17 January 2015

Cloud cuckoo land

Yesterday I posted a piece here on a cuckoo clock (Swiss Fanc) that chimes for Angela Merkel and Alexis Tsipras (on an election victory) to do "realpolitik".  The explanation I liked on yesterday's global spasms (and the Greek story) comes from Paul Mason's Channel 4 post .  American readers might also want to check "Welcome to the Currency Wars"

"In Switzerland, they had brotherly love, they had five hundred years of democracy and peace – and what did that produce? The cuckoo clock.” ― Orson Welles (from "the Third Man")

.....But now Switzerland is famous for something else. This week its central bank abandoned a currency peg with the Euro with all the suddenness of a film noir plot reversal.
To explain. During the euro crisis, with money flowing into Switzerland driving the value of its currency up, the Swiss National Bank announced a currency cap. It would intervene in the markets, and print money, so that the Swiss franc’s value stayed pegged to the euro.
Given the money of the global rich is stored in Swiss francs, and quite a lot of east European mortgages also, the sudden rise in value after the cap was lifted works like this:

a)   The value of people’s savings held in Swiss francs rises
b)   The value of people’s debts in Swiss francs also rises, especially people in east Europe who took out mortgages with Swiss banks
c)    The big Swiss manufacturing and export sector will get hammered
d)   The central bank itself will lose a lot of money, because some of the money it printed was used to buy assets in euros and dollars, and these are now worth less in Switzerland. And that means Swiss cantons, including Graubunden where the Davos jamboree is held, will lose money – because they lose or gain from central bank profits.......

....The SNB’s move came, simply, because it could not go on financing the cost of pegging its own currency. The central bank’s balance sheet had grown to 80 per cent of GDP.
Next week, it is probable that the European Central Bank will make an equally dramatic move, announcing between €500bn and €1tr worth of quantitative easing, in a move designed to end stagnation in the eurozone.

What we’re seeing, then, is three central banks engaged in an attempt to use monetary policy and bank regulation against a tide of deflation and low growth. You could think of it this way: there is very little growth available in this corner of the world and one way of competing for it is by stimulating your economy with QE, and letting your currency fall against others.
The ECB’s gambit next week is a kind of “join the club” move – because everyone else will do it. Switzerland’s move was really an admission that: we can’t do anymore. And the Greek situation is being driven by voters signaling – via the poll lead of the far left Syriza party – that “we can’t do anymore”..... "The cuckoo clock chimes for the Swiss franc" 
 As for the EU, and its rationalized* foolishness, here's something from Aristophanes (the Birds ): - "the perfect city in the clouds, named Νεφελοκοκκυγία, (Cloud cuckoo land)" comes crashing down. 

I didn't even mention the crows..


PS -  I was tempted to make a more respectable post with some random terms.  These are a few terms that I might have failed* to exclude:

*rationalized -- the world does not makes sense; make the world smaller until it does.

endogeneous - nothing exists outside the box

lower (and zero) bound interest rates -  we can't find the box

exogenous  -  god help us

The Impossibility Trinity 

Black S̶w̶a̶n̶ Wednesdays 



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