STAFF NEWS & ANALYSIS
Swiss Government Ruins Franc
By Staff News & Analysis - September 07, 2011

The Swiss franc tumbled against the euro and dollar on Tuesday after the Swiss National Bank set a minimum exchange rate target of 1.20 francs per euro to combat the strength of the currency, which it says poses a risk to the economy. Swiss franc falls sharply against the euro after the Swiss National Bank pegged the exchange rate at SFr1.20 against the euro. – UK Telegraph

Dominant Social Theme: The Swiss, gallantly, will do whatever they need to in order to defend the euro, even if it means debasing their own currency.

Free-Market Analysis: Switzerland is one of those rare European countries that are doing relatively well in a time of international economic crisis. But doing well is not something that can be tolerated in the "new" Europe. The Swiss have come under enormous pressure on a variety of fronts to make their sociopolitical environment conform to the larger dysfunction of the EU – and now they're ruining their currency at the behest of Brussels.

The Swiss move to set what is basically a link between what might be considered a dying euro (in its current form anyway) and the Swiss franc itself, which has been rising in value dramatically as people seek an alternative to inflated paper, will have the effect of debasing the value of the franc. What are the results? No more safe haven in the Swiss franc. Inevitably, this will benefit gold, which will be seen as rising as paper currencies around the world are further debased.

Why would the Swiss debase their currency? Because in fact there are two Switzerlands, as we have discussed before. The REAL Switzerland is the home for major, fantastic wealth. Many believe Switzerland is where the great banking families of the world store their funds, often in the form of gold.

The idea, then, is that the Swiss banking industry is something of a charade: The great banking families that attempt to run the world are likely worth trillions, but so much money brings problems. Switzerland provides the banks.

But the Swiss banking industry is not just restricted to these families. In order to disguise the families' patronage, an industry has been created to serve others as well. This is not a necessary industry for the exclusive private banks that serve the power elite, but it does disguise exactly whom the industry is focused on.

Again, there are two Switzerlands. The Switzerland that caters to the West's impossibly wealthy families remains exclusive and untouched. The Switzerland that has been created to serve the needs of its citizens and others who take advantage of its banking services is under severe attack.

It is the second Switzerland that we are concerned with here, today, the Switzerland that has again debased its currency. It is this Switzerland that removed the link between gold and the franc at the beginning of the 21st century. But nonetheless the Swiss franc was still seen as having an implicit link to gold. This could not be tolerated as every time the franc went up in value, the euro and the dollar were seen as more and more unattractive.

Of course, the relative valuations were accurate. Both the euro and the dollar are continually debased. But the franc has served as a kind of metaphorical reproach for these actions. Creating a formal link between the euro and the franc should be seen within this context.

Of course, none of this analysis will likely find its way into the mainstream press. Even at the UK Telegraph, which tends to be more honest about money than most, several articles covered the move regarding the franc by reproducing gobbledygook reports about valuations – as if the numbers were the story rather than the deliberate debasing of a currency by a bank that is supposed to be looking out for the best interests of the Swiss people. (It obviously is not.) Here's some more from the Telegraph article:

The single currency leapt to the target almost immediately on trading platform EBS from levels of 1.1270 before the announcement. It was last up further at SFr1.2150, up around 9pc on the day. The dollar also jumped to 0.8370 francs against around 0.8000, while the euro rose sharply to $1.4286, up more than 1pc on the day after trading almost flat beforehand.

"Our model suggests a minimum rate of 1.25 in euro/Swiss is needed to ward off a deflationary threat, which suggests we could see a move to 1.25-1.30 over the next month, maybe sooner," said Gavin Friend, currency strategist at National Australia Bank. The SNB said it would enforce the minimum target exchange rate by buying foreign currency in unlimited quantities.

To cushion the economy from a downturn as the strong franc hurts exports, the SNB cut its already low interest rate target to nil on August 3. It is also boosting the amount of liquidity in the banking system, effectively driving banking interest rates into negative territory, and had threatened further measures.

While the above seeks to drown salient facts in a flood of numbers, the last paragraph is significant. The SNB has been struggling with the strength of the franc for years. As a last resort, it had cut interests rates "to nil." But even this desperate move was not enough to make the franc look unattractive. A formal linkage was eventually the only solution.

The link is no victory for the euro or the dollar, though it may be reported that way. Such obvious moves are signals to the market that the corrosive conditions causing them are spiraling out of control. What the Swiss have done is essentially fixed the price of the franc: The trouble is that price fixing doesn't work. The Swiss are building up a good deal of grief with such moves. They shall be re-expressed in other ways – most likely with a further rise in the price of gold, which is now one of the only "safe havens" left.

The Swiss move smacks of desperation, and we can see why. Today is the Big Day when the German Constitutional Court is supposed to rule on the constitutionality of the bailouts to which Chancellor Angela Merkel has committed Germany.

If the Court makes significant adjustments to these bailouts, or casts doubt on their legitimacy, moves to support the EU and the euro will become even more dubious. Markets would surely become even more volatile – and bank solvency in Europe especially would be seen as at-risk.

Of course, bank solvency IS at risk. In fact, it is probably not too strong a statement to say that many of Europe's major banks are under-water, were serious standards applied to them. Of course, if one wants to delve deeper, one needs to question the fiat money system itself.

Central banks print money from nothing and the "money center" banks chosen to distribute this phony currency will eventually reap the inevitable consequences of insolvency. And this is exactly what is happening. Again, this week the finance ministers of Germany, the Netherlands and Finland have met to discuss the failing solvency of Greece. Finland (and likely German) want collateral for loans to Greece

Another tranche of aid is soon to be delivered to Greece, unless agreements cannot be reached. But after nearly three years of repeated crises, one wonders just how much more the Greeks and the rest of Europe can stomach. At some point, markets will reassert themselves and the Day of Reckoning will doubtless begin.

Increasingly the EU and the euro look like an old jalopy that has been patched and repatched so many times that it barely runs. It's not just Greece, of course. The entire Southern flank of Europe (the PIGS) is broke. This is a direct result of the EU, its profligacy with money and the debasement of the euro.

Now the Eurocrats, in their desperation, have turned to outright price-fixing, but price-fixing never works. Never – especially when it is undertaken to disguise the weakness of other currencies such as the euro and the dollar. The franc-euro linkage will be portrayed in all sorts of ways in the mainstream media – most importantly as a way "wise" central bankers have chosen to soothe volatility. It is nothing of the sort.

After Thoughts

The methodologies being chosen smack of more and more desperation. One beings to sense that the whole rotten edifice could tumble down – or at least come in for a major adjustment such as a deliberate shrinkage of the EU or the Eurozone. At some point, it may begin to look inevitable.

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