If anyone had any doubt how severely the global economy has been distorted by the actions of central bankers, the “surprise” announcement last week by the Swiss National Bank (SNB) to no longer peg the Swiss franc to the euro should provide a moment of crystal clarity. The decision sent the franc up almost 30% in intraday trading, a scale of movement that is unprecedented for a major currency in the modern era. Although very few in the media or on Wall Street fully understand the ramifications, the situation that forced the Swiss to abandon the peg will soon be faced by bankers of much larger countries in the coming years, the implications of which can have more profound implications for global financial markets.
Other than the immediate fluctuations in exchange rates, the primary reaction to the Swiss move has been indignation. The airwaves have been awash with officials and investors who have felt betrayed by an irresponsible bank that has not only squandered its own credibility but has also damaged the reputation of all central banks. Despite the complaints of now-ruined foreign-exchange speculators, who believed recent statements from the SNB that it would continue to enforce the peg, a blindsided policy reversal was its only viable option. Any hint that the policy was about to change, or could change, would have resulted in the same mass buying of Swiss francs.
But the only thing the SNB did wrong (other than initiating the peg in the first place) was to admit that the policy was unsustainable and have the courage to reverse course. In so doing, they violated the first rule of central banking, which appears to be: Never admit to making a mistake.
Although the move is not as dramatic a change as the recently defeated gold reserve referendum would have likely produced (see my prior commentary), the abandonment of the peg makes Switzerland the first major economy to surrender in the international currency war. It has decided not to race to the bottom, and it has understood that a cheap currency does not solve economic problems. The decision gives a long-delayed victory to the Swiss people.
