Friday, February 1, 2013

Peter Schiff: In Switzerland, it's not just the clocks that are cuckoo.

The Biggest Loser 
By Peter Schiff 

In Switzerland, it's not just the clocks that are cuckoo. Over the past four years Swiss politicians and central bankers have gone on an unprecedented buying spree of foreign exchange reserves. In 2012, their cache swelled to as much as $420 billion worth of various currencies, primarily the euro. This figure is a seven-fold increase since 2008 and equates to 70% of the country's annual GDP. The sum translates to $200,000 per family of four, enough to keep the Swiss in clocks, chocolates, and fondue for many years to come. The Swiss leadership will claim the money has been "invested" with an eye to the future, but what they've done is impoverished themselves in the present.  Although such a decision seems perverse, it makes perfect sense when seen through the lens of today's presiding economic thinking.

For the past few generations Switzerland has enjoyed some of the strongest economic fundamentals in the world. The country boasts a high savings rate, low taxes, strong exports, low debt-to-GDP, balanced government budgets, and prior to a few years ago one of the most responsible monetary policies in the world. These attributes made the Swiss franc one of the world's "safe haven" currencies. But in today's global economy, no good deed goes unpunished.

Central bankers around the world, particularly in Washington, Frankfurt and Tokyo, have been engaged in a massive and coordinated campaign of currency debasement to combat the recession. But for years the Swiss refused to join in the printing parade. As a result, investors around the world wisely decided to park their savings in the reliable Swiss franc. From December of 2008 to August 2011 the franc appreciated an astounding 59% against the U.S. dollar and approximately 30% against the Japanese yen. More importantly, the franc gained 42% against the euro. As the Eurozone completely surrounds Switzerland, its trade with those countries represents the vast majority of its international transactions.

During this massive run up in its currency, the Swiss economy continued to prosper. Wages and purchasing power increased and GDP grew consistently faster than other countries in Western Europe. Despite generally positive export statistics, some Swiss exporters noticed that at times the strong franc put them at a disadvantage against foreign competitors. In addition, the strengthening currency helped keep a lid on consumer prices, giving Switzerland a consistently low inflation rate with occasional bouts of actual deflation. Despite the fact that Switzerland was an island of economic health amidst a sea of problems, the reigning economic orthodoxy convinced Swiss leaders that their strong currency was a burden rather than a blessing. More pointedly, the rise in the franc was seen as a repudiation of the expansionary policies occurring in other countries. And so the Swiss government decided to join the currency killing party.

In early August 2011, the Swiss National Bank took a series of steps to reverse the fortunes of the franc. In the simplest terms, they sold francs and bought foreign currencies, most notably the euro. The announcement included a promise to buy unlimited quantities of foreign exchange to maintain a floor of 1.20 francs per euro. In so doing, the Swiss essentially outsourced their monetary policy to the Eurozone. Any moves taken by the European Central Bank would need to be matched by the Swiss. Ironically, it was fear of this outcome that kept the Swiss from adopting the euro in the first place. Despite the former bias toward independence, the Swiss have de facto adopted the euro anyway. Since that time, the franc has fallen 16% against the dollar, Swiss foreign exchange reserves have skyrocketed, and investors who bought francs as a means to escape debasement have been betrayed.

Productive nations generate excess goods and services that can be sold abroad and their growth and stability attract investment funds from abroad. These conditions will tend to increase demand for the nation's currency, thereby pushing up its price. A strong currency keeps capital and raw materials costs low, enabling more productive workers to earn higher real wages. But according to most economists, a strong currency will bring down an economy because it destroys international competitiveness and can even lead to lower prices (deflation) which they see as economic quicksand. These fears have ignited a "global currency war" in which countries are expending huge amounts of national savings in order to ensure that their currencies stay cheap. In today's economic logic we must fail in order to succeed.

But it is very easy to have a weak currency. All that is needed is an unlimited willingness to print. A strong currency requires real fiscal discipline and actual production. Yet, like the weight loss TV show, economists believe that the winner of a currency war is the biggest loser. You win not by killing your competitors, but by killing yourself! It's like a student convincing his parents that an "F" is a better grade than an "A." And if a straight "F" report card results in parental accolades rather than anger, the students will lack any incentive to improve performance. Similarly, as nations like Switzerland strive to reduce their own grades, the failing nations have a reduced incentive to change their study habits. Without outside support, nations with collapsing currencies would see huge increases in consumer prices. The resulting fall in living stands would force productive reform.

I take the minority position that just as it is better to be rich than poor, a strong currency is better than a weak one. Although much more credentialed economists may try to muddle the arguments, the truth may be seen when a particular position is taken to its logical extreme. If a weaker currency is preferable to a stronger one, then logic would dictate that a currency of no value will be preferable to one with an infinite value. But how would economies with these drastically different currencies operate?

It is true that the country with the zero value currency will tend to see full employment and strong exports. The relative low cost of labor will mean that the locals could be easily employed in even the most marginal activity. But since holders of other currencies will be able to outbid the domestic population for all of their production, everything produced will be exported. Imports will be zero as the local population would be unable to afford anything produced in countries with more valuable currencies. As a result, actual consumption would be extremely low. In essence this economy would be analogous to impoverished, subsistence level economies such as Bolivia, Zimbabwe, and Haiti.

In contrast, a country with an infinitely valuable currency would see the best of all possible worlds. Even the smallest amount of money would allow citizens to buy huge amounts of goods from abroad. An evening's babysitting money would deliver more purchasing power than months of hard labor in poorer countries. The strong currency would mean that consumption would soar even while hours worked fell. Savings would increase in value, and people would have more ability to travel and pursue leisure activities. In essence, we are describing a rich economy.

Placed in such a context, it's easy to see the preferred option. Those who believe in the benefits of weak currencies do not specify when a falling currency becomes a bad thing. Clearly there must be a tipping point where lost purchasing power overcomes supposed gains in growth. Yet they are silent on that point. My position is that a rising currency is always good. No magic tipping point needs to be identified.

The problem is that economists now believe that the goal of an economy is to provide employment, not goods and services. They see a job as an end in and of itself, rather than as a means for people to get the things they really want. But if we can get all that we want without having to work, who needs to bother? A strong currency takes us closer to this goal. It is a testament to how far the "science" of economics has fallen that this goal has been utterly forgotten.

But this junk science is killing real growth. As long as this "black is white" ideology remains in place, the biggest printers will continue to be the biggest actual losers.

Peter Schiff is the CEO and Chief Global Strategist of Euro Pacific Capital, best-selling author and host of syndicated Peter Schiff Show


  1. Mr. Schiff exposes a retiree's dream when he writes the following:

    "In contrast, a country with an infinitely valuable currency would see the best of all possible worlds. Even the smallest amount of money would allow citizens to buy huge amounts of goods from abroad. [...] The strong currency would mean that consumption would soar even while hours worked fell. Savings would increase in value, [...]"

    Note however, that domestic workers are much worse off, hours worked are falling, citizens are buying only goods from abroad in Mr. Schiff's OWN EXAMPLE. Savers win, but borrowers lose, it's the exact same logic as comparing moderate inflation to strong deflation. Retirees love it, businesses hate it. Best of all possible worlds? Not so much if you're under the age of 65 or not able to live off a trust fund.

    The middle class, relying on income from jobs gets killed. That's why Switzerland implemented their exchange rate policy. The vast majority of the Swiss are better off now than having to compete internationally with one leg and one arm tied behind their back, an exchange rate which makes competitors' goods and services cheaper through no effort of their own.

    And Mr. Schiff once more conveniently ignores the widely available argument "when a falling currency becomes a bad thing". Namely when "price inflation" increases beyond the specified target of around 2% per year.

    1. Idiot! Still have not learned anything have you? Why in hell do businesses want to see inflation? Do you actually run a business? because I certainly do and could not disagree with you more? Wages tend to fall far less than the commodities of production leading to expanded production and increases in that country's standard of living. This wealth effect for saver's over producers is completely ridiculous. And do also actually support the arbitrary and factless level of a 2% inflation rate being the best of all economic and monetary worlds? Please spare all of us further of your complete economic ignorance.

    2. Ad hominem attacks (idiots, ignorance) surely increase the power of your arguments, congratulations! Despite these and the obvious lack of care of your response (punctuation! grammar!) here are two brief replies.

      You answer your own question. "Why [gratuitous expletive omitted] do businesses want to see [low and stable] inflation?" Because empirically wages fall far less than prices, in particular wage cuts are very hard to implement. Then businesses see falling prices for their output at the same cost, not necessarily ideal. Also many businesses need to borrow to start or expand. Falling prices for their products combined with nominally fixed interest payments (the most common form for a loan) spells trouble. Falling prices of 10% or more a year are the surest way to drive the majority of businesses who have borrowed into bankruptcy. There you go.

      There is a large literature on the benefits of low and stable rates of "price inflation" as the goal for monetary policy. Google it. The main reasons, aside from measurement concerns, are the zero-lower-bound for nominal interest rates (the current predicament for the Federal Reserve) and money illusion which ties to my point above. These are empirical facts, not ignorance. Have you read these?

    3. Sorry for the offense but I have this bad habit of simply 'calling them as I see them'. And your reply only furthers my original opinion.

      Your overly simplistic, conflicted, and central planning thought process really reflects very little of economic reality. Wages are only one variable and component of production but, of course, some industries are more labor intensive than others. You also appear to assume 'prices' somehow come into existence from some divine source and put upon the producer by default. Certainly, a true, unhindered market would determine prices but you show a complete lack of understanding the formation and relationship of prices from the higher to lower order of production.

      Lower order production prices are determined by the producer. And the competition within the market and his/her efficiencies of production will ultimately determine whether he/she will make a profit and continue to be a viable enterprise.

      Also, you over simplify the use of leverage and available alternatives. Not to mention that deflation would likely produce higher profits and better margins for the producer enabling the firm easier to meet their debt obligations. And, of course, those firms that are too highly leveraged and/or inefficient and have higher costs of production relative to their competition will face 'trouble' as you say it. But this is how it should work and this benefits consumers, producers, and society alike by producing the least costly product and using the most efficient means of allocating scarce resources.

      The 'literature' you mention is more or less biased and subjective manipulation of data and contorted application of pseudo-scientific theories whose only conclusions would be reality within a vacuum. You say empirical? Sorry, but the truth requires more deeper analysis. And besides, what do we compare this with? We only have the reality of a highly rigged and manipulated, so-called, free market. We have staring in our face the cumulative unsound economic policies of intervention for at least the past 100 years and particularly accelerated since 1971. A TRUE free market still goes wanting. Do you continue to have your eyes completely closed....let alone your mind? Your '2 percent' is as arbitrary, and also complete failure, as are all the other central planning dogma and idiocy. I assume you are influenced by Friedman who, having otherwise respectable libertarian views, was fatally wrong on monetary policy.

      Nearly the entire 19th century experienced a period of deflation except for short periods of 'bad' monetary policy, as history and 'rulers' continue to repeat. The period between 1870 (after Lincoln's reign of despotism) and up to WWI saw the greatest increases in standards of living and economic growth that easily surpassed the 1980's and 90's. Today,we are sliding continually backwards economically since at least the mid to late 1990's.

    4. Well if you discount data and empirics entirely, you can believe anything you want. If you claim different facts for yourself than the ones which are available, you can believe anything you want. If you believe in some utopian free market world which never has been created yet, you can believe anything you want. (As a somewhat gratuitous aside, this remind me of the Marxist who to this day believes in communism because it has never been tried. No use arguing with those people either.)

      It is still not clear to me how a surprise bout of inflation will benefit anybody who borrowed money. Sure, retirees will benefit, but not businesses. Your arguments are at best incoherent above.

      It's an empirical fact that per capita growth rates of GDP are higher after World War 2 compared to the ones in the time period you describe as some "golden age" of the US economy before World War 1. The glorification of this time period always strikes me as odd from a libertarian standpoint. Jim Crowe laws in the South together with denying the vote to women don't look particular appealing from a "freedom-lover's" point of view. Neither do the trusts and robber barons who captured legislatures in an unmatched degree at the time. This is a big concern among many on this blog ("banksters"). Why is the free market so great, UNLESS for finance, where free-market fractional reserve banking represents evil incarnate?

      But if a square peg just HAS to fit a round hole, it seems anything goes. You don't look at data which counteracts your view, you make up your own ("the truth requires more [sic] deeper analysis", please....). Your worldview becomes completely shut off to overwhelming evidence of its failure (hyperinflation just MUST have been coming for four decades...). You leave intellectual discussion for the hermeneutics of your small community. Good luck!

    5. should read "surprise bout of DEFLATION" of course in the first sentence of the second paragraph.

    6. Unbelievable! You have confirmed your original label in spades. The 'honest/ data and empirical studies reveal just the opposite story of your well spun fantasies. So true that knowledge is simply wasted on the ignorant and ideologically narrow minded

  2. "Namely when "price inflation" increases beyond the specified target of around 2% per year."

    "Price inflation" numbers, what an accurate benchmark! As much of a scientific constant as water freezing at 0 degrees C, right?

  3. Ppl wouldn't make things for domestic use? Middle class suffers w a strong currency? That's silly. I'd just take all the cheap foreign inputs to make a service/tool that my domestic customers an iPad or something cool that no one thought about.

    Econo geeks always forget about innovation and entrepreneurs.

    Hell even farmers could buy cheap inputs and grow great food for its country.