STAFF NEWS & ANALYSIS
Deflation! … The Swiss Surrender
By Staff News & Analysis - January 16, 2015

World deflationary forces have swept away Switzerland's defences … A month ago the Swiss authorities were still claiming that their currency floor was crucial to prevent a deflation trap. They were right … The Swiss National Bank has lost control. It is the latest in a list of venerable central banks to be overwhelmed by deflationary forces and global economic disorder. – UK Telegraph

Dominant Social Theme: Deflation is coming … let us print!

Free-Market Analysis: The meme is strong in this one, apologies to Star Wars. Every time we turn around, we're seeing more mainstream reports about the dangers of deflation.

Now, having rejected their gold referendum, the Swiss have de-pegged their currency from the floundering euro … just as the ECB's Mario Draghi is getting ready to pump a trillion or so in new currency into the eurozone.

It seems like a natural move, something that had to be done. But notice how it enforces the larger meme. So much of the economic news today reinforces the chorus: Print … print … print.

It's convenient. Only monopoly central banking can save us from deflation. Only the state can salvage our lifestyles and societies now. We've written a lot about this recently, but it's an important topic. Realize it's a promotion, and you'll understand better how to react.

Here's more on this latest development.

The country is already in deflation. The Swiss franc ended Thursday 13pc higher after the SNB abandoned its three-year efforts to defend a currency floor of 1.20 to the euro. "We have a free exchange rate once again," said the SNB's president, Thomas Jordan.

Indeed, but nobody is fooled by the SNB's attempt to spin this as benign. "This is a huge hit to their credibility," said Deutsche Bank.

The official statement claimed that the exchange floor is no longer needed and that "overvaluation has decreased as a whole since the introduction of the minimum exchange rate". This is eyewash.

"They have had to throw in the towel. They couldn't hold the line anymore," said David Owen, from Jefferies Fixed Income. "This is going to cause extreme pain for parts of the Swiss economy but the SNB are trapped."

The franc has been level over the past year on a trade-weighted basis. Even before Thursday morning's events, the exchange rate was 25pc above its decade-long average. It is now 40pc higher. Just one month ago the SNB argued in its quarterly report that currency floor was imperative to stop Switzerland relapsing back into deflation.

"In view of heightened deflation risks, the minimum exchange rate remains the key instrument for ensuring appropriate monetary conditions. A further appreciation of the Swiss franc would have a major impact on salary and price structures. Companies in Switzerland would be forced to cut costs drastically again to remain competitive."

The statement was true then. The threat is much greater now, made all too clear by the howls of protest this morning from the Swiss export sector. Nick Hayek, head of Swatch Group, said the collapse of the floor would cause havoc. "Words fail me. Today's SNB action is a tsunami; for the export industry and for tourism, and for the entire country," he said.

Oh, come on, Swatch! Suck it up. Is it such a disaster to have a strong currency that can buy lots of things for a little bit?

Again, the message being sent here is that the modern central banking system provides our last best hope. They are all printing now … Japan, China, Europe, India … Even when the emphasis is on tightening, as it is in the US, the chances are there is surreptitious (or not so surreptitious) loosening going on.

A tsunami of capital is about to flood the world, even more than the US$50 trillion that central banks are said to have injected one way or another in the past five or so years. Keeping rates artificially low is one way. Various kinds of short-term lending is another – especially when the banks don't insist on repayment.

We once predicted that the world's central banks would print US$100 trillion to dig themselves out of the 2008 financial crash. And they are well on their way.

We have to examine how we got here to really understand the faux hysteria now taking place. For one thing, large corporations don't necessarily suffer from appreciating currency because they can build their products and present their services all around the world. Swatch presumably can do the same thing.

This leaves the smaller corporations and Mom and Pop shops. But often a good deal of business being performed by these smaller entities takes place within the borders of a given country. The real impact for such groups may have more to do with a reduction of costs for imported goods than agony over higher prices that must be charged abroad.

Some are inconvenienced, of course … and can be hurt when their country's money becomes more expensive. But we would suggest that the pain is being exaggerated and the damages are being overstated.

People are resourceful and, yes, there are worse things to grapple with than an appreciating currency. Somehow the horrible depreciations of currency are never discussed with the forcefulness that deflation attracts.

In a modern central bank environment, the deflation we're discussing is an inevitable outcome of an asset boom, and these booms are never properly discussed in the mainstream media, either.

The current "deflation" is part of the continuing hangover of 2008. It was then the market began to surrender, eventually traveling down in 2009 by 50 percent! People were wiped out. Fortunes were lost. Pensions were halved or worse. This is the agony of asset INFLATION.

Now comes monetary and price "deflation." But this sort of deflation is in many cases manipulated (see oil) or is the result of the refusal of central banks to easily allow the subsidence of half-decade-old asset bubbles. Only now is the air finally leaking away.

It is really cynical. The top bankers understand their system inevitably creates asset bubbles that, when popped, give way to disinflation and deflation. And at this point, they bellow once more for inflation. The inflation of paper money that only THEY can provide.

It's a sick system. Even the dilemmas are not presented properly. Here's how the article ends:

The European Central Bank can no longer keep dragging its feet on QE. Whether the ECB announces a €1 trillion blitz next week, or just €500bn, funds are already flooding into Switzerland from the eurozone. The SNB has to pick its poison. It is damned for one set of reasons if it holds the currency peg, and damned for another set if it ditches the peg. Welcome to the world of horrible dilemmas facing modern central banks.

In fact, the dilemmas are not FACING central banks. The dilemma is created BY central banks. The kinds of uncompetitive monopoly/fiat currency printed by central banks around the world virtually guarantees this kind of monetary tension.

The only way to get rid of this unpleasant cycle is to remove the money monopoly. In the meantime, please try to understand the reality of the mechanism and the true outcome of the deflationary meme – which will be to provide a justification for massive money printing. It is this money printing that will give rise to further asset inflations … and then deflations over time until there is perhaps one final explosive bust.

After Thoughts

But these are not natural occurrences, and they are not being properly expressed in the mainstream media. Make up your own mind. As always, we'll try to provide you with the "other side."

Posted in STAFF NEWS & ANALYSIS
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