Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Why Most Investors LOST Money by Investing in ARK FUNDS - 27th Jan 22
The “play-to-earn” trend taking the crypto world by storm - 27th Jan 22
Quantum AI Stocks Investing Priority - 26th Jan 22
Is Everyone Going To Be Right About This Stocks Bear Market?- 26th Jan 22
Stock Market Glass Half Empty or Half Full? - 26th Jan 22
Stock Market Quoted As Saying 'The Reports Of My Demise Are Greatly Exaggerated' - 26th Jan 22
The Synthetic Dividend Option To Generate Profits - 26th Jan 22
The Beginner's Guide to Credit Repair - 26th Jan 22
AI Tech Stocks State Going into the CRASH and Capitalising on the Metaverse - 25th Jan 22
Stock Market Relief Rally, Maybe? - 25th Jan 22
Why Gold’s Latest Rally Is Nothing to Get Excited About - 25th Jan 22
Gold Slides and Rebounds in 2022 - 25th Jan 22
Gold; a stellar picture - 25th Jan 22
CATHY WOOD ARK GARBAGE ARK Funds Heading for 90% STOCK CRASH! - 22nd Jan 22
Gold Is the Belle of the Ball. Will Its Dance Turn Bearish? - 22nd Jan 22
Best Neighborhoods to Buy Real Estate in San Diego - 22nd Jan 22
Stock Market January PANIC AI Tech Stocks Buying Opp - Trend Forecast 2022 - 21st Jan 21
How to Get Rich in the MetaVerse - 20th Jan 21
Should you Buy Payment Disruptor Stocks in 2022? - 20th Jan 21
2022 the Year of Smart devices, Electric Vehicles, and AI Startups - 20th Jan 21
Oil Markets More Animated by Geopolitics, Supply, and Demand - 20th Jan 21
WARNING - AI STOCK MARKET CRASH / BEAR SWITCH TRIGGERED! - 19th Jan 22
Fake It Till You Make It: Will Silver’s Motto Work on Gold? - 19th Jan 22
Crude Oil Smashing Stocks - 19th Jan 22
US Stagflation: The Global Risk of 2022 - 19th Jan 22
Stock Market Trend Forecast Early 2022 - Tech Growth Value Stocks Rotation - 18th Jan 22
Stock Market Sentiment Speaks: Are We Setting Up For A 'Mini-Crash'? - 18th Jan 22
Mobile Sports Betting is on a rise: Here’s why - 18th Jan 22
Exponential AI Stocks Mega-trend - 17th Jan 22
THE NEXT BITCOIN - 17th Jan 22
Gold Price Predictions for 2022 - 17th Jan 22
How Do Debt Relief Services Work To Reduce The Amount You Owe? - 17th Jan 22
RIVIAN IPO Illustrates We are in the Mother of all Stock Market Bubbles - 16th Jan 22
All Market Eyes on Copper - 16th Jan 22
The US Dollar Had a Slip-Up, but Gold Turned a Blind Eye to It - 16th Jan 22
A Stock Market Top for the Ages - 16th Jan 22
FREETRADE - Stock Investing Platform, the Good, Bad and Ugly Review, Free Shares, Cancelled Orders - 15th Jan 22
WD 14tb My Book External Drive Unboxing, Testing and Benchmark Performance Amazon Buy Review - 15th Jan 22
Toyland Ferris Wheel Birthday Fun at Gulliver's Rother Valley UK Theme Park 2022 - 15th Jan 22
What You Should Know About a TailoredPay High Risk Merchant Account - 15th Jan 22

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

The Swiss Franc and The Tragedy of the Euro

Currencies / Euro-Zone Feb 10, 2015 - 04:35 PM GMT

By: Philipp_Bagus

Currencies

Philipp Bagus, author of The Tragedy of the Euro recently spoke with the Mises Institute about recent developments in Switzerland and the European Monetary Union.

Mises Institute: In January, the Swiss central bank unpegged the franc from the euro. What does this mean for the future of the Swiss franc?


Philipp Bagus: The Swiss central bank admitted a huge and costly error by unpegging the franc from the euro. First, they chained the Swiss franc to the sinking ship that is the euro. Then, once they found themselves under water and half drowned, they decided to cut the chain. Moreover, the Swiss national bank endured important losses on euro-denominated investments. These losses, borne by all Swiss franc users, in a sense reflect the hidden subsidies given to the Swiss export industry in recent years. Now, the Swiss franc will likely appreciate compared to currencies that are being inflated, such as the euro.

MI: Why was the Swiss National Bank (SNB) chained to the euro in the first place?

PB: By establishing a fixed rate for the franc against the euro, the SNB had committed itself to follow the European Central Bank. So the ECB, managing the crisis of its own poorly constructed currency, was indirectly determining the Swiss monetary policy as well.

MI: Why do you describe the euro as a sinking ship?

PB: The euro is badly designed. There is one central banking system that can be used by a wide variety of governments to finance themselves. This is the tragedy of the euro: governments can finance their deficits indirectly through the central bank as their debts are pledged as collateral for loans to the banking system. Or they can be directly purchased by the central bank.

The effect of this policy is to externalize the costs of this monetization of the deficits on all users of the euro, some of them living in other countries. There is therefore an incentive in the euro countries to make deficits and accumulate debt, while externalizing costs on foreigners. They wanted to prevent this with the rules agreed upon within the Stability and Growth Pact, but no one feels bound by those anymore.

MI: Could this lead to the downfall of the euro?

PB: It has already led to an enormous debt for most countries. Add to that the expansionary monetary policy of the European Central Bank, which is always coming up with new tricks that put more money in circulation, such as their recently-announced quantitative easing.

As the number of euros increases, the value of each euro is diluted. The Swiss National Bank had decided to tie the franc to this depreciating currency, but apparently, by January, the Swiss had had enough.

MI: So does that mean we can now buy more goods with fewer francs?

PB: Well, you can buy fewer francs now than you could have when the franc was stronger. In a well-functioning economy, though, if you had economic growth and if people actually paid back their loans, the prices of goods would actually fall and people could buy more for their money. But, as it is, we do not benefit from strongly falling prices, because of this expansionary monetary policy. What we are experiencing with the falling gasoline prices or in the electronic goods sector, we could have witnessed in recent years in virtually all goods and services. But we didn´t. Thanks to central banks printing new money wildly.

MI: Who benefits from such a policy?

PB: You will benefit some players who get the newly created money first, and those who create the money themselves may benefit as well. These are people in the financial system, particularly banks, and within the state itself. Then, those who get the money first can shop with lots of new money, but at old prices. Then prices rise and the ordinary people can, for example, no longer afford real estate. The cost of living increases, but wages do not rise or not so fast as the cost of living. The benefits of economic growth are reaped mainly by the first recipients of the money and not by all.

MI: How does the state benefit?

PB: States can go further and further into debt thanks to this monetary policy, and they can further distribute the borrowed money to the civil servants and subsidized entrepreneurs. Because the initial recipients of paper money (i.e., the financial and banking sectors) benefit most from this, they are the ones who advocate it most loudly.

MI: How to correct such a monetary system?

PB: As long as you can create money by pushing some keys on a computer, nothing will change. We could simply add a zero to every franc and every euro. Then the money supply would be ten times greater, but we’d be no richer, because prices would also increase tenfold. Of course, the way monetary policy is done now is not like that. The new money is not injected equally to everyone in the economy by adding zeros to euros or francs. If it were done that way, no one would be interested in it anymore and no one would be shouting for more money printing.

To correct the system we need a money that cannot be produced by touching a key on a keyboard. As long as money can be produced at almost no cost, the temptation is great and the political pressure to do so is huge. We see this over and over in history.

MI: In what kind of system would this be possible?

PB: A system with full gold backing, is one example. Gold can not simply be created from scratch, you have to dig for it.

MI: How long will the paper money system last?

PB: If I knew that I could be very rich. It depends greatly on the monetary policy. And the financial and political elites will try to save the system because they benefit from it. They could try to reset the system. What is clear is that the debt held by so many states cannot grow much more. It is unlikely that you can pay back this debt through growth. Most countries are in a monetary trap. When interest rates rise, the states are bankrupt because they cannot pay the interest.

MI: How will the current system end?

PB: There are different ways and none of them are good for savers. Central banks could let the printing presses run faster and thus completely devalue the money. Then they could confiscate or tax away assets; a wealth tax as has been proposed by the International Monetary Fund. Or proceeding as in Cyprus, where there was a bail-in which bank creditors have been converted into shareholders. Or you take a haircut — the creditors must give up a large part of their claims. Or there is monetary reform. This is something like the reset button. You can then start all over again.

MI: Will new currencies emerge to replace the old ones?

PB: First of all, competition between currencies must be maintained, because people then can use the currency that they find most suitable for their purposes. A few currencies might then prevail. Gold or silver, and there might be even good electronic currencies such as Bitcoin. As a transition you could first, with the gold of the national bank, create a fully covered gold currency and then open up the market for other competitors.

MI: Is a gold standard a solution?

PB: I'm not fixated on the gold standard. In the competition between currencies, gold and other precious metals have historically proven to be good money. In 1914, governments nationalized our gold in Europe. After some back and forth the last bond to gold was abolished in the 1970s because it limited the governments in their spending orgies. Now we have a pure paper money system. We should set our monetary system back to the pre-1914 period. This time with a one-hundred-percent-backed gold standard — and open the competition in alternative currencies. Then people can choose freely. The big advantage is that these currencies are truly independent of politics. Gold cannot be politically manipulated. Un-manipulated money is better money than state money ever can be.

Philipp Bagus is an associate professor at Universidad Rey Juan Carlos. He is the author of The Tragedy of the Euro. See his website. Send him mail. See Philipp Bagus's article archives.

http://mises.org

© 2015 Copyright Philipp Bagus - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in