Editorial
The Biggest Loser
In Switzerland, it's not just the clocks that are cuckoo. Over the past four years Swiss politicians and central bankers have gone on an unprecedented buying spree of foreign exchange reserves. In 2012, their cache swelled to as much as $420 billion worth of various currencies, primarily the euro. This figure is a seven-fold increase since 2008 and equates to 70% of the country's annual GDP. The sum translates to $200,000 per family of four, enough to keep the Swiss in clocks, chocolates, and fondue for many years to come. The Swiss leadership will claim the money has been "invested" with an eye to the future, but what they've done is impoverished themselves in the present. Although such a decision seems perverse, it makes perfect sense when seen through the lens of today's presiding economic thinking.
For the past few generations Switzerland has enjoyed some of the strongest economic fundamentals in the world. The country boasts a high savings rate, low taxes, strong exports, low debt-to-GDP, balanced government budgets, and prior to a few years ago one of the most responsible monetary policies in the world. These attributes made the Swiss franc one of the world's "safe haven" currencies. But in today's global economy, no good deed goes unpunished.
Central bankers around the world, particularly in Washington, Frankfurt and Tokyo, have been engaged in a massive and coordinated campaign of currency debasement to combat the recession. But for years the Swiss refused to join in the printing parade. As a result, investors around the world wisely decided to park their savings in the reliable Swiss franc. From December of 2008 to August 2011 the franc appreciated an astounding 59% against the U.S. dollar and approximately 30% against the Japanese yen. More importantly, the franc gained 42% against the euro. As the Eurozone completely surrounds Switzerland, its trade with those countries represents the vast majority of its international transactions.
During this massive run up in its currency, the Swiss economy continued to prosper. Wages and purchasing power increased and GDP grew consistently faster than other countries in Western Europe. Despite generally positive export statistics, some Swiss exporters noticed that at times the strong franc put them at a disadvantage against foreign competitors. In addition, the strengthening currency helped keep a lid on consumer prices, giving Switzerland a consistently low inflation rate with occasional bouts of actual deflation. Despite the fact that Switzerland was an island of economic health amidst a sea of problems, the reigning economic orthodoxy convinced Swiss leaders that their strong currency was a burden rather than a blessing. More pointedly, the rise in the franc was seen as a repudiation of the expansionary policies occurring in other countries. And so the Swiss government decided to join the currency killing party.
In early August 2011, the Swiss National Bank took a series of steps to reverse the fortunes of the franc. In the simplest terms, they sold francs and bought foreign currencies, most notably the euro. The announcement included a promise to buy unlimited quantities of foreign exchange to maintain a floor of 1.20 francs per euro. In so doing, the Swiss essentially outsourced their monetary policy to the Eurozone. Any moves taken by the European Central Bank would need to be matched by the Swiss. Ironically, it was fear of this outcome that kept the Swiss from adopting the euro in the first place. Despite the former bias toward independence, the Swiss have de facto adopted the euro anyway. Since that time, the franc has fallen 16% against the dollar, Swiss foreign exchange reserves have skyrocketed, and investors who bought francs as a means to escape debasement have been betrayed.
Productive nations generate excess goods and services that can be sold abroad and their growth and stability attract investment funds from abroad. These conditions will tend to increase demand for the nation's currency, thereby pushing up its price. A strong currency keeps capital and raw materials costs low, enabling more productive workers to earn higher real wages. But according to most economists, a strong currency will bring down an economy because it destroys international competitiveness and can even lead to lower prices (deflation) which they see as economic quicksand. These fears have ignited a "global currency war" in which countries are expending huge amounts of national savings in order to ensure that their currencies stay cheap. In today's economic logic we must fail in order to succeed.
But it is very easy to have a weak currency. All that is needed is an unlimited willingness to print. A strong currency requires real fiscal discipline and actual production. Yet, like the weight loss TV show, economists believe that the winner of a currency war is the biggest loser. You win not by killing your competitors, but by killing yourself! It's like a student convincing his parents that an "F" is a better grade than an "A." And if a straight "F" report card results in parental accolades rather than anger, the students will lack any incentive to improve performance. Similarly, as nations like Switzerland strive to reduce their own grades, the failing nations have a reduced incentive to change their study habits. Without outside support, nations with collapsing currencies would see huge increases in consumer prices. The resulting fall in living stands would force productive reform.
I take the minority position that just as it is better to be rich than poor, a strong currency is better than a weak one. Although much more credentialed economists may try to muddle the arguments, the truth may be seen when a particular position is taken to its logical extreme. If a weaker currency is preferable to a stronger one, then logic would dictate that a currency of no value will be preferable to one with an infinite value. But how would economies with these drastically different currencies operate?
It is true that the country with the zero value currency will tend to see full employment and strong exports. The relative low cost of labor will mean that the locals could be easily employed in even the most marginal activity. But since holders of other currencies will be able to outbid the domestic population for all of their production, everything produced will be exported. Imports will be zero as the local population would be unable to afford anything produced in countries with more valuable currencies. As a result, actual consumption would be extremely low. In essence this economy would be analogous to impoverished, subsistence level economies such as Bolivia, Zimbabwe, and Haiti.
In contrast, a country with an infinitely valuable currency would see the best of all possible worlds. Even the smallest amount of money would allow citizens to buy huge amounts of goods from abroad. An evening's babysitting money would deliver more purchasing power than months of hard labor in poorer countries. The strong currency would mean that consumption would soar even while hours worked fell. Savings would increase in value, and people would have more ability to travel and pursue leisure activities. In essence, we are describing a rich economy.
Placed in such a context, it's easy to see the preferred option. Those who believe in the benefits of weak currencies do not specify when a falling currency becomes a bad thing. Clearly there must be a tipping point where lost purchasing power overcomes supposed gains in growth. Yet they are silent on that point. My position is that a rising currency is always good. No magic tipping point needs to be identified.
The problem is that economists now believe that the goal of an economy is to provide employment, not goods and services. They see a job as an end in and of itself, rather than as a means for people to get the things they really want. But if we can get all that we want without having to work, who needs to bother? A strong currency takes us closer to this goal. It is a testament to how far the "science" of economics has fallen that this goal has been utterly forgotten.
But this junk science is killing real growth. As long as this "black is white" ideology remains in place, the biggest printers will continue to be the biggest actual losers.
Peter and Euro Pacific Metals are the subject of a Daily Bell Special Report: "To Survive the Coming Financial Hurricane, Physical Holdings of Gold and Silver Are a Must. This Solution Provider Can Help You Now – Without Leverage or High Pressure Tactics."
Peter Schiff is CEO and Chief Global Strategist of Euro Pacific Metals.
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Posted by Howling Wolf on 02/06/13 08:02 PM
@ Bischoff
You are the most arrogant commentator I have ever had the displeasure of reading. Henry George and his BS land value taxation remedies have long been disputed in proper academic circles for the juvenile, if not downright ridiculous, pretences on which they base their formal arguments. You are an archaic soldier. Lay down your arms and admit defeat you old Nazi soldier of the State.
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Posted by Bischoff on 02/05/13 01:03 AM
@nail
NAIL: "You gotta quit broadcasting stuff that's been discredited since the 19th century, the labor theory of value. Gold, like any other commodity, is worth what people are willing to pay for it. A change in the price of gold doesn't mean that mining and refining it has become easier or more difficult, what it means is that the value of the currency in relation to gold has changed."
BISCHOFF: Somehow, my detailed reply to your comments disappeared from this thread. I won't bother to rewrite them, except to say that in this matter of the standard to measure value, your comment about the Labor Theory of Value, the ideas of Marx and Ricardo, have absolutely no relevance. Your comment proves that you have no idea about the difference between an irredeemable central bank currency based on the 'Quantity Theory of Money', and a redeemable currency created under the Real Bills Doctrine with value based on the gold standard.
I suggest that instead of taking the easy way by repeating the opinions of others, you in fact start to think and reason for yourself. Sapere aude.
I hope this reply will pass the censor.
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Posted by bob on 02/04/13 11:00 PM
[The problem is that economists now believe that the goal of an economy is to provide employment, not goods and services. They see a job as an end in and of itself, rather than as a means for people to get the things they really want. But if we can get all that we want without having to work, who needs to bother?]
Back in the Soviet Union, this was a State goal. So, one would not be a parasite (it was an official version). In reality, USSR was a police state. So, by being employed, the State knew, at least for 10 hours, were you are as well as helping State informers to hear and observe you.
As for USSR's economic science, yes, there were economic universities, professors and academicians teaching students and publishing scientific papers. But it was all bogus. There were very few incentives to work except for coercion. Well, as soon as coercion was reduced, a runaway corruption, fraud, and thievery took place leading to the USSR collapse. The entire Soviet economic science was built on a dogmatic ideological foundation to keep the Soviet Communist Party in political & economic power. It is clear that today Western world is trying to retry the 'Soviet Way'.
As a matter of fact, China has the same problem now. During his last years in power, Stalin understood the problem and tried to remove Communist bureaucracy from political power restricting it to the areas of ideology and propaganda. The Soviet Communist bureaucracy did not like it, so they killed Stalin. In other world, by clinging in absolute power, Chinese Communist Party dooms the country to major political/economic turmoil.
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Posted by Bischoff on 02/03/13 06:53 PM
@k33j88
K33: "Would someone please explain how the dollar's reserve currency status is affected/or not, by the "currency wars". Throw in the "Libor scandal's" manipulation of the interest rate (banking corruption at its finest), and you have quite a toxic brew. Let's not overlook the North American Union(NAU)and the Amero."
BISCHOFF: The currency wars have absolutely no effect on the USD as world reserve currency. The FED central bank manages the USD/FRN, just like any other government manages its currency. There are certain rules, as regards the major currencies which are normally worked out, at least temporarily, at the G8, or G10, or G20 meetings.
The oil bills of all the countries in the world are still invoiced in USD. The world needs USDs to pay the oil bills. Unless the Saudis, who set the world price for oil, quote oil in an other currency than then USD, the reserve status of the USD will not change, regardless of any "currency war".
As regards the Libor rate manipulation, this is what happens when the prime interest rates are set by central banks. Under the gold standard, the prime interest rate is a market factor brought on by the willingness of savers to part with their gold savings for an interest return. When the central bank sets the prime interest rate, the market decision is replaced by a decision of a committee of humans. Their judgment is influenced by the state of the banks, not by the requirement for a return on investment to savers. Libor is merely part of the manipulation of interest rates under a worldwide managed currency system.
As regards the North American Trade Union, I see nothing wrong with free trade, except that the legal system in Mexico is based on statutory law, while the legal system in the U.S. and Canada (Quebec has a bijudicial system) is based on common law. This presents problems in providing an even playing field for the economic union called the North American Trade Union.
As regards the Amero, it is just another irredeemable currency. Which governmental bodies will create the new central bank to create the Amero... ??? What control will you have over the Amero central bank... ???
Not that the American people exercise much control over the FED central bank, but they could, if they were willing to throw out of office the federal politicians who vote debt on which currency creation is based.
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Posted by Bischoff on 02/03/13 11:09 AM
@Danny B
DANNY: "Can America do a selective default, institute a "North Korea" economic system and go to war with the Sino-Soviets? Will the U.S. military allow this?"
BISCHOFF: A parallel currency system, redeemable in gold and based on the RBD, circulating alongside with central bank currency will settle our debt problems through the FX markets.
As to major war, the fear is way overblown. China, nor Russia, nor the U.S. want war. The U.S. has kept the world economic system going by using the value of oil to define the value of an irredeemable USD. It had to expend untold riches to keep the "price" of oil under control. This effort has cost the U.S. dearly, but it has resulted in an much more interdependent world. It is much harder these days to propagandize a population into going to war. I am convinced that Russia and China is as concerned about North Korea and Iran as much as the U.S. is. That doesn't mean that they will not seek advantages for themselves when dealing with these countries in world affairs.
Right now, with the crew running the country under Obama, both Russia and China won't have to worry that the U.S. will get "one up" on them.
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Posted by Bischoff on 02/03/13 10:53 AM
@RR
CORRECTION: "No, lets restore redeemable RBD currency created in the private sector which serves as a instrument for work performed."
SHOULD READ: "No, lets restore redeemable RBD currency created in the private sector which serves as a instrument to CLEAR work performed.
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Posted by Bischoff on 02/03/13 10:51 AM
@RR
RR: "Let us make the currency hundred times stronger so that everyone has to work hundred times harder to pay off their past debts. Seems like a plan."
BISCHOFF: No, lets restore redeemable RBD currency created in the private sector which serves as a instrument for work performed. Let RBD currency compete with the FED central bank's FRNs. The FX markets will in short order sort out the debt owed.
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Posted by Bischoff on 02/03/13 10:41 AM
@nail
NAIL: "You gotta quit broadcasting stuff that's been discredited since the 19th century, the labor theory of value. Gold, like any other commodity, is worth what people are willing to pay for it. A change in the price of gold doesn't mean that mining and refining it has become easier or more difficult, what it means is that the value of the currency in relation to gold has changed."
BISCHOFF: Any subject of importance in political economy, such as the creation of VALUE raises controversy, because it is apt at every point to come into contact with the pecuniary interests of one group or another.
It is the complexity of the subjects with which political economy deals that makes it relatively easy to pawn off on the unreasoning all sorts of absurdities.
Only in a currency system based on the QTM can you claim that gold is just another commodity worth what people are willing to pay for it. However, my entire comments were directed at the inadequacy of of a currency system based on the QTM.
In turn, you throw out the "labor theory of value" which refers to the ideas of Marx and Ricardo, and you claim that since their theories of LABOR VALUE have been debunked, to use the WORK required to mine and refine gold as a standard of value, and to use aliquot parts of gold as the standard of price has no reasonable basis.
When you make comments as you did in this case, it is not good to depend on others to save yourself the trouble to think for yourself. I won't go on to disect your your comment regarding the gold standard (measure of value), other than to say that gold has value, bit it has no price, even under the QTM currency system.
The price of one ounce of gold is NOT $1,800 USD. The price of one (1) USD is 1/1800 of an ounce of gold. The sooner you can get that through your head, the sooner you can understand USE VALUE, EXCHANGE VALUE, PRICES, PROFITS and arbitrage (MARKETS).
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Posted by dave jr on 02/03/13 09:24 AM
Seems it was a week or two ago I stated my opinion, that the second biggest fraud operating under our noses is manipulated exchange rates.
The first fraud, actually several, takes away the function of currency creation from market forces, so that currency no longer represents the quantity and quality of goods produced in the host economies.
Without this and the second fraud, weak and strong currencies would not exist, or at least be much of a factor. Because again, in a free market if we ever saw one, trade would balance or seek equalibrium in regard to quantity and quality of goods traded against quanity and quality of currencies traded.
It is important to realize that the world is trying to globalize due to advancements in technologies. Better communications, production and transportation allow resources and goods to reach further markets. Elite bankers know this and have positioned themselves to take advantage and control of it for their own agenda.
Like any war, nobody will win a currency war except the intellectual manipulative sponsors.
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Posted by k33j88 on 02/03/13 05:12 AM
Would someone please explain how the dollar's reserve currency status is affected/or not, by the "currency wars". Throw in the "Libor scandal's" manipulation of the interest rate (banking corruption at its finest), and you have quite a toxic brew. Let's not overlook the North American Union(NAU)and the Amero.
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Posted by RR on 02/03/13 04:23 AM
Let us make the currency hundred times stronger so that everyone has to work hundred times harder to pay off their past debts. Seems like a plan. Great article.
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Posted by Danny B on 02/03/13 01:07 AM
Bischoff, thanks for the clarification.
The next absolutely unavoidable link in the chain of logic is the commonly used deterrent of war.
Did we force Japan to start belligerence with China to start a proxy war?
Since America now exports both oil and food, do we believe that we can start a non-nuclear war with China?
Can America do a selective default, institute a "North Korea" economic system and go to war with the Sino-Soviets?
Will the U.S. military allow this?
Lots of unpleasant possibilities.
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Posted by nailheadtom on 02/03/13 12:15 AM
Bischoff on 02/02/13 10:34 PM
You gotta quit broadcasting stuff that's been discredited since the 19th century, the labor theory of value. Gold, like any other commodity, is worth what people are willing to pay for it. A change in the price of gold doesn't mean that mining and refining it has become easier or more difficult, what it means is that the value of the currency in relation to gold has changed.
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Posted by Bischoff on 02/02/13 11:40 PM
@Danny B
DANNY: "China has positioned themselves as powerful brokers of both gold and oil. The Remnimbi is approaching reserve status. Who knows?"
BISCHOFF: Saddam Hussein had invited the Chinese to come into Iraq for a technological "update" the oil production infrastructure. When George W. Bush invaded Iraq in March of 2003, the Chinese were days away from putting boots on the ground. By being there first, George W. Bush avoided an otherwise serious confrontation with the Chinese. At the same time, he saved the U.S. Dollar by controlling Iraq's oil reserves. He saw to it that Iraq's practice of selling oil for EUROs was discontinued.
What happens now that Obama is bugging out of Iraq, is anybody's guess. The only indication Obama has given is found in his nominations of Kerry as Secretary of State, and Hagel as Secretary of Defense.
We live in interesting times.
As regards the Chinese brokering oil and gold, all they want to do is gain control over oil reserves. However, as long as the Saudi's will quote oil in USDs only, there is little chance that the Chinese Renmimbi will become the world reserve currency any time soon.
As regards brokering gold, China does not want to control the "price" of gold. They know that gold is money, and therefore gold really has no "price". China is intent on growing its gold reserves through domestic production and purchases in the precious metal markets. However, they are very careful not to upset the "price" of gold in terms of USD. China urges its population to keep savings in the form of gold. The largest "gold market" is not in London or in New York. It is in Shanghai.
The Chinese gold stocks, both government and individual, are being grown to support a redeemable Yuan planned for introduction in the future. The Chinese are not interested in trading gold for irredeemable currencies. They collect physical gold. They will mine it both domestically and internationally, and they will buy it with the USDs they get from selling us their bobbles and bangles.
When they are good and ready, meaning in a position to let their private industry sprout, they will introduce a redeemable Yuan. The world reserve currency will then not be the USD or the Yuan. It will be gold. IOW, the Chinese will restore the gold standard.
As far as I am concerned, this cannot happen too soon. If China goes to a redeemable Yuan, it will force the U.S. to return to a redeemable USD. What really matters then is the productivity of the Chinese people versus the American people. On an even playing field, the Americans can't be beat.
Except, with the creation of a redeemable Yuan, China will also introduce to its economy the land use policy adopted by the Taiwanese several decades ago. This land use policy makes possible the employment of labor and capital without the disadvantage having both exposed to heavy taxation.
With the present form of croney capitalism practiced by Obama, for which California with its Prop 13 taxing policy has set the example, the U.S. wouldn't have a chance against China, as far as productivity is concerned.
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Posted by Bischoff on 02/02/13 10:34 PM
@Justin
As a clarification, the "amount of work expended" to produce a good is expressed by the "price" of a good. The price is quoted in aliquot parts of gold/redeemable RBD currency.
The value of a specific amount of gold, such as the specific amount of gold set by the U.S. Congress under Section 8 of Article I of the U.S. Constitution to be One (1) U.S. Dollar is represented by the work required to mine and refine that specific quantity of gold.
The value of gold may change depending on the amount of WORK (human exertion) required to mine and refine it. However, the aliquot parts of gold in which "prices" of goods are quoted do not change.
Gold is the standard for the measure of value (WORK required to mine and refine it). When technological progress reduces the amount of WORK (human exertion) required to mine and refine it, gold looses value. To the extent that the technological progress also benefits the productive sector in saving LABOR (WORK), the value difference between gold and all other goods is a wash. To the extent there is a difference, it will be expressed in the "price" of goods.
Gold itself has no "price", because it is the standard by which the value of goods are measured. However, what stays constant and does not change are the aliquot parts of gold in which the "prices" are quoted. This is also known as the "Standard of Price".
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Posted by Danny B on 02/02/13 08:53 PM
The world planners and the CBs are playing a game of round-robin on currency devaluations. The Swiss undoubtedly didn't want to play. The FED put huge pressure on them for disclosure. You can bet that all of the CBs put pressure on the Swiss so that there would be NO SAFE HAVEN for value. Wealth was flowing rapidly to the Swiss franc. Capital controls, disclosure, UNIVERSAL devaluations,,,,, ALL are necessary.
NO respectable currency could be allowed to be a reliable store-of-value.
The Western hegemon worked diligently to expunge gold as a store of value. You can bet that they don't want ANY currency to serve that function either.
The feces-for-brains who some refer to as the "elites" seem to have forgotten one small detail. As you expunge value, you expunge trust.
The Bundesbank and a few others have brought this small detail to the forefront.
The BOJ has reignited the currency wars. Competition and survival are on the ascendancy and trust is descendant.
China has positioned themselves as powerful brokers of both gold and oil. The Remnimbi is approaching reserve status. Who knows?
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Posted by Justin on 02/02/13 08:20 PM
Hear, Hear Mr Bischoff,
I don't subscribe to your 'amount of WORK expended' theory but everything else is spot on.
The quantity doctrine is the root of all evil.
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Posted by Justin on 02/02/13 08:13 PM
"a country with an infinitely valuable currency would see the best of all possible worlds"
I like the cut of Mr Schiff's jib here. Money is the most precious, the most precious could be said to have infinite value. Shame he doesn't make the connection between the quality of said currency & its value.
But how does Mr Schiff square his promotion of the quantity doctrine with the above statement? By his reckoning, a currency that doesn't exist, because the central bank hasn't printed any of it, would be the most valuable of all.
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Posted by bionic mosquito on 02/02/13 07:27 PM
It is time to put to bed the idea regarding a weak currency being good for an economy. I am glad to see Peter Schiff understands this, when he writes 'A strong currency keeps capital and raw materials costs low, enabling more productive workers to earn higher real wages.'
Antal Fekete also understands this issue well: 'To see the Friedmanite bunk in the true light of science we need only recall that devaluation always makes the terms of trade of any country deteriorate. The euphoria of exporting more will last only as long as the stockpiles of imported ingredients used by the exporting industry last. Ever after, the country will have to pay more for the imported ingredients and will also get less value for units of its exports - a double whammy that is certain to make trade imbalance deteriorate further.'
Click to view link
It is a simple concept, sadly misunderstood by too many.
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Posted by Bischoff on 02/02/13 05:14 PM
@dimitri
DIMITRI: "You can't even trust the trustworthy Swiss?"
BISCHOFF: In a world of "managed" currencies, there is no way for the Swiss to to exclude themselves from this worldwide manipulation. The fact that the Swiss central bank has held the value the SFr as high as it did until now, is no doubt due to large scale foreign currencies hedges put on by their export industry.
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