Best of the Week
Most Popular
1. US Housing Market House Prices Bull Market Trend Current State - Nadeem_Walayat
2.Gold and Silver End of Week Technical, CoT and Fundamental Status - Gary_Tanashian
3.Stock Market Dow Trend Forecast - April Update - Nadeem_Walayat
4.When Will the Stock Market’s Rally Stop? - Troy_Bombardia
5.Russia and China Intend to Drain the West of Its Gold - MoneyMetals
6.BAIDU (BIDU) - Top 10 Artificial Intelligence Stocks Investing To Profit from AI Mega-trend - Nadeem_Walayat
7.Stop Feeding the Chinese Empire - ‘Belt and Road’ Trojan Horse - Richard_Mills
8.Stock Market US China Trade War Panic! Trend Forecast May 2019 Update - Nadeem_Walayat
9.US China Trade Impasse Threatens US Lithium, Rare Earth Imports - Richard_Mills
10.How to Invest in AI Stocks to Profit from the Machine Intelligence Mega-trend - Nadeem_Walayat
Last 7 days
Silver Medium-Term Trend Analysis - 20th June 19
Gold Mining Stocks Waiting on This Chart - 20th June 19
A Key Gold Bull Market Signal - 20th June 19
Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - 20th June 19
Investing in APPLE (AAPL) to Profit From AI Machine Learning Stocks - 20th June 19
Small Cap Stocks May Lead A Market Rally - 20th June 19 -
Interest Rates Square Minus Zero - 20th June 19
Advice for Financing a Luxury Vehicle - 20th June 19
Stock Market Final Blow Off Top Just Hit… Next Week Comes the FIREWORKS - 20th June 19
US Dollar Rallies Off Support But Is This A Top Or Bottom? - 19th June 19
Most Income Investors Are Picking Up Nickels in Front of a Steamroller - 19th June 19
Is the Stock Market’s Volatility About to Spike? - 19th June 19
Facebook's Libra Crypto currency vs Bitcoin: Five Key Differences - 19th June 19
Fed May Trigger Wild Swing In Stock Index and Precious Metals - 19th June 19
How Long Do Land Rover Discovery Sport Brake Pads Last? - 19th June 19
Gold Golden 'Moment of Truth' Is Upon Us: $1,400-Plus or Not? - 18th June 19
Exceptional Times for Gold Warrant Special Attention - 18th June 19
The Stock Market Has Gone Nowhere and Volume is Low. What’s Next - 18th June 19
Silver Long-Term Trend Analysis - 18th June 19
IBM - Watson Deep Learning - AI Stocks Investing - Video - 18th June 19
Investors are Confident, Bullish and Buying Stocks, but… - 18th June 19
Gold and Silver Reversals – Impossible Not to Notice - 18th June 19
S&P 500 Stuck at 2,900, Still No Clear Direction - 17th June 19
Is Boris set to be the next Conservation leader? - 17th June 19
Clock’s Ticking on Your Chance to Profit from the Yield Curve Inversion - 17th June 19
Stock Market Rally Faltering? - 17th June 19
Johnson Vs Gove Tory Leadership Contest Grudge Match Betfair Betting - 17th June 19
Nasdaq Stock Index Prediction System Is Telling Us A Very Different Story - 17th June 19
King Dollar Rides Higher Creating Pressures On Foreign Economies - 17th June 19
Land Rover Discovery Sport Tailgate Not Working Problems Fix (70) - 17th June 19
Stock Market Outlook: is the S&P today just like 2007 or 2016? - 17th June 19
US China War - Thucydides Trap and gold - 16th June 19
Gold Stocks Bull Upleg Mounting - 16th June 19
Gold Price Seasonal Trend Analysis - Video - 16th June 19
Fethiye Market Fruit, Veg, Spices and Turkish Delight Tourist Shopping - 16th June 19
US Dollar Gold Trend Analysis - 15th June 19
Gold Stocks “Launch” is in Line With Fundamentals - 15th June 19
The Rise of Silver and Major Economic Decline - 15th June 19
Fire Insurance Claims: What Are the Things a Fire Claim Adjuster Does? - 15th June 19
How To Find A Trustworthy Casino? - 15th June 19
Boris Johnson Vs Michael Gove Tory Leadership Grudge Match - Video - 14th June 19
Gold and Silver, Precious Metals: T-Minus 3 Seconds To Liftoff! - 14th June 19
Silver Investing Trend Analysis - Video - 14th June 19
The American Dream Is Alive and Well - in China - 14th June 19
Keeping the Online Gaming Industry in Line - 14th June 19
How Acquisitions Affect Global Stocks - 14th June 19
Please Don’t Buy the Dip in Nvidia or Other Chip Stocks - 14th June 19
A Big Thing in Investor Education is Explainer Videos - 14th June 19
IRAN - The Next American War - 13th June 19
Boris Johnson Vs Michael Gove Tory Leadership Grudge Match Contest - 13th June 19
Top Best VPN Services You Can Choose For Your iPhone - 13th June 19
Tory Leadership Contest Betting Markets Forecast - Betfair - 13th June 19
US Stock Market Setting Up A Pennant Formation - 13th June 19
Which Stocks Will Lead The Cannabis Rebound? - 13th June 19

Market Oracle FREE Newsletter

Gold Price Trend Forecast Summer 2019

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

6 Critical Money Making Rules