The Swiss have a problem that sounds like one of those “good problems” but which is a real problem nonetheless: Their money is worth too much.
With the European Union in a more or less constant state of economic crisis — the direct result of an ingenious idea to insist that the Germans and the Greeks follow an identical monetary policy — investors have been dumping their euros and looking for a nice, safe, boring, predictable place to park their money. Some of that loot has been flowing to the United States and Canada, but the little-known fact is that if you repeat “nice, safe, boring, predictable!” three times quickly, then a Swiss banker in an Ermenegildo Zegna tie springs forth out of the vasty deep like Beetlejuice and very politely offers to look after your money for you. The demand for Swiss francs has been pushing the value of the currency up, and the Swiss central bank has been pushing it back down. There are a few reasons for that: One is that the Swiss, as advertised, have a prudent and decent regard for stability and are therefore suspicious of dramatic swings in the value of their currency in either direction; another is that exports and tourism play a relatively large role in the Swiss economy, and a soaring franc makes those Swatches and Rolexes and less-rarefied products from Nestlé and Hilti more expensive to overseas buyers — and you’re only going to sell so many chronographs and power drills in Zurich. Beyond exports, the Swiss also fear deflation in their domestic markets.
But keeping your people from getting richer too quickly turns out to be a strangely expensive proposition, so the Swiss central bank stopped pushing yesterday. The franc leapt up 39 percent, Swatch shares crashed 15 percent, equities investors witnessed “carnage,” and everybody complained that the central bank had, in very un-Swiss fashion, surprised them.
The Swiss way of doing things is generally admirable, thoughtful, and intelligent, and there is much about Swiss governance to appeal to American conservatives, especially those of a libertarian bent. But it is also a reminder that in this famously neutral, non-interventionist, and most independent of nations, minding one’s business is no longer a realistic option. The Alps may have protected the Swiss from would-be invaders, and the Swiss people’s excellent national-stupidity radar kept them well away from the euro. But Switzerland is as much euro-locked as it is landlocked, and of late its economic policy has not been so much one of national action but one of national reaction to events in the euro zone and policies handed down by Brussels. This most recent move was probably caused by the Swiss expectation that the European Union is headed toward another round of so-called quantitative easing, i.e. the devaluation of the euro in the hopes that if enough debased currency goes sloshing through the European economy then some of it will splash up against productive uses.
Interestingly, the Swiss took one other interesting step at the same time: Because demand for a safe financial haven in Switzerland is so high, interest rates on investors seeking to hold Swiss francs have gone from low to negative: The rate was -0.25 percent but will now be -0.75 percent. While those sub–1 percent rates on U.S. savings accounts may not be very attractive, investors in Switzerland will pay the banks for the privilege of sitting on their money. In other words, the Swiss just raised the rent on monetary stability.
Why should Americans care about Swiss monetary policy?
For one thing, the consequences of events of this kind are impossible to predict. Many observers believed that housing prices in 2007 were due for a correction, and that those declining valuations would play hell with the subprime-mortgage market, but very few — only a handful, in fact — understood in advance the sort of worldwide financial crisis that it would help to create. As Tyler Cowen points out, the Swiss move will mean the restructuring of an unknown number of mortgages around the world, in Eastern Europe, in Hungary, and in — make a note — Russia, because mortgages in those countries often are denominated in Swiss francs rather than in the unpredictable local currencies.
But the larger lesson for the United States is that even if by some miraculous chance we manage to get our own national economic and fiscal affairs in order — a challenge that appears to be well beyond our political institutions as currently constituted — that still will be insufficient. The Swiss are highly exposed to events in Europe and to currents in the financial markets for obvious reasons that are idiosyncratic to Switzerland. The United States, because of the unique role it plays in the world, is in effect exposed to everything: Chinese banking crises, Ukrainian sovereign defaults, Russian energy policy – everything. A national government – three branches, both parties – that cannot even produce a credible program for not driving itself into insolvency with spending on three welfare programs cannot be trusted even to comprehend the threats to our economic and non-economic interests, much less to do anything meaningful about them. Little Switzerland, with its 8 million people and sober leadership, is scrambling just to keep up with events in its immediate neighborhood. The United States, with its 320 million people and global vulnerabilities . . . is currently having a nervous breakdown over the fact that all of this year’s best-actor nominees are white in a country in which the overwhelming majority of people are white.
Question: Is it more likely that President Barack Obama will respond with interest to the news from Bern or the news from Hollywood?
— Kevin D. Williamson is roving correspondent at National Review.