The Swiss Franc and Japanese Yen

Last week, the Swiss central bank announced that it would put a cap on how high the Swiss franc could go in relation to the euro.  This drove the Swiss franc down over 10 cents in one day against the U.S. dollar.  This is unprecedented.  It is rare to see a currency move almost 10% in one day.  This is basically a formal devaluation.

The Swiss National Bank has only one way to ultimately put a ceiling on the franc.  The only way to do this is to create new money out of thin air.  This is unfortunate because the Swiss franc has been one of the most reliable currencies.  Even though it is no longer backed by any gold and is a fiat currency like the rest of them, there has always been this sense that the Swiss central bank is tighter with its monetary policy and less political.

Assuming this announcement works and the Swiss franc stays capped, then it would not surprise me to see the Bank of Japan try the same thing.  The yen is another fiat currency that has been more reliable in relation to the others and some are saying that the yen is appreciating too far and too fast.  It astounds me that the yen is as strong as it is, considering that the debt-to-GDP ratio of the Japanese government is over 200%.  This makes Greece look good.

The Japanese central bank has been able to maintain a relatively tight monetary policy because the moron investors keep buying Japanese government bonds for some reason.  With the massive debt that the Japanese government has run up, the rates on bonds there should be somewhere near the Greece level.  That is, the rates should be indicating a default is near.  Instead, rates in Japan are extremely low, despite a lack of buying from the central bank.  This means that private investors are funding this massive debt.

This move by the Swiss central bank is stupid, assuming that they weren't being threatened with a nuke by the U.S. government or something crazy (although not that far fetched) like that.  Why does the Swiss government feel like they can't let their currency appreciate?  Why is this the same with other governments?

Basically, these are a bunch of mercantilists making this decision.  Their excuse is that they cannot have too strong a currency or it will hurt their export sector.  But what about their import sector?  If you have a strong currency, you can import goods and services from other countries for cheaper prices than otherwise would have been the case.

Although weakening their currency might benefit the export sector, overall it will hurt the Swiss people more.  It means that people will have to pay more for goods and services.  The Swiss central bank will be devaluing their currency now like most of the other central banks around the world.

The U.S. dollar is losing its status as the reserve currency of the world.  I don't think there is any other currency likely to take its place.  I think that either there will be no reserve currency or else a commodity or basket of commodities will serve this purpose.  Gold may become money again faster than we think.

Later this week, I will discuss my thoughts on investing in foreign currencies.