Lessons from the Swiss unpegging the franc

 Go Lean Commentary

The financial world is all abuzz regarding the move by the Switzerland National Bank to unpeg their currency from their default value tied to the Euro.

Change is afoot:

o CNBC – VIDEO: Swiss franc soars, stocks tank as euro peg scrapped

o Business Insider-UK: The Swiss Franc Is Out of Control

o Bloomberg: Swiss Franc Stages Historic Rally as SNB Move Shocks Market

o Wall Street Journal: Swiss Franc Remains at Sky-High Levels; Swiss Stocks Regain Some Stability

o Financial Times (London): Swiss franc fallout claims more casualties

o Business Insider Editorial: The Decision To Let The Swiss Franc Cause Market Chaos

There are winners and losers from this new move.

How does it relate to the Caribbean?

The Swiss franc is not one of our focused currencies; we get little tourism from that country in particular and we do little trade. Yet this move is HUGE for Caribbean consideration.

This article is in consideration of the book Go Lean…Caribbean; it serves as a roadmap for the introduction and implementation of the technocratic Caribbean Union Trade Federation (CU) and Caribbean Central Bank (CCB) to provide better stewardship, to ensure that the economic/currency failures of the past, in the Caribbean and other regions, do not re-occur here in the homeland.

This Economist article here explains more fundamental dynamics from this global-currency strategy-play:

Title: The Economist explains: Why the Swiss unpegged the franc
By: C.W.
CU Blog - Lessons from the Swiss unpegging the franc - Photo 1IN THE world of central banking, slow and predictable decisions are the aim. So on January 15th, when the Swiss National Bank (SNB) suddenly announced that it would no longer hold the Swiss franc at a fixed exchange rate with the Euro, there was panic. The franc soared. On Wednesday one Euro was worth 1.2 Swiss francs; at one point on Thursday its value had fallen to just 0.85 francs. A number of hedge funds across the world made big losses. The Swiss stock market collapsed. Why did the SNB provoke such chaos?

The SNB introduced the exchange-rate peg in 2011, while financial markets around the world were in turmoil. Investors consider the Swiss franc as a “safe haven” asset, along with American government bonds: buy them and you know your money will not be at risk. Investors like the franc because they think the Swiss government is a safe pair of hands: it runs a balanced budget, for instance. But as investors flocked to the franc, they dramatically pushed up its value. An expensive franc hurts Switzerland because the economy is heavily reliant on selling things abroad: exports of goods and services are worth over 70% of GDP. To bring down the franc’s value, the SNB created new francs and used them to buy Euros. Increasing the supply of francs relative to Euros on foreign-exchange markets caused the franc’s value to fall (thereby ensuring a Euro was worth 1.2 francs). Thanks to this policy, by 2014 the SNB had amassed about $480 billion-worth of foreign currency, a sum equal to about 70% of Swiss GDP.

The SNB suddenly dropped the cap last week for several reasons. First, many Swiss are angry that the SNB has built up such large foreign-exchange reserves. Printing all those francs, they say, will eventually lead to hyperinflation. Those fears are probably unfounded: Swiss inflation is too low, not too high. But it is a hot political issue. In November there was a referendum which, had it passed, would have made it difficult for the SNB to increase its reserves. Second, the SNB risked irritating its critics even more, thanks to something that is happening this Thursday: many expect the European Central Bank to introduce “quantitative easing”. This entails the creation of money to buy the government debt of Euro-Zone countries. That will push down the value of the Euro, which might have required the SNB to print lots more francs to maintain the cap. But there is also a third reason behind the SNB’s decision. During 2014 the Euro depreciated against other major currencies. As a result, the franc (being pegged to the Euro) has depreciated too: in 2014 it lost about 12% of its value against the dollar and 10% against the Rupee (though it appreciated against both currencies following the SNB’s decision). A cheaper franc boosts exports to America and India, which together make up about 20% of Swiss exports. If the Swiss franc is not so overvalued, the SNB argues, then it has no reason to continue trying to weaken it.

The big question now is how much the removal of the cap will hurt the Swiss economy. The stock market fell because Swiss companies will now find it more difficult to sell their wares to European customers (high-rolling Europeans are already complaining about the price of this year’s skiing holidays). UBS, a bank, downgraded its forecast for Swiss growth in 2015 from 1.8% to 0.5%. Switzerland will probably remain in deflation. But the SNB should not be lambasted for removing the cap. Rather, it should be criticized for adopting it in the first place. When central banks try to manipulate exchange rates, it almost always ends in tears.

Source: The Economist Magazine – Financial Weekly (Posted 01/18/2015) –
 http://www.economist.com/blogs/economist-explains/2015/01/economist-explains-13

CU Blog - Lessons from the Swiss unpegging the franc - Photo 2The Swiss National Bank is unlike other central banks because it is not owned by the Swiss government but is a listed company with shareholders that include Swiss administrative regions, known as cantons, as well other public bodies and private individuals. This arrangement provides a cool 1 billion francs ($1.15 billion) annually split between Switzerland’s 26 cantons in proportion to their populations and, most importantly, was considered a safe and reliable stream of income. In fact, according to the Swiss Central Bank, the dividend had been paid every year for over 100 years until a 2013 collapse in the price of gold hurt the bank’s gold asset holdings.

Here is where the lessons for the Caribbean magnify. The Swiss National Bank is a confederation, much like the Go Lean roadmap for the Caribbean Union, Caribbean Central Bank (CCB) and the Caribbean Dollar (C$). The roadmap calls for a cooperative entity of the existing Central Banks in the region; fostering interdependence for the regional Greater Good. There is now interconnectivity of the financial systems, bank/currency troubles in foreign countries easily become trouble for the Caribbean region. Though there is elasticity from these foreign financial centers, the Caribbean is big enough (42 million people in 30 member-states) to streamline its own viable currency/financial/securities market – just like the Swiss (a country of 8 million people but with a $680 Billion economy).

The Caribbean has had to learn hard lessons on currency, as many of the CU member-states have had to endure painful devaluations over the past decades – on more than one occasions. Any attempt to reboot Caribbean economic landscape must first start with a strenuous oversight of the C$ currency. Oversight would imply actions in offense and defense of our own currency. This is what the Swiss (SNB) has done in the foregoing articles. They were at the mercy of the Euro Zone, being pegged to the Euro, as the Euro moved up, the franc would move up; as the Euro moved down, the franc moved down. This parasitical elasticity undermined their independence and any discipline on their part was neutralized by the Euro Zone.

This is the exact position of the Caribbean today. Most Caribbean currencies are pegged to the US dollar. As the dollar rises and falls, so do Caribbean currencies. The US Dollar planners (Federal Reserve) do not have the Caribbean best-interest in mind; they have American self-interest in mind. Good for them; bad for us! Change has now come. A strong currency is a good thing! The Go Lean book strongly urges the region to overcome any “fear of math” because the C$ may become stronger in comparison to the US$. This is why e-Commerce and e-Payments schemes are strongly urged within the CU/Go Lean roadmap.

Early in the book, this need for regional stewardship of Caribbean currencies was pronounced (Declaration of Interdependence – Page 13) with these statements:

xxiv.    Whereas a free market economy can be induced and spurred for continuous progress, the Federation must install the controls to better manage aspects of the economy: jobs, inflation, savings rate, investments and other economic principles. Thereby attracting direct foreign investment because of the stability and vibrancy of our economy.

xxv.    Whereas the legacy of international democracies had been imperiled due to a global financial crisis, the structure of the Federation must allow for financial stability and assurance of the Federation’s institutions. To mandate the economic vibrancy of the region, monetary and fiscal controls and policies must be incorporated as proactive and reactive measures. These measures must address threats against the financial integrity of the Federation and of the member-states.

The Go Lean book, and previous blog/commentaries, stressed the key community ethos, strategies, tactics, implementations and advocacies necessary to establish the regional financial eco-systems for Caribbean self-determination. These points are detailed in the book as follows:

Community Ethos – Economic Principles – Economic Systems Influence   Individual Choices Page 21
Community Ethos – Economic Principles – Voluntary Trade Creates Wealth Page 21
Community Ethos – Economic Principles – Consequences of Choices Lie in   the Future Page 21
Community Ethos – Economic Principles – Money Multiplier Page 23
Community Ethos – Governing Principles – Lean Operations Page 24
Community Ethos – Governing Principles – Return on Investments Page 24
Community Ethos – Governing Principles – Cooperatives Page 25
Community Ethos – Ways to Impact the Future – Count on the Greedy to   be Greedy Page 26
Community Ethos – Ways to Impact the Greater Good Page 37
Strategy – Mission – Fortify the Stability of   the Securities Markets Page 45
Strategy – Provide Proper Oversight and Support for the Depository   Institutions Page 46
Strategy – e-Payments and Card-based Transactions Page 49
Tactical – Summary of Swiss Confederation and Other Models Page 63
Tactical – Growing the Economy – Minimizing Bubbles Page 69
Tactical – Separation-of-Powers – Depository Insurance &   Regulatory Agency Page 73
Anecdote – Turning Around CARICOM – Effects of 2008 Financial Crisis Page 92
Implementation – Assemble Caribbean Central Bank as a Cooperative Page 96
Implementation – Ways to Better Manage Debt – Optimizing Wall Street   Role Page 114
Planning – 10 Big Ideas – Single Market / Currency Union Page 127
Planning – Ways to Model the European Union Page 130
Planning – Lessons Learned from 2008 Page 136
Planning – Lessons Learned from New York City – Wall Street Page 137
Planning – Ways to Measure Progress Page 147
Anecdote – Caribbean Currencies Page 149
Advocacy – Ways to Grow the Economy Page 151
Advocacy – Ways to Control Inflation Page 153
Advocacy – Ways to Better Manage Foreign Exchange Page 154
Advocacy – Ways to Foster Cooperatives – Caribbean Central Bank Page 176
Advocacy – Ways to Foster Electronic Commerce Page 198
Advocacy – Reforms for Banking Regulations Page 199
Advocacy – Ways to Impact Wall Street Page 200
Appendix – Tool-kits for Capital Controls Page 315
Appendix – Lessons Learned from Floating the Trinidad & Tobago   Dollar Page 316
Appendix – Controlling Inflation – Technical Details Page 318
Appendix – e-Government and e-Payments Example: EBT Page 353

The points of effective, technocratic banking/economic stewardship, were further elaborated upon in these previous blog/commentaries:

http://www.goleancaribbean.com/blog/?p=3582 For Canadian Banks: Caribbean is a ‘Bad Bet’
http://www.goleancaribbean.com/blog/?p=3397 A Christmas Present for the Banks from the Omnibus Bill
http://www.goleancaribbean.com/blog/?p=3090 Lessons Learned – Europe Sovereign Debt Crisis of 2009
http://www.goleancaribbean.com/blog/?p=3028 Why India is doing better than most emerging markets
http://www.goleancaribbean.com/blog/?p=2930 ‘Too Big To Fail’ – Caribbean Version
http://www.goleancaribbean.com/blog/?p=2090 The Depth & Breadth of Remediating 2008 – Need for Command-and-Control
http://www.goleancaribbean.com/blog/?p=1014 Canadian View: All is not well in the sunny Caribbean
http://www.goleancaribbean.com/blog/?p=833 One currency, divergent economies
http://www.goleancaribbean.com/blog/?p=518 Analyzing the Data – What Banks learn about financial risks
http://www.goleancaribbean.com/blog/?p=378 US Federal Reserve Releases Transcripts from 2008 Meetings

The Caribbean dream is the coveted role of protégé to our North American and European trading partners, not the parasite role we have thus far assumed. But this is easier said than done, as the doing part requires heavy-lifting. But this plan is conceivable, believable and achievable. The Swiss, while not a member of the EU nor Euro Zone, provides such a great role model for the Caribbean:

Switzerland comprises four main linguistic and cultural regions: German, French, Italian and the Romansh unique dialect. Therefore the Swiss, although predominantly German-speaking, do not form a nation in the sense of a common ethnicity or language; rather, Switzerland’s strong sense of identity and community is founded on a common historical background, shared values such as federalism and direct democracy,[10] and Alpine symbolism.[11] 

Switzerland ranks high in several metrics of national performance, including government transparency, civil liberties, economic competitiveness, and human development. It has the highest nominal wealth per adult (financial and non-financial assets) in the world according to Credit Suisse and the eighth-highest per capita gross domestic product (GDP)  on the IMF list.[12][13] Swiss citizens have the second-highest life expectancy in the world. Zürich and Geneva each have been ranked among the top cities with the highest quality of life in the world; (Source: http://en.wikipedia.org/wiki/Switzerland).

All in all, the country is a great place to live, work and play.

On the other hand, the Go Lean book declares to “count on greedy people to be greedy” (Page 26). This situation is manifested here in the foregoing articles; investors will always exploit opportunities to maximize profits. Globalization affords options to move money from one financial “bucket” in one country to another “bucket” in another country. This exercise has affected many middle-wage jobs in developed lands. The end result, increased profits for the decision-makers, less jobs for the workers; thus a growing income inequality: so the “Rich” get richer, but the “Middle Class” get shrunk.

CU Blog - Lessons from the Swiss unpegging the franc - Photo 3We have so many lessons to learn from the Swiss in this mission to elevate Caribbean economic-security-governing engines. The Swiss Confederacy (circa 1300 – 1798) facilitated management of common interests and ensured peace on their important trade routes. The Swiss has demonstrated that a Permanent Union can facilitate the Greater Good for multiple states (26) in a geographical region. That’s the Old Lesson; based on the foregoing articles, there are now many new lessons; some good, some bad. Foreign currency (Fx) brokerage houses are suffering financial setbacks because of these sudden changes with the Swiss franc; with leverage and derivatives, the Fx industry has become one big gamble. This point impresses the lesson of how Fx speculators can manipulate a country’s currency – this plight previously afflicted individual Caribbean currencies (Page 149). But now we see the Swiss using their unified command-and-control to set their currency standards for their own best interest, not the profit motives of some external stakeholders. The Swiss are no parasites! They are protégés!

Switzerland has hereby demonstrated that having command-and-control is required for economic success. Lesson learned!

The Caribbean’s 30 member-states are urged to lean-in to this Go Lean confederation roadmap. This is the turn-by-turn directions, the heavy-lifting, to move the region to its new destination: a better homeland to live, work and play.  🙂

Download the book Go Lean … Caribbean – now!

Share this post:
, , , ,

Leave a Reply

Your email address will not be published. Required fields are marked *