Tuesday, September 6, 2011

Switzerland Pegs - Devalues

This morning the Central Bank of Switzerland announced that they would be pegging their currency to the Euro.  They will not let its value appreciate above 1.20 Euros.

This is perhaps the second biggest news event of the year (behind the announcement that the ECB would begin purchasing toxic sovereign debt which I discussed a few weeks ago in The ECB Announced The Final QE)

Why is this so important?  Before we get there, let's discuss how and why this came about.

For decades the Swiss Franc has been considered the golden standard for how to treat a currency.  They do not run massive deficits and they have always pledged monetary control.

During the recent collapse of the European Union (Greece, Portugal, Ireland, Italy, Spain) over the past 18 months, citizens of those countries have removed their savings deposits from local banks and transferred them into Switzerland accounts.  They have done this in fear of a banking collapse, which is a well grounded decision.

The Swiss banking system is in excellent shape, and at the same time investors have felt great about holding Swiss currency.  This has proven to be an excellent investment decision over the past 12 months as the Swiss franc has appreciated greatly against the Euro (and almost every currency in the world).

There is a problem, however, that has been building.  Switzerland export companies have begun to lose a serious competitive advantage as the value of their currency has risen dramatically.  It now costs more to purchase goods from Switzerland than for example Germany, another heavily dependent export economy.

This morning the Swiss central bank took action and have pledged to halt the rise.  This means that they will print and purchase assets outside of Switzerland to devalue their own currency

They have tied an anchor to the sinking European Union.

This is the exact same technique the Chinese have employed with the United States.  By pegging their currency to ours at a fixed exchange rate they must import the inflation that our central bank exports.

The same is coming for the people of Switzerland.  As the European sovereign debt continues to implode, the European Central Bank will be forced to print an enormous amount of money to purchase the toxic debt.  The Swiss Central Bank will then be forced to mirror this action.

The ramifications for this are enormous.  Last night there were two safe havens from the global money printing and currency devaluation taking place around the world:

1. Gold
2. The Swiss Franc

This morning there is now only one.  We are moving into the next stage of the global financial crisis: currency wars.  It is an excellent time to look again at the graphic that displays where we've come and exactly how it will play out ahead of us.


Stay focused.  Things are changing rapidly now.

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