The Swiss Franc Shock!

January 16, 2015

Tiny Switzerland is an economic powerhouse of sorts. Swiss GDP is about 1/50th of US GDP, while GDP per capita is about 5% higher than in the US. Growth in the Swiss Economy is about in line with US numbers – except the US numbers are fudged with the lowball CPI figures. Swiss unemployment is lower than the US. The appeal of its banking system to worldwide customers is legendary.

The Swiss Franc, their paper currency, once was fully backed by Gold, lowered in steps down to 20% backing, and most recently has about 6% Gold support. The Swiss people tried but failed (this time) to raise the Gold backing up to the previous 20% level.

The Franc is a world class currency, although too small to replace the Dollar as THE world reserve currency. In 1970, as the Bretton Woods world currency system was about to break down, the Franc traded around $0.23 per Franc. Over those 45 years, the Franc has appreciated (with ups and downs) to about $1.14 per Franc, as of last May.

Switzerland’s main trading partners are Germany, the US, Italy, and France (in that order). Since three of those countries use the Euro as their paper money, Switzerland pegged the value of their Franc to the Euro. If the Euro went up, then the Franc went up. If the Euro went down on world forex markets, then the Franc went down.

The Eurozone has gone through a lot of fiscal turmoil over the last few years, with the Euro falling considerably. During the last eight months, the Franc has fallen with the Euro – from $1.14 to $0.98 a few days ago.

But fiscal policy in Switzerland is much more prudent than throughout the Eurozone, so the Franc’s tendency is to rise. The only way that the Franc can maintain its peg – and fall with the Euro – is for the Swiss Central Bank to print Francs to sell in the world forex markets.

But a large minority of Swiss voters signaled in the recent vote that they were ready to eviscerate the Swiss Central Bank by forcing a 20% Gold backing. Those voters have watched as the falling Franc has limited the benefit to Switzerland from the falling price of Crude Oil.

The Central Bank, trying to prevent another referendum on Gold – which they might have a greater chance of losing – decided Thursday to eliminate the Franc’s peg to the Euro. In one trading day, the Franc jumped – from $0.98 to a daily high of $1.36, before settling in at $1.17 – a stunning almost 20% rise from the previous day’s close.

One side effect is that Gold has broken out of its downtrend, rising 4% since Thursday morning, as traders around the world recognize the Swiss move as a vote of confidence in Gold as money.

Switzerland imports account for about 80% of their Economy, so the 20% adjustment of the Franc upward will give the average Swiss in the street about 16% more purchasing power than a couple of days ago. Even so, we probably can expect Swiss imports to rise marginally, while exports take a hit. Swiss wages likely will be stable or fall a little, but with a 16% jump in purchasing power, the impact on the Swiss Economy should be quite small.

In contrast, our leaders in Washington are set to raise the $18 Trillion national debt this year by another half Trillion, as they continue to spend like drunken sailors. The US FED, although ending its latest Quantitative Easing (QE), still is printing more and more paper Dollars. One way to see all this printing is through the fall of US interest rates.

With the official CPI growing around 2%, with taxes reducing the nominal yield, and with the likelihood that the debt never will be repaid, why would anybody in his right mind “invest” in 30-year Treasury Bonds at 2.4%? Or for only 10 years at only 1.77% (below the CPI rate!)? No, the tiny rate on Treasuries indicates that the printing presses are running overtime in order to suppress those interest rates.

Government overspending, together with the wild printing and rate suppression are killing the US. We should learn from the Swiss example and vote in representatives who will act responsibly with our tax money and who will vote to End the FED.

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