Notes From Underground: To Print or Not to Print (For the BOJ and SNB)

In the time of “secular stagnation,” the burden of economic policy has fallen on the world’s central bankers. Whatever the question of economic malaise the answer is to print money and stave off the fear of deflation. This is why Ben Bernanke was the captain of the ’37ers, the cadre of central bankers who learned that the mistakes made by the U.S. Secretary of Treasury and the Federal Reserve would not be repeated. As it goes, it is easier to stop inflation then it is to prevent the pains of a deflationary spiral. The central banks of all the developed world economies are in full stop deflation mode. Thus, when in doubt, PRINT.

In a November 20 Financial Times  article by William White, the former BIS economic adviser wrote, “Japan’s Stimulus Plan Is Not Courageous But Foolhardy.” Mr. White wrote a splendid piece in 2006  predicting the coming credit crisis, thus his opinions carry far more weight than the talking heads that fill the airwaves on a daily basis. White argues that the BOJ stimulus is not needed for three reasons. First, slow growth is a result of demographic trends and not the result of deflationary trends. Secondly, the policy of weakening the yen is in contravention to what the Japanese economy needs, more consumer spending, but the weakened YEN is putting pressure on import prices which is forcing Japanese citizens to spend less because wages have failed to rise. And lastly, if price rises begin to increase risk premiums for yen-denominated assets, bond yields could rise putting much more pressure on the Japanese budget deficit.

The current Japanese fiscal deficit is 8 percent and if interest rates were to rise the cost of financing the deficit would rise putting more pressure on government finances. There is no time-table for the outcomes to any of these events but it does raise a modicum of doubt about current bank policy. The world’s equity markets are giddy over a world floating on a sea of central bank created liquidity. It is necessary for analysts with the stature of William White to raise concerns about global central bank policy:

“Higher central bank rates to support the yen would increase debt service, sending bond rates even higher. A failure to raise rates would result in the yen weakening further, exacerbating ‘currency war’ tensions. Sales of foreign exchange reserves to support the yen might be effective but could have serious effects on the markets for U.S. Treasuries and elsewhere. Confidence everywhere would be seriously affected should it become clear Japan’s authorities were losing control of events.”

The BOJ is not alone in promoting a “foolhardy” policy. THE SWISS NATIONAL BANK (SNB) has embarked on a three-year effort to contain the strength of the Swiss franc. Thomas Jordan, chairman of the SNB, delivered a speech on November 23 titled, “Sound Money: A Fundamental Pillar Of Our Society.” Jordan provided a historical summary of Swiss monetary policy but failed to convey why the present policy of protecting the EUR/CHF 1.20 level is representative of sound money. It seems that the SNB is preventing the overvaluation of the FRANC in an effort to placate Swiss exporters but the price is an exploding SNB balance sheet which risks future instability for domestic prices. In the SNB‘s determination to keep the SWISS FRANC at a steady level the Swiss are captive to the decisions of Mario Draghi and the ECB.

Mr. Jordan maintains that the Swiss have not surrendered control of its monetary policy but is in fact acting out its mandate. “The minimum exchange rate is therefore an expression of our national policy sovereignty and the SNB‘s lived independence, not a sign that we have given up our autonomy.” Sorry but having to quadruple the SNB balance sheet in an effort to placate the Swiss exporters is a sign of enslavement not an act of free will. The SWISS have tied themselves to the mast of the ECB and are reacting to the siren calls of Mario Draghi and his continued, “Whatever It Takes.” Printing money should be the last action for the SNB, which prides itself on stability.

The SNB should be placing negative interest rates on deposits, especially foreign money, and to prevent a housing bubble raising the equity levels on home loans to a very lofty percentage (macroprudential tools in the classic sense). In a speech last Thursday, SNB member Fritz Zurbruegg noted that the SNB “… is prepared to purchase foreign exchange in unlimited quantities and to take further measures immediately if required.” The Swiss have been consistent practitioners of sound money but recent SNB actions have raised doubts about its credibility. In Sunday’s referendum I would certainly vote in favor of Swiss GOLD purchases. Let’s see what the sense of the Swiss citizenry is as the establishment and the SNB are actively campaigning against the proposal. The question is whether to be crucified on a GOLD CROSS or the EUR/CHF cross … hmmmmmm.

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9 Responses to “Notes From Underground: To Print or Not to Print (For the BOJ and SNB)”

  1. Michael DeRenzo Says:

    The Cost of Code Red article for Fletcher.


  2. asherz Says:

    `Yra,excellent post. Your reference to the Cross of Gold, going back 118 years to William Jennings Bryan famous speech, revers back to the argument then for bimetallism against the gold standard. Look how we have moved from gold as monetary backing, to gold and silver, to fiat currency which is unlimited. From President McKinley, to FDR to Nixon, to Greenspan/Bernanke/Yellin/Abe/Jordan/Draghi is a progression that will ultimately lead to a total breakdown of our monetary system. Our grandchildren will live under a totally different system of commercial transactions than exists today. Unelected central bankers have used their power to try out unproven theories that if mistaken, would adversely affect everone. Even Bryan would be appalled.

  3. yra Says:

    Asherz–thank you and your discussion about Bryan is well placed and now it is Thanksgiving it is time to cocoon and watch The Wizard of Oz and the Swiss will be traveling the yellow brick road

  4. yra Says:

    Michael De—not understanding your post

  5. Kenny Says:

    Happy Thanksgiving everyone except the central banksters leading us into no mans land.

  6. ShockedToFindGambling Says:

    Yra- basic question.

    SNB buys Euros and holds them on its balance sheet (or exchanges them for Gold).

    Is the expanded SNB balance, in and of itself, a problem?

    I understand that if they have flooded the market with CHF, this could will later cause inflation?

    If they get a rally in EUR/CHF, they can reverse the trade, but they may never get that big rally, especially if Europe goes into recession.

    Seems like the easiest thing to do is convert the EUR into Gold (to the extent possible).

    The SNB gets a quiet way to dump Euros off their balance sheet, insure against a meltdown in Europe by increasing non EURO assets, and satisfies those who want higher Gold reserves.

  7. ShockedToFindGambling Says:

    Yra- I just saw the 5 year USA CDS traded at 19.50 yesterday. This is the highest spread I have seen in months.

    Do you have a chart of this that you could post, going back a few years?


  8. Yra Says:

    Shocked –dead right on in your analysis–it should be easy to see but i fail to understand the SNB for keeping going down a bad path—45% of SNB assets are in Euro denominated but that number must have grown recently as the Eur/Chf remains pinned to the 1.20–they have bought yen and dollars along with Euros but have kept the 45% ratio for Euro denominated assets—I am sure one of our readers with access to a Bloomberg can post a chart of 5 year USA CDS–thanks for the great discourse

  9. SacredReich Says:

    Shocked –5 year USA CDS not markedly higher, last high was 2013 govt shutdown when spread hit 40bp.
    Recently, CDS-wise, development in Japan bears watching. (Japan’s 5 year CDS in yellow at left-hand scale)

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