ã¢â€šÂ¬Ã¢â€žÂ¢t have anything to do with a ÃƒÂ¢Ã¢â€šÂ¬Ã‹Å“beggar thy neighborÃƒÂ¢Ã¢â€šÂ¬Ã¢â€žÂ¢ policy and must not be interpreted as the beginning of a currency war. ItÃƒÂ¢Ã¢â€šÂ¬Ã¢â€žÂ¢s not about Switzerland creating advantages with a weak franc.ÃƒÂ¢Ã¢â€šÂ¬Ã‚Â
He can call it whatever he wants. Functionally it’s a policy to keep their currency weak enough to keep export prices from falling. ‘Beggar thy neighbor’ is not a matter of degree. It means leaning on your neighbors domestic demand for your own employment purposes.
This is what happens when those running a government don’t understand how their non convertible currency works.
ÃƒÂ¢Ã¢â€šÂ¬Ã…â€œOur purchases on the currency market are only to be seen as an additional instrument in times of zero-rate policy to fight the deflation threat.ÃƒÂ¢Ã¢â€šÂ¬Ã‚Â
Call it what you want, mate. It’s a dead on beggar thy neighbor policy by ‘previous’ definition.
On unconventional tools:
ÃƒÂ¢Ã¢â€šÂ¬Ã…â€œThe use of unconventional measures doesnÃƒÂ¢Ã¢â€šÂ¬Ã¢â€žÂ¢t go without risks. On one hand, effects and side effects arenÃƒÂ¢Ã¢â€šÂ¬Ã¢â€žÂ¢t as well known as those of the conventional monetary policy.
First, they are highly unsure of the effects of ‘conventional monetary policy’ as per their own econometric research and theory.
Second, the effects of ‘unconventional measures’ are not only not well known, they are not understood at all.
Ironically, however, they are easier to understand, they alter the term structure of rates and remove interest income from the non government sectors.
And selling your currency to buy FX is an inflationary bias that drives down your currency and increases local currency prices of imports and exports.
On the other hand, itÃƒÂ¢Ã¢â€šÂ¬Ã¢â€žÂ¢s an intentional over-supply of the economy with liquidity.
Whatever that means in this context. Close questioning of what this means operationally reveals it’s empty rhetoric, all based on the backwards notion that the banking system needs reserves to be able to make loans.
There needs to be an immediate exit of unconventional measures once the monetary stimulus can be reduced. The assessment of the current crisis means that the SNB has to take these risks.ÃƒÂ¢Ã¢â€šÂ¬Ã‚Â
There are no such risks. They don’t know how their own monetary system works.
The SNB ÃƒÂ¢Ã¢â€šÂ¬Ã…â€œhas to already engage itself with the question of a timely exit of these measures, however. Even with all uncertainty in forecasts, thereÃƒÂ¢Ã¢â€šÂ¬Ã¢â€žÂ¢s certainty that there will be quieter times in the future. The exit of unconventional measures has to immediately happen once the monetary stimulus can be reduced. ThatÃƒÂ¢Ã¢â€šÂ¬Ã¢â€žÂ¢s the case when tensions on money and credit markets are over and inflation risks are increasing along with an economic recovery.ÃƒÂ¢Ã¢â€šÂ¬Ã‚Â
ÃƒÂ¢Ã¢â€šÂ¬Ã…â€œThe dosage of monetary policy isnÃƒÂ¢Ã¢â€šÂ¬Ã¢â€žÂ¢t easy in the current environment. The assessment of current risks is clearly in favor of rather too much monetary stimulus than too little.ÃƒÂ¢Ã¢â€šÂ¬Ã‚Â
The SNB is ÃƒÂ¢Ã¢â€šÂ¬Ã…â€œconfidentÃƒÂ¢Ã¢â€šÂ¬Ã‚Â it will be able ÃƒÂ¢Ã¢â€šÂ¬Ã…â€œreduce liquidityÃƒÂ¢Ã¢â€šÂ¬Ã‚Â when the time comes.
This is all non-sensical.