A central plank of the policies of governments in the main capitalist economies, and of the propaganda put out by the media and financial analysts, has rested upon the power of central planners, based in the central banks, to determine prices, in particular, to determine the price of loanable money-capital, i.e. interest rates. This ability is then, necessarily, an ability to determine the price of every other commodity, because it determines the value of the currency, which is the measure of that value, and of one currency relative to another.
Of course, those central planners have no such power, and the attempt to maintain the fiction that they do continually causes the contradictions, that arise from their attempt to act as though they do, to break out violently. Economic policy becomes like a game of whack-a-mole, where increasingly frantic and desperate reactions are required to respond to the unpredictable consequences of previous actions.
Large scale QE, by the US Federal Reserve, over the last few years, and by the Bank of England, caused the value of the Euro to rise, because the ECB did not undertake such open QE, though it did undertake a form of money printing via its various LTRO programmes. But, as the Euro rose in value, the Swiss Franc, rose even further. Switzerland has a population not much different than that of London. Its economy depends essentially on two things. Firstly, its ability to pull in large amounts of bank deposits from the world's plutocrats, who seek to take advantage of the country's renowned stability, and the secrecy of its banking system, from the prying eyes of tax authorities, and the ability of its small population to produce high value products - jewellery, pharmaceuticals etc - using their complex labour, which can be exported in exchange for the lower value imports it requires.
The rapidly rising value of the Swiss Franc vis a vis the Euro, had been causing Switzerland some problems, therefore, because it meant its exports became much less competitive, and a rapidly rising currency meant increasing deflation within the economy. So, a couple of years ago, the Swiss authorities decided to peg the rise of the Franc against the Euro to €1.20. If it fell below this level, the Swiss National Bank, would have to sell Francs and buy Euros, by some means, so as to reduce the value of the Franc. In order to reduce demand for the Franc further, they also introduced negative deposit rates.
This in itself causes unforeseen consequences. For example, these ultra low interest rates, with a pegged currency, encouraged a carry trade, whereby, particularly European borrowers, were led to borrow in Francs. A large number of Eastern European banks have borrowed significant amounts in Francs. But, the Swiss National Bank has today had to admit that it is not God, that it cannot control interest rates, and the value of the currency. The immediate effect was that the Dollar fell by more than 25% against the Swiss Franc, and the Euro, fell from the pegged rate of 1.20 to more or less parity.
Anyone who has taken advantage of this carry trade, over the last couple of years, to borrow at nearly zero in Swiss Francs, now faces seeing the amount they have to repay rise by 25%! For some of those Eastern European banks, in Hungary, and Poland, that were already teetering on the need for a bail-out, this could spell disaster, especially if the value of the Forint, and the Zloty fall in value by even greater amounts.
What could be worse, is the question of how much other banks, in Europe, such as those in Luxembourg, Malta and elsewhere have borrowed in Francs, and who will now face the same 25% shock. As previously described, the exposure of banks in Luxembourg is far greater even than that which caused the collapse of the banking system in Cyprus. In Cyprus the banks' deposits amounted to 8 times the country's GDP, in Luxembourg, it is 20 times!
But, the capitulation of the Swiss National Bank, in admitting that it could not control the price of money, is merely a reflection of the same point made here many times. These kinds of large scale shocks are likely to increase, over coming weeks, as these contradictions, flowing from QE, unravel. The next expression will be sharp rises in market interest rates, leading to huge and rapid falls in the prices of financial assets, from bonds and shares, to property.
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