swiss franc

Swiss Franc … Why Should We Care?

Most people probably haven’t noticed, but the Swiss government did something extraordinary overnight.

During the last European crisis, money flooded into the relatively safe Swiss currency.  The Swiss reaction was to fix their currency to the Euro, which at the time helped prop up the Euro and stopped the rise of the Swiss Franc.  Switzerland is not part of the Euro currency club.  The concept was that if the Swiss Franc continued its sharp rise that Swiss companies would be penalized in the world market.  Their goods and services would become far more expensive in other currencies, most especially in the Euro zone, but also in America, Japan & China.

Alas, that move was reversed last night.

Why would the Swiss government suddenly and without warning reverse its decision to tie its currency & the country to the European Union?

Only one answer makes sense:  The European Zone has slipped back into another recession, despite the enormous worldwide “quantitative easing” — governments, lead by the United States, have flooded the world with money in an attempt to restart the growth engine of the world economy.

News flash:  It’s NOT working.

The Swiss government, I believe, realized that the EU was going to begin its own massive QE project, despite EU law that forbids the purchase of bonds for this purpose.  The EU has swept aside its law before, when convenient (a little like our President), and the Swiss must believe the EU is about to do it again … but this time in a grand scale.

Therefore, the Swiss interceded on their own.  Result?  Swiss franc soars.  Swiss stocks tank.  Swiss companies less competitive today than yesterday.  But the Swiss government must feel that this relatively small amount of pain is far better than continuing to go down with the European version of the Titanic.

But Why Do We Care????

Notice the much higher volatility in the stock market recently.  Up a couple hundred points on the Dow, then down a couple of hundred.  The Japanese Yen getting killed while the US Dollar is stronger.  China’s growth engine running out of steam.  And Europe back in Recession, partly because the Yen’s collapse is making Japanese exports more attractive and German exports less attractive.

The great experiment from 2008-2015 is failing before our eyes.   Pumping up a balance sheet in order to try to fix an over bloated balance sheet doesn’t work.  Taking on more debt to solve a debt problem doesn’t work – even for the world’s largest economies.

There is a very good possibility that the next world economic crisis is right around the corner.