Virtually every day there is an eruption of lunacy from one central bank or another somewhere in the world. Today it was the Swiss central bank’s turn, and it didn’t pull any punches with regard to Russian billionaires seeking a safe haven from the ruble-rubble in Moscow or investors from all around its borders fleeing Mario Draghi’s impending euro-trashing campaign. The essence of its action was that your money is not welcome in Switzerland; and if you do bring it, we will extract a rental payment from your deposits.
For the time being, that levy amounts to a negative 25 bps on deposits with the Swiss Central bank—-a maneuver that is designed to drive Swiss Libor into the realm of negative interest rates as well. But the more significant implication is that the Swiss are prepared to print endless amounts of their own currency to enforce this utterly unnatural edict on savers and depositors within its borders.
Yes, the once and former pillar of monetary rectitude, the SNB, has gone all-in for money printing. Indeed, it now aims to become the BOJ on steroids—-a monetary Godzilla.
So its current plunge into the netherworld of negative interest rates is nothing new. It’s just the next step in its long-standing campaign to put a floor under the Swiss Franc at 120. That means effectively that it stands ready to print enough francs to purchase any and all euros (and other currencies) on offer without limit.
And print it has. During the last 80 months, the SNB’s balance sheet has soared from 100B CHF to 530B CHF——a 5X explosion that would make even Bernanke envious. Better still, a balance sheet which stood at 20% of Swiss GDP in early 2008—-now towers at a world record 80% of the alpine nation’s total output. Kuroda-san, with a balance sheet at 50% of Japan’s GDP, can only pine for the efficiency of the SNB’s printing presses.
As per the usual Keynesian folly, this is all being done in the name of protecting Switzerland’s fabled export industries.
Let’s see. During the most recent year, Switzerland did export $265 billion of goods, representing an impressive 41% of GDP. But then again, it also imported $250 billion of stuff. Accordingly, for every dollar of watches, ball point pens, (Logitech) mouses, top-end pharmaceuticals and state of the art high speed elevators it exported, it imported 95 cents worth of petroleum, raw and intermediate materials, semi-finished components and expensive German cars.
Accordingly, allowing the market to drive its FX rate below the magic 120 floor (i.e. appreciating the CHF) would not bring on Armageddon —just a reduction in its giant import bill to offset any loss of earnings from its export trades. Instead, however, the mad money printers at the SNB are pursuing an altogether different financial proposition. Namely, they are going massively and incorrigibly “long” the Euro, and, in fact, have already stuffed their bulging one-half trillion dollar balance sheet with vast emissions of the ECB’s unwanted euros.
Now why in the world would any rational investor want to get massively long the squabbling, dissembling monetary crackpots who run the ECB and the even worse gang of self-serving parasites who urge them on from Brussels? Needless to say, that question doesn’t require much contemplation. The fact is, the SNB’s crazy money printing scheme to throttle CHF appreciation is just plain irrational.
Yet this very irrationality is part and parcel of the central bank race to the currency bottom that is driving the global financial system toward a monumental implosion. Prior to Mario Draghi’s accidental discovery in mid-2012 that by the mere emission of words (“whatever it takes”), he could temporarily park a $1.3 trillion chunk of his balance sheet with the fast money traders of London and New York (i.e. they and the various national banks front-ran the promised QE), the ECB’s balance sheet had expanded at a blistering pace, as well.
In fact, between 2007 and early 2012, the ECB printing presses had been working overtime, tripling their footings in a relative heart-beat of historical time.
Facing this tsunami of euro, the SNB simply responded in kind. After only a modest rise in the CHF exchange rate, it has launched a veritable monetary rampage. Consequently, it has now committed what amounts to one-year’s output by the Swiss people to the dubious proposition that something will not go bump in the night among the German, French, Italian, Spanish, Greek, Dutch etc. patriots—–financially illiterate as they may be—who malinger in Frankfurt.
So add Thomas J. Jordan, Chairman of the SNB and PhD economist, to the rogue’s gallery of financial arsonists who are setting up the global financial system for a fiery conflagration. To nearly every last man and woman, these central bankers are now daily espousing pure monetary rubbish, making up theories as they go along to justify an out of control spiral of debt monetization and extreme interest rate repression.
To reprise, there is no “deflation” threat whatsoever in the Eurozone. It’s just made-up chatter among the financial apparatchiks based on the fact that the long-suffering citizens of these countries are finally enjoying a moment of price stability compared to the official 2% inflation “target” . Yet there is not a shred of proof that cutting the purchasing power of savings in half every working generation—–that’s what 2% compounds to over 30 years—-results in more growth and wealth.
Stated differently, the ECB is fixing to unleash a new round of QE based on mere ritual incantation. Buying the junk bonds of Italy, Spain, Portugal and Greece cannot possibly generate more productivity, enterprise or investment in the euro-zone. Interest rates are already at the zero-bound and households, business and banks are already saturated with “peak debt” and have been so since 2008.
What QE in the Eurozone will do is enable fiscal fraud in the peripheral countries and a further inflation of already lunatic valuations of sovereign debt. It is now an established fact that the Italian government, for example, cannot get out of its own way, and that its public debt is in a death spiral. Yet today the Italian 10-year is trading at a 1.9% yield because the fast money traders are happy to hold it on zero cost repo—- until the ECB takes it off their hands at an enormous windfall gain a few months down the road.
The above pictures are no more anomalous than today’s 35 bps yield on 10-year JGBs——the debt of a government which is hopelessly bankrupt and for which there is virtually not a single bid anywhere outside of the open market desk of the BOJ. Nor does it make any more sense than today’s heated rip on Wall Street based on the word “patient” at a point in the cycle where 71 months of free carry trade money has already inflated financial asset values to the nose-bleed section of history.
In short, the central banks of the world are embroiled in a group-think mania so extreme and irrational that it puts one in mind of the spasm of witchcraft trials that erupted in the Massachusetts Bay Colony nearly four centuries ago. As a practical matter, this mania amounts to a race to the currency bottom and the final extinguishment of the price discovery mechanism in every financial market on the planet.
Flying blind, the financial markets are thus bubbling–in the delirium phase—-like never before. That is, until they don’t.
Reprinted with permission from David Stockman.
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Former Congressman David A. Stockman was Reagan’s OMB director, which he wrote about in his best-selling book, The Triumph of Politics. His latest book is The Great Deformation: The Corruption of Capitalism in America. He’s the editor and publisher of the new David Stockman’s Contra Corner. He was an original partner in the Blackstone Group, and reads LRC the first thing every morning.
Copyright © 2014 David Stockman
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