Mitchell, B. (2015) “SNB decision tells us that the crisis in entering a new phase“, Bill Mitchell Blog, 19 January.
Switzerland – home of the secret bank vaults, which house treasures stolen from people (particularly the Jewish victims) by the Nazis during WW2 and ill-gotten cash by capitalists who wish to evade scrutiny of prudential and tax authorities of their domiciled nations. Now it is the canary, which has just sung to tell us that all the hubris about Eurozone recovery cannot cover up the reality that the crisis is not yet over and requires root and branch reform to the policy ideology that exposes the floored design of the monetary union. The – Decision – last week (January 15, 2015) by the Swiss National Bank (SNB) to both break the peg of the Swiss franc to the euro and cut its interest rate on sight deposits to -0.75 per cent signals the surrender by that nation to the reality surrounding its borders. The interest rate decision was required after it decided to scrap the exchange rate peg, given that it didn’t want a credit crunch killing the domestic economy. The appreciation of the exchange rate, which has been held artificially low by the peg, will already undermine domestic spending. The SNB said its decision as reversing its previous “exceptional and temporary measure”, which “protected the Swiss economy from serious harm” as the exchange rate became overvalued. But the decision itself was rather extraordinary given it was seemingly so surprising for most and central bankers are meant to be cautious types.
But the decision has a logic that is easily understood by those who are not trapped within the Euro Troika narrative.
What the decision means is that the exchange rate quickly appreciated from its pegged value and is looking like being stable at the new parities.
This is what happened (graphically, using daily data):
But this is a longer-term view (using monthly data) and I have expressed the currencies in reverse order in this graph so an appreciation is a fall in the graph. The reason for presenting the data in this way is because the SNB provides the raw data in two different forms and I was just saving myself time. But then, of course, once I had created the graphs I realised that typing these three lines took me more time than computing the reciprocal in Excel!
Relevant posts:
- Watt, A. (2015) “Is Greek Public Debt Unsustainable? It’s The (nominal growth rate of the) Economy, Stupid!“, Social Europe Journal, Occasional Papers No. 6, January.
- Tenebrarum, P. (2014) “The Consequences of Imposing Negative Interest Rates“, Acting Man Blog, 21 November.
- Mitchell, B. (2014) “Greece – return to growth demonstrates the role of substantial fiscal deficits“, Bill Mitchell Blog: Modern Macroeconomic Theory – Macroeconomic Reality, 19 November.