The Short View

July 10, 2012 10:59 pm

Investors cannot be neutral on Switzerland

Central bank risks soaring inflation from monetary splurge

Investors need to be capable of cognitive dissonance to prosper. But the scale of doublethink in the markets has gone too far.

Consider US Treasuries and UK gilts, both near record-low yields. A large part of their investment case is that Britain and America control their central banks, and so can print money if needed – making default purely voluntary. The argument against the bonds is identical: the dollar and sterling are being debased by their central banks.

The same mental split is under way in the Alps. Switzerland is the safest place in the world, according to its bond market: money is pouring in, pushing yields to extraordinary negative levels.

Yet, the central bank seems to think it is representing Zimbabwe-le-Lac, rather than the safest of the world’s havens. The Swiss National Bank printed SFr59bn ($60bn) last month, pushing its foreign currency reserves to 63 per cent of economic output. It is running its printing presses at a speed not seen since Harare set itself on a course to hyperinflation in 2005 (it took two years for Zimbabwe to become a barter economy).

The Swiss are printing money to prevent the franc strengthening above SFr1.20 to the euro. Speculators are betting the Swiss eventually cave in and let the franc rise.

This makes for a fascinating study in the effects of printing money. Switzerland has been the world’s strongest major currency in both nominal and inflation-adjusted terms over the past 112 years, according to academics at London Business School. The SNB’s monetary splurge has done nothing to deter buyers, or to create inflation – quite the contrary, with deflation of 1.1 per cent.

Investors need to make up their minds. Either the Swiss should be bracing for soaring inflation and the franc is no haven. Or there is little to fear from the scale of central bank money creation, and no reason to panic about the debasing of the dollar and other “fiat”, or paper, currencies.

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