EUCOM Economic Analysis - Part I

[Surferbeetle]

Hildebrand Steps Down at SNB, By Jennifer M. Freedman and Klaus Wille - Jan 9, 2012 6:37 AM MT, Bloomberg News

Philipp Hildebrand resigned as head of the Swiss central bank after a currency transaction by his wife last year dented the credibility of the franc’s chief guardian.

As head of the SNB, he helped toughen financial regulation, forcing UBS AG and Credit Suisse Group AG to boost capital buffers. He also lowered borrowing costs to zero and in September introduced the first currency ceiling since the 1970s to help protect the economy.

Hildebrand’s first round of currency purchases forced the SNB to declare a record loss in 2010 and prompted calls from Christoph Blocher, vice president of the Swiss People’s Party, for him to resign. Bank Sarasin, a Basel-based private bank, said on Jan. 3 it had fired an employee who helped pass data on the trades by the Hildebrands to Blocher.

Philipp Hildebrand from wikipedia

Hildebrand is currently under attack due to the losses arising from SNB’s exchange rate interventions between March 2009 and June 2010. In this period, the SNB accumulated foreign currency reserves worth over 200 billion Swiss francs. Since the Swiss franc has since appreciated substantially, the interventions caused losses on SNB foreign currency positions equivalent to 26.5 billion Swiss francs in 2010 and a further 11.7 billion Swiss francs in the six months thereafter.[4] Although the SNB has repeatedly defended these interventions as they made “sense at the zero lower bound when the traditional monetary policy instrument is exhausted”,[5] the international press and financial market analysts by and large deem the interventions a “costly failure”.[6]

Given the size of the loss (equivalent to around 5,000 francs per capita), Hildebrand is under fierce political attack for being the driving factor behind these interventions. Critics point out that the interventions were undertaken when there was no underlying need to intervene and that they were continued even when the European debt crisis in spring 2010 already had intensified so that the exchange rate the SNB was trying to support was unrealistic.

The right-wing People’s Party (Schweizerische Volkspartei (SVP) / Union Démocratique du Centre (UDC)) and the politically colored magazine Weltwoche are among the loudest critics of Hildebrand, repeatedly demanding his resignation. These attacks however led to prominent figures of other parties voicing their support for Hildebrand and moreover emphasized the political independence of the SNB. However, in an article titled “With Unsteady Hand”, Switzerland’s center-leaning major business magazine Bilanz criticized Mr. Hildebrand’s leadership of SNB, citing in particular his limited experience and that Mr. Hildebrand’s actions in large parts seem to be the result of his eagerness to appeal to the public.[7]

Christoph Blocher bio from Wikipedia

Blocher built his political career through campaigning for smaller government, for a free-market economy, against Switzerland's membership in the European Union and for more tightly controlled immigration. He represented the canton of Zürich in the Swiss National Council from 1980 until his election to the federal council in 2003 as a deputy of the Swiss People's Party (Schweizerische Volkspartei/Union démocratique du centre; SVP/UDC). In addition to the Zürich chapter of the Swiss People's Party, he led a mass organisation, the Action for an Independent and Neutral Switzerland (Aktion für eine unabhängige und neutrale Schweiz). He has frequently been compared by the media and his political opponents to figures such as Jean-Marie Le Pen and Jörg Haider.

Blocher is leader of the party's nationalist wing, which dominates the party's delegation to the National Council.

Germany issues debt with negative yield, By Richard Milne, Capital Markets Editor, January 9, 2012 12:04 pm, Financial Times, www.ft.com

Germany issued debt on Monday for the first time with a negative yield, meaning that investors were in effect paying Berlin for the privilege of lending it money.

A €4bn auction of 6-month bills drew a negative yield of 0.0122 per cent in a sign of Germany’s haven status amid the eurozone debt crisis.

But demand for the debt was down with the so-called bid-to-cover ratio dropping to 1.8 times from 3.8 times at the previous auction a month ago.

German short-term debt has traded at negative yields in the secondary market for some weeks with three-month, six-month and one-year debt all below zero. Bills for six-month debt hit a low of minus 0.3 per cent shortly after Christmas.

[Firn]

The policy of the Swiss NB to draw a line into the sand at a very deep point was so far successful, and the Euro is still hovering above it, despite it came closer in the turmoil of the last days. Traditional monetary policy has indeed run out of room, which forces me to once again make a nod to Keynes, so other tools were needed to achieve the desired effect. This policy has a couple of effects, even if it won't be able to stem the tide of liquidity into the "safe heaven" Switzerland.

1) The Swiss economy, especially the export, the retail in border areas (Switzerland is small and well connected) and tourism sector suffered already heavily due to a Franken, widely seen as overvalued. This will at least mitigate that damage

2) It helps those in Europe which took a credit in the Franken, a strategy rather popular a couple of years ago in Austria and some regions of Italy and especially in countries like Hungary where the rates on the own currency were relatively very high. (A 'very' controversial law was passed in Hungary to mitigate the effect of the big slide of the Florint against the Euro at the cost of the banks)

Anyway around 1950 you got 1 CH for roughly 1 DM, perhaps the unofficial reseve currency of Europe, around 1970 even more then that and around 1995 quite a bit less then that. Before the SNB acted like it did you got at the lowest point roughly 1 CH for 1 Euro. In fact the CH gained roughly 90% in the last 20 years...

[Fuchs]

...which accounts for little unless we compare the inflation rates.

The really interesting thing about exchange rates is in the long term not the official exchange rate, but its movement in comparison to purchasing power parity (PPP).


One example about PPP; Krugman recently published some stats about Japan which made Japanese workers look rather unproductive in comparison to U.S. workers. This can be wholly explained with the undervaluation of the Yen; the same statistic expressed with PPP would have looked very differently.
This PPP thing contributes to an outdated and false sense of superiority of Americans in regard to their economic standing.

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Somewhat related to the topic in general:
A short story and defence-related concern about the Euro crisis.

[davidbfpo]

A short KoW comment by David Betz that takes imagination - in my case - to follow. Citing a German source:

1. If Greece gets the next big (80 billion Euro) tranche of IMF-EU bailout moulah in March; then,

2. it will be able to conclude a whole bunch of new defence contracts including, inter alia, new Eurofighter jets, frigates from France, submarines from Germany, and Apache helicopters from the USA.

Link:http://kingsofwar.org.uk/2012/01/guns-not-butter/

He's also written a wider comment on the world economy, with many valid points beyond money. This is only a taster:

If you’ve read a newspaper lately you’ll have seen ample evidence that no one has the faintest idea how to deal with simultaneously:

a credit bubble
a bond bubble
a real estate bubble and a farmland bubble
a commodities bubble, and
several currency bubbles.
(Plus a higher education bubble?)

Link:http://kingsofwar.org.uk/2012/01/ple...ut-the-bubbly/

[Fuchs]

There's a way how to deal with it; understand that you an allow all this to blow up and have a comeback in less than ten years IF you get rid of the burden.
Germany reached 1936 levels of industrial production in 1952, only seven years after the war and only three to four years since actual recovery began.
Less than eight years later it had defeated unemployment (temporarily) and was transitioning to real wealth for everyone (refrigerator, TV set, kitchen electrical equipment, car - the stuff that was used to measure wealth well into the 80's).


The worst you can do is to lack confidence and courage and muddle through.

[Firn]

...which accounts for little unless we compare the inflation rates.

The really interesting thing about exchange rates is in the long term not the official exchange rate, but its movement in comparison to purchasing power parity (PPP).


One example about PPP; Krugman recently published some stats about Japan which made Japanese workers look rather unproductive in comparison to U.S. workers. This can be wholly explained with the undervaluation of the Yen; the same statistic expressed with PPP would have looked very differently.
This PPP thing contributes to an outdated and false sense of superiority of Americans in regard to their economic standing.

-------------------------------------

Somewhat related to the topic in general:
A short story and defence-related concern about the Euro crisis.

Leaving the PPP issue aside, which has it's merits even despite the difficulty to calculate it, as it is usually better to be roughly right then exactly wrong, I can not imagine that the slight difference in inflation in the last, say 20 or 30 years can explain the rise of the Franken. Swiss and German inflation differ only slightly even if compounded.

The radical gain of the Franken in such a short time is IMHO only explainable by the same, almost desperate rush for perceived safety which drives up the parked money at the ECB to ever greater heights and which has driven the interest rates on Danish and German bonds into the negative.

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The story in the liberal ZEIT states to some extent the obvious and well-known. Greece has a very large military compared to it's size, seemingly mostly due the perceived Turkish threat, composed of many products bought abroad with big German share. The German politicians have pressed (like others) the Greece to buy German (or European, for example the Eurofighter) and the German defense industry has long established Greek subsidiaries to better play the political game which created some odd purchasing decision. And last but not least Greece doesn't seem to be ready to cut the defense budget nearly as much as other ones, for example that of social security even if it is running a massive current budget deficit...