In a conversation with an economics PhD friend of mine last Thursday, I was indulging in my usual bloviation about the insanity of the notion that a weak currency is good for the economy. As I have ranted here previously, it may be good for debtors, who can pay back their obligations in inflated currencty, and it may be a short term benefit for some exporters, but it certainly isn’t good for the economy. As my friend pointed out, it may also be good for politicians, since the resulting inflation may cause a nominal increase in the income subject to taxation, with the net effect of pushing it into higher tax brackets.

In the course of our conversation (and in my previous post), I cited Switzerland as a country that clearly should be able to get the benefits of both a strong currency and strong exports, simply by adjusting prices instead of trashing the currency.

The very next day, the SNB announced that they were dropping the CHF1.20 ceiling vs. the Euro, causing a great deal of wailing and gnashing of teeth in the financial world, and no doubt laughing all the way to the bank. What a sucker play! First they in effect devalue the currency by 12% or so overnight when they institute the CHF 1.20 peg, screwing over everyone who happened to be holding Swiss francs at the time. Then they wait until everyone adjusts their positions to the new exchange rate, and they send the CHF 30% or more in the other direction (initially — currently it’s up about 20%) . Apparently several large institutions are now in deep trouble over leveraged positions, and pity the poor suckers in Eastern European countries who took out home mortgages denominated in Swiss Francs. But you can be very sure that those lovable Swiss bankers (and also, I will venture the guess, those same exporters who pushed for the 1.20 peg) were correctly positioned to make a killing.

Of course, this likely comes at a cost. The Swiss have now, four times in quick succession, broken trust with all those who believed the “safe haven” fantasy. First they removed the gold backing of the currency; then, to save UBS and Credit Suisse from the consequences of their foreign adventures, they caved in to U.S. pressure and retroactively eliminated banking privacy; and now they have twice engaged in blatant exchange rate manipulation. As a safe haven for preserving wealth, Swiss banks now rank slightly below Argentinian government bonds. A two hundred year old reputation, completely destroyed in a decade! Nice going, guys!

Anyway, in the aftermath, I notice that the commentary seems to be coming around more to my enlightened point of view. For example, from this editorial by Edward Harrison on the Foreign Policy magazine web site:

A strong currency is not a bad thing. The Swiss franc, the Japanese yen, and the German deutsche mark all appreciated against the U.S. dollar for years in the 1970s and 1980s and their economies remained strong. In fact, these economies had some of the best growth rates in the developed world. A strong currency is a good thing because it means you have to give up less in productive capacity for the goods and services you buy from abroad. But in a world in which domestic demand growth is weak and growth globally is also weak, countries don’t want a strong currency for the simple reason that it means short-term pain as exports become less competitive in the shrinking pie of the global economy.

Finally! Except, he’s wrong about “countries don’t want a strong currency”. Some exporters and politicians don’t want a strong currency, but they aren’t the country. I’m pretty sure that what the country wants is sound money, reasonable interest rates, and a whole lot less cheating and game playing by those entrusted with control over the banking system. (Don’t hold your breath.)

Even the Economist took an uncharacteristically anti-interventionist view:

But the SNB should not be lambasted for removing the cap. Rather, it should be criticised for adopting it in the first place. When central banks try to manipulate exchange rates, it almost always ends in tears.

Abenomics, anyone?

And, of course, all of this comes at a time when the U.S. dollar is, somewhat inexplicably in view of ZIRP and QE-infinity, gaining in value, if not in absolute terms, at least against most other currencies. Which is at least some improvement for those of us living in other countries on an income denominated in dollars, after watching the geniuses in Washington manage to drag the dollar south by ~30 percent against the Philippine peso.

Are we seeing the first glimmerings of the dawn of a new era of, if not sound money, at least not-deliberately-flushed-down-the-toilet money?

If only.

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