The Swiss National Bank: Negative Rates and Legal Counterfeiting
Last week, Thomas Jordan, the chairman of the Swiss National Bank (SNB) appeared on national television, stating:
The SNB still regards both foreign currency interventions and negative interest rates as vital to stem appreciation pressure on the Swiss franc…
The significance of these policies may be lost on many. Other than the US Treasury labeling Switzerland as a currency manipulator, no one at any level of government nor any prominent economist seems to have spoken out against the SNB. Luckily, several news articles explain the problem.
On February 2, Reuters released the following statement regarding negative interest rates:
The benefits of negative Swiss rates outweigh the disadvantages, Swiss National Bank policymaker Andrea Maechler said on Tuesday.
She told a panel discussion sponsored by the NZZ newspaper that the safe-haven Swiss franc’s strength would put Switzerland in a much worse position if not for negative rates.
This policymaker's statements cannot constitute “economics.” To claim things would be worse if not for negative interest rates in no way can be proven. Like the US dollar, the Swiss franc is highly sought. But unlike the Americans, the Swiss have been managing their currency for a very long time. Forgetting that negative rates defy logic, we find this notion of the Swiss franc acting as a “safe-haven” to be a problem the SNB decided to tackle. As Chairman Jordan claims:
If the SNB were to raise its policy rate from the current level of minus 0.75%, the franc would rise massively in value and the Swiss economy would be crippled.
The bank has somehow determined a strong currency is bad and that therefore negative rates help keep currency weaker, as to not “cripple” the economy with strong purchasing power and low prices. While negative rates punish savers in Switzerland, the continuation of these market interventions eventually impacts America and explains the vast holdings of US equities.
Another Reuters article on January 29 gets to why currency intervention is problematic:
The SNB makes a profit from its vast holdings of foreign currency investments built up during its long campaign to slow the rise of the safe-haven Swiss franc.
The SNB claims the objective is to devalue its currency, therefore, like the Federal Reserve, it expands its balance sheet (i.e., creates money). This newly created money is exchanged for US dollars then US equities are purchased. The countless dividends and billions in capital gains received is nothing more than a by-product of being compelled to devalue the Swiss franc.
By year-end 2020, their ongoing currency management had incidentally led to ownership of a $140.7 billion US equity portfolio. This is a $13 billion gain from last quarter. Given how lucrative foreign equity purchases can be, why every other central bank in the world doesn’t jump into the stock market remains a mystery. As reported:
The Swiss National Bank has agreed to a new deal with the Swiss government which could see the central bank increase its annual payments to Bern and the country’s local governments to 6 billion Swiss francs ($6.7 billion).
This makes for an increase of 2 billion from the previous year, which seems reasonable as:
The SNB said earlier this month it expected to make a profit of around 21 billion francs for 2020 as soaring gold and stock markets boosted the value of its foreign currency assets.
Also keep in mind that from Q1 to Q3 of 2020 the bank increased the size of its currency intervention total
to just over 100 billion francs, well above the 13.2 billion francs it spent for all of 2019 to buy foreign currency.
The curious case of the currency too strong for its own good is one to watch in 2021. If we look beyond the vague belief about how to best manage a currency or find an ideal exchange rate, there really is no mystery.
It’s one thing for a central bank to hold its own interest rates negative, but quite another to create digital francs, exchange them for digital dollars, then buy US stocks at virtually zero cost; all for the stated purpose of weakening the franc. But let’s be honest, if you owned your very own central bank, wouldn’t you do exactly what Switzerland is doing?