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  #661  
Old 07.09.2011, 09:32
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Re: Swiss Franc Climbs to Record High

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You don't know that. Nobody does, including the SNB. There is no guaranteed winning strategy. The payoff depends on the future economic performance of Greece, Italy, Germany and factors we don't even know are relevant yet.

However, you cannot rule out the possibility that what the SNB has just done is worse than nothing. Yes, Switzerland's economy would probably have been damaged by doing nothing. But this intervention has the potential to do even worse damage.

Each time the rate is driven against 1.20, the SNB is going to have to perform actions which will drive up the inflation rate. That is not a game they can play infinitely often. In the worst case scenario, they keep doing this until the inflation rate becomes unbearable and have to remove the peg and let the exchange rate settle. In that case they are no better off on the exchange rate than they would have been without intervening, but with an inflation problem they otherwise wouldn't have had.
You're right in the sense that nobody knows where on the scale of complete success and abject failure the SNB's actions will fall. Of course the intervention carries risks. Is anybody denying that?

1. Presumably the SNB took those into account when they set the cap at 1.20 - easier to defend than in the more recent interventions.

2. Nothing's fixed in stone. Later on they can always change to a floating rather than a single target by switching to a range of say 1.15 to 1.20. That would keep the FX market guessing.

3. If inflation becomes a problem they can take steps to manage that. No doubt they have an inflation target.


4. But intervention isn't the only option. It can still impose negative rates on foreign deposits. This in isolation wouldn't have had much of an affect but in combination with a cap it might have more impact.

5. At 1.20 Switzerland's industry isn't out of the fire. The kind of support measures Mowvich talks about on the other thread will still be necessary.
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  #662  
Old 07.09.2011, 09:34
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Re: Swiss Franc Climbs to Record High

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Thanks I can understand that sort of thing. I suppose it's too early to tell just how much and how soon such inflation will show up at the local Migros, yes?
Yes, it is.
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  #663  
Old 07.09.2011, 09:40
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Re: Swiss Franc Climbs to Record High

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You're right in the sense that nobody knows where on the scale of complete success and abject failure the SNB's actions will fall. Of course the intervention carries risks. Is anybody denying that?
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B) The SNB intervention is NOT damaging but absolutely vital and necessary. The "external forces" damaging the Swiss economy of course are weak economies no longer able to do purchases. The SNB does not cause economic collapses to other economies. To say that is paranoid indeed.
which was the point of my post

Otherwise Nev I agree with you.

Last edited by quark; 07.09.2011 at 09:40. Reason: highlight
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  #664  
Old 07.09.2011, 19:53
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Re: Swiss Franc Climbs to Record High

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Thanks I can understand that sort of thing. I suppose it's too early to tell just how much and how soon such inflation will show up at the local Migros, yes?
Probably inflation will show up just as quickly as the price falls theoreticaly due to the stronger franc showed up?

Since Migros (& other large retailers) claim to have long term fixed price contracts with their suppliers then it should take a long time before we see any price changes?
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  #665  
Old 07.09.2011, 21:48
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Re: Swiss Franc Climbs to Record High

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What some of you chaps need to understand is that what the SNB has exposed Switzerland inc to, is not simply a cost of limiting the currency value by intervention, but the real cost will be the deterioration of the asset that they have to buy whilst limiting the Chf value. Markets fix the value of any good/commodity or currency, not central banks.
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The SNB did not expose Switzerland to anything, but has to intervene as the "markets" fail to fix anything as shown here clearly. And what exactly do you mean by "deterioration of the asset" ? If you mean that currencies or bonds may come down in value, it is a problem which has been discussed on all levels and in all sectors here. Finally, everybody agreed that this is the obvious cost. The cost is not so much the purchasing price but the relative loss you take when the stuff gets devalued even further.

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When a countrys national interest rate is at 0 it means the government has tried and failed to resist strength in its currency.
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You have to see that what is discussed is to keep the interest rates at a normal leval but charges foreign money deposits with a NEGATIVE interest rate. I cannot tell you how this will work, but it already DID work 30 years ago.

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The reality is that a cheaper option would be to use those reserves by învesting /subsidising if necessary the national economy, rather than fighting a market which is 1000 times larger than its own GDP.
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No, no, no !!! A) Who would determine which companies, which shops, which cities, towns, villages would get those subsidies ?! B) Subsidies are NOT a good thing anyway. C) The finance market in total may be as large as you say, but the actual money movers in question are only a small section of the international finance market. Beside the point that Switzerland has no alternative. D) The SNB does NOT fight THE international finance market, but simply a specific segment of that market

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The very real danger is that those eurobonds that SNB will buy with its Euros, will decrease subtsantially in value terms and the country will be faced with a much larger loss than simple exchange rate calculation as some have considered.
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That such Eurobonds may decrease is obvious. "Much larger loss" ? Larger loss than what ?? The country HAS to and does accept a certain loss suffered by the SNB. Not just for some "simple rate calculation" but to save the national economy.

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This could theoretically cause a downgrade in its own ratings, thereby increasing the cost of borrowing as in the PIGIS economies that we have seen or even in the USA
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and what ? Switzerland apparently is not in need of borrowing. If money is needed, let's sell the union-held shares of the UBS to some banks in the Arabian Gulf or the Far East and then reduce the bulk of goldbars not really needed
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  #666  
Old 07.09.2011, 21:57
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Re: Swiss Franc Climbs to Record High

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You're right in the sense that nobody knows where on the scale of complete success and abject failure the SNB's actions will fall. Of course the intervention carries risks. Is anybody denying that?

1. Presumably the SNB took those into account when they set the cap at 1.20 - easier to defend than in the more recent interventions.

2. Nothing's fixed in stone. Later on they can always change to a floating rather than a single target by switching to a range of say 1.15 to 1.20. That would keep the FX market guessing.

3. If inflation becomes a problem they can take steps to manage that. No doubt they have an inflation target.


4. But intervention isn't the only option. It can still impose negative rates on foreign deposits. This in isolation wouldn't have had much of an affect but in combination with a cap it might have more impact.

5. At 1.20 Switzerland's industry isn't out of the fire. The kind of support measures Mowvich talks about on the other thread will still be necessary.
NOT "out of fire" but fairly well off. Sure, as I said earlier, the exchange-rate should be 1.35 but such a thing simply is out of reach. I was rather surprised to hear that they chose 1.20 as I expected something between 1.10 and 1.15. The "support measures" in question will be talked about in October, possibly come into action in spring 2012 and only be of a minor effect in some minor areas. Finance Minister Widmer-Schlumpf did with Schneider-Ammann what football players do with their counterparts, he allowed him to run heavily into the off-side and then acted on another part of the field. In view of the small share of her party, what she does is Russian Roulette, but may pay off. Schneider-Ammann may do with party-colleague Burkhalter what Deiss did with Mrs Metzler, sacrifice the other chap for his own position. So that even the 1.20 instead of a more realistic 1.12 may be a political horse-trade.
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  #667  
Old 07.09.2011, 22:03
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Re: Swiss Franc Climbs to Record High

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The reality is that a cheaper option would be to use those reserves by învesting /subsidising if necessary the national economy, rather than fighting a market which is 1000 times larger than its own GDP.
The very real danger is that those eurobonds that SNB will buy with its Euros, will decrease subtsantially in value terms and the country will be faced with a much larger loss than simple exchange rate calculation as some have considered.
This could theoretically cause a downgrade in its own ratings, thereby increasing the cost of borrowing as in the PIGIS economies that we have seen or even in the USA
In the old days there was another solution used: direct currency controls.
I remember as a kid in the UK that Britain used to use currency controls which presumably limited the amount of money entering / leaving the country in a single transaction. I have little idea how that worked. Anyone here know anything about that method???
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  #668  
Old 07.09.2011, 22:04
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Re: Swiss Franc Climbs to Record High

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Probably inflation will show up just as quickly as the price falls theoreticaly due to the stronger franc showed up?

Since Migros (& other large retailers) claim to have long term fixed price contracts with their suppliers then it should take a long time before we see any price changes?
A) Inflation ? Last time it increased a bit within 6 months and even more within 18 months, but in quite of the SNB interventions having been extremely massive, as the new imports, just as now were fairly cheap, as just as now, the CHF was heavily overvalued even after the SNB intervention.
B) retailers ? it depends on the goods. Foodstuff is material changing round fairly swiftly. But in other fields you now sell stuff you purchased one or up to 10 years ago. You have to try to at least cover your purchase prices
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  #669  
Old 07.09.2011, 22:12
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Re: Swiss Franc Climbs to Record High

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In the old days there was another solution used: direct currency controls.
I remember as a kid in the UK that Britain used to use currency controls which presumably limited the amount of money entering / leaving the country in a single transaction. I have little idea how that worked. Anyone here know anything about that method???
Sure, this was the case here in Switzerland until 31st December 1959. But trade had to go through the Verrechnungsstelle/ClearingHouse. Which means an organisation of the central state, to where you handed your invoice to foreign customers. The customer got the same invoice and had to go to his VerSt and make the payment. The money than was transferred to the CH VerSt and lead to the shipper being paid. So that all payments went via official channels, and no direct payments in a commercial sense were allowed.

Btw. the Verrechnungsstelle in Zürich was just beside the stock exchange until about 1951 or 52 and then at Genferstrasse (near the Arboretum and the Alpenquai/General-Guisan-Quai until 1959 . As this, I mean the abolishment of the VerSt, was based on an international agreement in favour of free trade, at least outside the Comecon, I suppose that the scheme also came to an end in the other countries of the Free World.

And the "direct currency control" only was possible as long as the exchange rates were fixed immovable by international agreements. Any country wanting to DEvalue had to talk about the step with the other countries. And then make a formal announcement about how many % the devaluation would be.
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  #670  
Old 07.09.2011, 22:21
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Re: Swiss Franc Climbs to Record High

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In the old days there was another solution used: direct currency controls.
I remember as a kid in the UK that Britain used to use currency controls which presumably limited the amount of money entering / leaving the country in a single transaction. I have little idea how that worked. Anyone here know anything about that method???
If you went on holiday you could only take upto £600 each, this was stamped in your passport. You could not get cash out of the wall as you can today.
This is why package holidays became so popular, as your accomodation and possibly some meals were paid for.

If you decided to leave the UK, you could not take your money out of the country except with the permission of the Bank of England. That was removed by Geoffery How in his first budget alond with reducing the top tax rate from 60% to 40%. I think there was also an investment income surcharge of 15% that also got removed at that time.
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  #671  
Old 07.09.2011, 23:29
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Re: Swiss Franc Climbs to Record High

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In the old days there was another solution used: direct currency controls.
I remember as a kid in the UK that Britain used to use currency controls which presumably limited the amount of money entering / leaving the country in a single transaction. I have little idea how that worked. Anyone here know anything about that method???
I can remember when UK holiday-makers abroad were limited to £50 a head. I spent 6 weeks in the USA on only that - and no credit card. Simply telling the fact got me a number of free meals on my travels...
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  #672  
Old 07.09.2011, 23:54
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Re: Swiss Franc Climbs to Record High

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If you went on holiday you could only take upto £600 each, this was stamped in your passport. You could not get cash out of the wall as you can today.
This is why package holidays became so popular, as your accomodation and possibly some meals were paid for.

If you decided to leave the UK, you could not take your money out of the country except with the permission of the Bank of England. That was removed by Geoffery How in his first budget alond with reducing the top tax rate from 60% to 40%. I think there was also an investment income surcharge of 15% that also got removed at that time.
I found those methods used by a modern country of the West rather bizarre and impossible to understand. And practically nobody in Western Europe did do such strange things. And these methods failed to keep up the exchange rate of the UK£

It may be interesting for younger people to hear that the UK£ in the 1960ies was worth about CHF 12.--, and even in 1972 still was above CHF 8.70
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  #673  
Old 08.09.2011, 00:03
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Re: Swiss Franc Climbs to Record High

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It may be interesting for younger people to hear that the UK£ in the 1960ies was worth about CHF 12.--, and even in 1972 still was above CHF 8.70
I hope you won't forget to tell the younger people how those figures compare in PPP terms, will you now?
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  #674  
Old 08.09.2011, 00:32
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Re: Swiss Franc Climbs to Record High

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I found those methods used by a modern country of the West rather bizarre and impossible to understand. And practically nobody in Western Europe did do such strange things. And these methods failed to keep up the exchange rate of the UK£

It may be interesting for younger people to hear that the UK£ in the 1960ies was worth about CHF 12.--, and even in 1972 still was above CHF 8.70
Bear in mind a house worth £25,000 in London in 1972, today would sell for about £1,000,000. It'snot really clear that almost zero inflation in CH for 40 years has actually benefited the Swiss more than Londoners over the same period.

Inflation was was apparently terrible for pensioners, low interest rates seem just as bad if not worse, there is no free lunch & in the end makes little difference to peoples lives which is rather surprising.

Best FMF
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  #675  
Old 08.09.2011, 06:38
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Re: Swiss Franc Climbs to Record High

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Bear in mind a house worth £25,000 in London in 1972, today would sell for about £1,000,000. It'snot really clear that almost zero inflation in CH for 40 years has actually benefited the Swiss more than Londoners over the same period.

Inflation was was apparently terrible for pensioners, low interest rates seem just as bad if not worse, there is no free lunch & in the end makes little difference to peoples lives which is rather surprising.

Best FMF
House prices in London are not typical of the UK and therefore is not really a measure of price inflation.

While prices in Switzerland have not gone up so disastrously as in the UK nonetheless there has been substantial price inflation even in the time I have lived here. When I was learning German in Basel a standard Café Crème in Café Huguenin was CHF 1.50 if I remember rightly and that's not 40 years ago.
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  #676  
Old 08.09.2011, 10:44
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Re: Swiss Franc Climbs to Record High

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House prices in London are not typical of the UK and therefore is not really a measure of price inflation.
No, because house prices outside of London have most probably risen faster than in London.
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  #677  
Old 08.09.2011, 13:14
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Re: Swiss Franc Climbs to Record High

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No, because house prices outside of London have most probably risen faster than in London.
This graph would appear to refute that supposition....

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  #678  
Old 08.09.2011, 13:18
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This graph would appear to refute that supposition....

The London 'crash' has not happened yet, give it 5 years the graph may look very different.
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  #679  
Old 08.09.2011, 13:45
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Re: Swiss Franc Climbs to Record High

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This graph would appear to refute that supposition....
Sorry, but I can't read the percentile increased from the graph and see if the London percentile increases are larger or smaller than UK.
In addition to that I would like to see separate England, Ireland and Wales figures on a percentile increase as well.

I am pretty sure that there was a period in the last 15 years that the prices were increasing faster in the rest of England than in London.
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