Blame Swiss Currency Mess On Crummy Central Bank Policies
Currency Crisis: The abrupt move by Switzerland's central bank to remove the cap on the franc-euro exchange rate has created turmoil from Europe to Wall Street. This is what you get when monetary policy runs amok.
The move caused an unprecedented 18% one-day surge in the Swiss currency's value against the euro. Since Switzerland's franc is one of the world's major currencies, the sudden surge has impacts far and wide.
The reason: The franc has long been a safe-haven currency, and an alternative to the euro, dollar and yen. A good chunk of Eastern Europe's debt is denominated in Swiss francs - not dollars or euros.
As an example, Bloomberg notes that 46% of all Polish home loans are in Swiss francs - not the plunging Polish zloty. So, in one brutal market move, many Polish homeowners can no longer pay their loans.
Then there are currency traders. With hedging margins as low as 2% of the amount invested, some investors were wiped out overnight. Some currency trading firms have also suffered catastrophic losses.
A Reuters headline, with classic understatement, summed it all up: "Swiss franc shock shuts some FX brokers; regulators move in."
It's that last one that got us. "Regulators" - that is, mostly the central banks themselves - are "moving in," even though they are the ones who caused the problem. Expect lawsuits, bankruptcies and perhaps even criminal charges. Just don't expect any action at all against the central banks for their malpractice.
This didn't have to happen. It wasn't a random event, like bad weather. We've made ourselves vulnerable to this through five years of a global central banking experiment gone awry.
If there was a trigger this time, it was the expectation by the Swiss that the European Central Bank, meeting next week, would double down on its quantitative easing program.
More money-printing would have put more pressure on the Swiss franc, forcing the Swiss to buy huge amounts of euro assets and putting their whole economy at risk. Finally, they said "enough!"
Now, they've cut their interest rate to a negative 0.75% - that is, you have to pay them to deposit money - and are no longer trying to maintain the 1.20 euro-franc exchange rate.
The worst part is that all this is a result of the six years' efforts by the world's central banks to flood the global economy with liquidity through quantitative easing and zero interest rates. Europe has been most aggressive, leading to the euro's plunge and investment paralysis for long-term projects.
In the U.S., we've been lucky. Our economy has been boosted by fracking and low energy prices, and the dollar has surged. With unemployment falling, many investors expect the Fed to raise rates later this year.
But trouble overseas has a way of coming back to us. Japan is already in a slump, China is undergoing a dramatic slowdown and Europe is sliding into recession. Will the Swiss move be a trigger for another global crisis? If the world catches cold, will the U.S. sneeze?
