…of the exchange rate floor…. The old regime, with or without the additional 50bps cut… was viable and superior to the new regime…. Central banks can live with very large balance sheets… diversify… out of euro forex…. There is no ostensible problem with the central bank having to live with becoming an even larger hedge fund/asset manager or Sovereign Wealth Fund…. It may be that the political scrutiny that would come with an even larger balance sheet… was a source of concern…. But such discomfort would seem to be a small price to pay compared to the cost to the nation of a massively overvalued currency, serious deflation and the resulting harmful effects on the real economy….
The second superior alternative would have been to abolish the effective lower bound on the nominal interest rate…. There is little empirical evidence on demurrage for paper currency…. There are no serious arguments against creating a financial system where nominal policy rates can be set with equal ease at -5% as at +5%…. The ELB can be eliminated… by abolishing currency/cash… checkable deposits… credit cards, debit cards and cash-on-a-chip cards… existing and yet-to-be invented e-money… taxing currency, in the spirit of Gesell (1916)… end the fixed exchange rate, currently set at unity, between SNB deposits and cash… encourage the use of the deposit Franc as the numéraire… for price and wage setting….
The good news is that, apart for the reputational damage suffered by the SNB… much of the damage can be undone. The SNB… [could] restore as much of the status quo ante as possible by restoring a floor to the exchange rate of the CHF and the euro (or to the effective exchange rate of the CHF for some suitable basket of currencies)….
No doubt the euros would be galloping in at any floor that is not well below 1.20 CHF per euro, but Switzerland has many skilled asset managers who could invest the rapidly expanding resources of the SNB in a globally diversified portfolio of nominal and real assets. The second damage-limiting option is to abolish the ELB on nominal interest rates as soon as possible…
Month: January 2015
Morning Must-Read: Franklin Delano Roosevelt (1935): “A Hope of Many Years’ Standing…
Via Eric Rauchway, Franklin Delano Roosevelt while signing the Social Security Act on January 19, 1935:
…The civilization of the past hundred years, with its startling industrial changes, has tended more and more to make life insecure. Young people have come to wonder what would be their lot when they came to old age. The man with a job has wondered how long the job would last.
This social security measure gives at least some protection to thirty millions of our citizens who will reap direct benefits through unemployment compensation, through old-age pensions and through increased services for the protection of children and the prevention of ill health.
We can never insure one hundred percent of the population against one hundred percent of the hazards and vicissitudes of life, but we have tried to frame a law which will give some measure of protection to the average citizen and to his family against the loss of a job and against poverty-ridden old age.
This law, too, represents a cornerstone in a structure which is being built but is by no means complete. It is a structure intended to lessen the force of possible future depressions. It will act as a protection to future Administrations against the necessity of going deeply into debt to furnish relief to the needy. The law will flatten out the peaks and valleys of deflation and of inflation. It is, in short, a law that will take care of human needs and at the same time provide for the United States an economic structure of vastly greater soundness.
Nighttime Must-Read: Ezra Klein: Why Republicans Can’t Replace ObamaCare
…for getting outplayed, again and again, on health care:
Conservatives are falling into the same trap… conceding… that the government should be trying to provide everybody with health insurance…. Once you accept those premises, all of your solutions look like the left’s solutions….
Cannon is right. The basic project of health reform, at least as it’s been understood in American politics in recent decades, involves the government giving money to poor people so they can buy health-care insurance. That money needs to come from somewhere…. The problem for conservatives is that making sure poor people have health insurance is politically popular…. Philip Klein illuminates an inconvenient truth: upheaval in the health-care system typically makes for terrible politics…. This is the central problem for conservative health reformers… the party doesn’t want to make the sacrifices necessary to unite behind an alternative to Obamacare, much less actually pass and implement it….
Klein identifies three schools of conservative thought on what to do next: the Reform School… the Replace School… repeal Obamacare and replace it with Obamacare-lite; and the Restart School, which… rejects the idea that the government should be… expand[ing] access to health care…. Klein’s book is… far and away the clearest, most detailed look at conservative health-policy thinking….
But… the important cleavage… is between those in the party who want to prioritize health reform and those who don’t…. And that’s really the problem for conservative health reformers. For all the plans floating around, there’s little evidence Republicans care enough about health reform to pay its cost.
Things to Read on the Evening of September 18, 2015
Must- and Shall-Reads:
- : Will 2014 Finally Be the Year That Puts the Climate Denialists’ 1998 Chestnut to Rest?
- : The Swiss Currency Bombshell–Cause and Effect
- : DeLong Smackdown Patrol: How worse off are we really?
- Republican Governors Accept Medicaid Expansion, Make It Costlier
-
: : Focus on Middle Class Growth: “Growth that is a necessary condition for rising incomes is threatened by the specter of secular stagnation and deflation. In… 2014… 10-year Treasury rates have fallen by more than 1 percentage point in the United States and are only half as high in Germany and Japan as they were a year ago. In… Germany, France and Japan, short-term interest rates are now negative… suggest[ing] a chronic excess of saving over investment and the likely persistence of conditions that make monetary policy ineffective…. The world has largely exhausted the scope for central bank improvisation as a growth strategy…. It is time for concerted and substantial measures to raise both public and private investment…. The United States has enjoyed growth of about 11 percent over the past five years. Of this, standard economic calculations suggest that about 8 percent can be regarded as cyclical…. That leaves just 3 percent over five years as attributable to growth in the economy’s capacity. Even after our recovery, the share of American men age 25 to 54 who are out of work exceeds that in Japan, France, Germany and Britain…. Third, if it is to benefit the middle class, prosperity must be inclusive, and in the current environment this is far from assured…. These three concerns… are real but… not grounds for fatalism…. Canada and Australia in this century… show that sustained growth in middle-class living standards is attainable. But it requires elites to recognize its importance and commit themselves to its achievement. That must be the focus of this year’s Davos” -
: President Obama Finally Has His Piketty Moment: “Obama… will call for $320 billion of new taxes [over ten years] on rentiers, their heirs, and the big banks to pay for $175 billion of tax credits that will reward work… fighting a two-front war against a Piketty-style oligarchy where today’s hedge funders become tomorrow’s trust funders… trying to slow the seemingly endless accumulation of wealth among the top 1, and really the top 0.1, no actually the top 0.001…. And…trying to help the middle help itself by subsidizing work, child care, and education…. End the step-up [at death of] basis for capital gains…. Raise the top capital gains tax rate from 23.8 to 28 percent…. Tax the big banks for being big…. Subsidize middle-class work… a second-earner tax credit of $500… calling for the Earned Income Tax Credit to be doubled for childless workers, to try to get more young men in particular into the workforce… college tax credits to be streamlined, extended, and expanded… automatically enrolling [workers] in an IRA…. These are ideas, to be honest, that some Republicans support…. The question, then, isn’t how to help the middle class. It’s how to pay for it. Obama wants to make the top 1 percent and Wall Street do so. Republicans don’t. That, like every other one, will be what the 2016 election is about.” -
: Did the SNB Score an Own Goal? Francly, Yes: “1. The removal of the 1.20 floor on the CHF-euro exchange rate was a mistake. 2. Superior policy alternatives existed. 3. The old regime was indefinitely sustainable. 4. Removing the lower bound on nominal interest rates would have been the best choice. This can be done one of three ways. 5. The economic damage can be limited by restoring the exchange rate floor at a level not below the old one, and/or by eliminating the lower bound on nominal interest rates. 6. The rest of the world can learn from the SNB’s experience with a -0.75% deposit rate.” -
: DeLong Smackdown Patrol: How worse off are we really?: “Bad Brad! In 2000, you believed that American economic policy and the American economy, though far from perfect, had been largely a success (right?). It’s understandable to think the 15 years since then have been a big disappointment – they have! – but why should that cause you to revise your evaluation of the period from 1980 to 2000? Do you think that we are now paying for excesses we enjoyed in that period, and that our prosperity increases during that period were thus illusory? I don’t think you think that. So don’t succumb to excessive pessimism!” -
: The ‘Safety Trap’ and Eurozone Secular Stagnation: “I have recently worked out a… DSGE model where the upsurge of pessimistic expectations causes high liquidity preference to become the source of a persistent drop in demand…. Would breaching the ZLB through negative interest rates (NIR) really help the economy exit the trap? Theoretically, it would; in practice, it is much less certain… push agents to search for alternative safe assets earning higher returns… [which] would then supplant… those liquid assets whose liquidity premiums the monetary authorities had sought to neutralize through NIR…. For similar reasons, quantitative easing… is ineffective…. Yet under liquidity preference dominance (Landau’s safety trap) and a binding ZLB, agents absorb any amounts of reserve money created and hold on to them without changing their consumption and investment plans…. Assume the central bank commits to being ‘irresponsible’… [if] QE policy actually becomes ‘helicopter money’… [it] impact[s] spending decisions through the fiscal lever…. Short of this twist… the central bank is left without effective channels…”
Should Be Aware of:
- : Now they’re sliming Elizabeth Warren: Fox News tactics and the surprising water carriers for the 1 percent
- HiLine Coffee Company
: Warren, public opinion, and inequality: ”
Paul Rosenberg has a good response to Amitai Etzioni’s rather lame attempt at a hatchet-job on Elizabeth Warren at The Atlantic: ‘Taking Norton and Ariely’s results seriously, we can say that the American people want a much fairer society than they live in, but that the means for articulating this desire—the stories, concepts, policy proposals, etc.—are in scandalously short supply, a de facto example of hypocognition thwarting what people want. Elizabeth Warren is particularly popular precisely because she provides some of the missing means that people are so hungry for—an antidote to the hypocognition that thwarts their desire for a fairer, more just vision of America, which respects both their hard work and their compassionate values. There may be relatively little polling to support this view (though there’s considerably more than you’d expect) but that’s partly just another example of how elites dominate the landscape of acceptable thought to protect their interests, as underscored by recent research by Martin Gilens and Benjamin Page. Warren represents a clear alternative to this narrow-minded view. Her popularity derives in large part from her ability to shape narratives that reflect the hidden majority’s shared values and articulate them in policy terms, reversing a decades-long trend by which elites of both parties have turned their backs on the welfare of ordinary Americans.’ While Rosenberg offers a much more accurate portrait of American public opinion than does Etzioni, there are reasons to think this offers an overly optimistic account. He’s right, of course, that Americans want a more egalitarian distribution of wealth and income than they’ve got. But it’s almost certainly the case that partisan identity is likely to significantly diminish the ‘hidden majority’ support for redistribution when it turns into an actual plan promoted by and associated with Democratic politicians (as the continued unpopularity of something called ‘Obamacare’ demonstrates). Raising the minimum wage manages to remain broadly popular despite the partisan divide, so it’s important not to be too fatalistic about this. (I suspect one reason for this is the simplicity of the policy; it’s harder to spin or dissemble the basic fairness of it away.) But the lack of specific policy proposals cuts both ways–lots of inequality-reducing proposals could be quite popular in the abstract, but once they become ‘Democratic’ proposals support is likely to conform to a more familiar partisan pattern.”
Evening Must-Read: Lawrence Summers: Focus on Middle Class Growth
…is threatened by the specter of secular stagnation and deflation. In… 2014… 10-year Treasury rates have fallen by more than 1 percentage point in the United States and are only half as high in Germany and Japan as they were a year ago. In… Germany, France and Japan, short-term interest rates are now negative… suggest[ing] a chronic excess of saving over investment and the likely persistence of conditions that make monetary policy ineffective…. The world has largely exhausted the scope for central bank improvisation as a growth strategy….
It is time for concerted and substantial measures to raise both public and private investment…. The United States has enjoyed growth of about 11 percent over the past five years. Of this, standard economic calculations suggest that about 8 percent can be regarded as cyclical…. That leaves just 3 percent over five years as attributable to growth in the economy’s capacity. Even after our recovery, the share of American men age 25 to 54 who are out of work exceeds that in Japan, France, Germany and Britain….
Third, if it is to benefit the middle class, prosperity must be inclusive, and in the current environment this is far from assured…. These three concerns… are real but… not grounds for fatalism…. Canada and Australia in this century… show that sustained growth in middle-class living standards is attainable. But it requires elites to recognize its importance and commit themselves to its achievement. That must be the focus of this year’s Davos.
How Do Projected Long-Run Deficits Matter?: Daily Focus
Howard Gleckman writes:
…A recent debate between my Tax Policy Center colleague Bill Gale and UC Berkeley economist Brad DeLong…. Bill wrote that ‘a major priority should be to get our long-term fiscal house in order.’… Brad argued that… the fiscal gap is really not that bad… especially if you assume that Congress will eventually enact a carbon tax and that the Affordable Care Act will help control future health costs…. With interest rates so low… why worry about deficits in the current environment? Long-term debt is a problem for future generations. Let them figure out how to address it…
I don’t think that that last paraphrase from the excellent Howard Gleckman quite gets at what I was trying to say. And since that is what Howard got, that means I said it wrong. Let’s try again, in a different way:
Sokrates: I did not expect to see you here at Davos!
Gorgias: Wherefore not? I am a rhetorician. That as, as Homer would say: “what I boast myself to be!” Where better to practice my excellence? And acquire clients so that I can live at the standard of living I dream of?
Sokrates: And what topic are you going to use to demonstrate your excellence as a rhetorician this forthcoming week?
Gorgias: “Fix the Debt!” of course. It is really important to pass laws to cut spending and raise taxes and so get our debt-to-GDP ratio on a trajectory where it is declining rapidly. That is one of the three things we could do to most effectively boost economic growth.
Sokrates: Right now, if President Obama and the centrist Democrats agreed, to join the Republican coalition, we could pass laws to cut Social Security, Medicaid, Medicare, SCHIP, and ACA spending. But there are no counterparts on the Republican side to pass laws to raise taxes now and in the future.
Gorgias: That is true. But that is not terribly relevant. The important thing to do is to Fix the Debt. Any steps that Fix the Debt are good–we are not partisan about this, it is simply that right now it is possible if moderate Democrats agree to pass one set of steps to Fix the Debt.
Sokrates: And moderate Republicans?
Norman Ornstein: Moderate Republicans are party loyalists first and moderates second. They will never break party discipline.
Gorgias: Unfortunate. But not relevant. Fix the Debt!
Sokrates: Is it that government spending is too high and needs to be cut?
Peter Diamond: Actually not. As we move into the twenty-first century, it is likely that categories of domestic spending in which the government has a comparative advantage vis-a-vis the market–pensions and other retirement social insurance, medical insurance, education, research and development, information goods–will grow as a share of GDP. Optimal fiscal policy will in all likelihood have the government spending a greater share of GDP in the twenty-first century than it did in the 20th.
Sokrates: Do you disagree Gorgias?
Gorgias: I neither agree nor disagree: I say that we need to Fix the Debt!
Sokrates: So if the government were now to pass a law that would greatly increase the tax base by, in the long run, severely reducing the tax preference offered to employer-sponsored health insurance, you would be in favor of that? That would help Fix the Debt?
Gorgias: Yes. But since the moderate Republicans will not break party discipline to support it, that is irrelevant. Fix the Debt!
Sokrates: And if government would pass a law giving the Secretary of HHS power to curb Medicare spending in a smart, technocrat way, you would be in favor of that? That would help Fix the Debt?
Gorgias: Yes. But since the moderate Republicans will not break party discipline to support it, that is irrelevant. Fix the Debt!?
Marty Weitzman: Since if we do not pass a carbon tax in the next generation, the U.S. long-run fiscal gap is likely to be way, way, way down on our list of serious problems, we should carve our policies toward the debt presuming that we will pass such a carbon tax and its revenues will be available to help Fix the Debt, nu?
Sokrates: But we have already Fixed the Debt. The ACA–ObamaCare–contains the IPAB, which gives the Secretary of HHS power to curb Medicare spending in a smart, technocrat way. The ACA–ObamaCare–contains the Cadillac Tax, would greatly increase the tax base by, in the long run, severely reducing the tax preference offered to employer-sponsored health insurance. When we include those two and a reasonable carbon tax in our long-run forecasts, the Debt Is Fixed: resources available exceed projected spending.
Gorgias: But future congresses will repeal the IPAB! Future congresses will repeal the Cadillac Tax! Future congresses, if they do pass a carbon tax, will couple it with tax cuts so that it will not raise any revenue! We must Fix the Debt.
Sokrates: So, if I understand you, we Fixed the Debt in the Clinton administration in the sense that there was no fiscal gap if future congresses adhered to the pay-as-you-go principle. And then the George W. Bush administration unfixed it. And we have Fixed the Debt in the Obama administration in the sense that there is no fiscal gap if future congresses adhere to the pay-as-you-go principle. But you do not believe that future congresses will adhere to the pay-as-you-go principle?
Gorgias: No. I do not. And you should not either.
Sokrates And if I say that interest rates right now are so low that any optimal fiscal policy would say that the debt-to-GDP ratio should be rising, rather than falling?
Gorgias: I would say that such considerations would apply if we had a plan for balancing the long-term finances of the federal government that will be put into effect. But we do not. Fix the Debt!
Sokrates: So the things that the Obama administration has done to Fix the Debt do not count because you see them as likely to be undone by future congresses?
Gorgias: Exactly!
Sokrates: And the plans you have for policy changes to Fix the Debt are painful and difficult to pass?
Gorgias: Yes!
Sokrates: And even if you do pass them, they are likely to be unpopular?
Gorgias: Yes…
Sokrates: But you believe that future congresses will not repeal your policies–even though you believe future congresses will repeal the IPAB and the Cadillac Tax, and offset the carbon tax that is coming–because?…
Gorgias: [Silence]
I would be very happy if I could get an answer from the Fix the Debt crowd as to why Fix the Debt doesn’t mean working to:
- enforce pay-as-you-go on congress,
- defend the Cadillac Tax,
- protect the IPAB, and
- pass a carbon tax.
But that’s not what Fix the Debt means in America today. And until it does, I will be highly skeptical of all who want to put it high on the list of policy priorities…
1168 words
Morning Must-Read: Matt O’Brien: President Obama Finally Has His Piketty Moment
…on rentiers, their heirs, and the big banks to pay for $175 billion of tax credits that will reward work… fighting a two-front war against a Piketty-style oligarchy where today’s hedge funders become tomorrow’s trust funders… trying to slow the seemingly endless accumulation of wealth among the top 1, and really the top 0.1, no actually the top 0.001…. And…trying to help the middle help itself by subsidizing work, child care, and education….
End the step-up [at death of] basis for capital gains…. Raise the top capital gains tax rate from 23.8 to 28 percent…. Tax the big banks for being big…. Subsidize middle-class work… a second-earner tax credit of $500… calling for the Earned Income Tax Credit to be doubled for childless workers, to try to get more young men in particular into the workforce… college tax credits to be streamlined, extended, and expanded… automatically enrolling [workers] in an IRA….
These are ideas, to be honest, that some Republicans support…. The question, then, isn’t how to help the middle class. It’s how to pay for it. Obama wants to make the top 1 percent and Wall Street do so. Republicans don’t. That, like every other one, will be what the 2016 election is about.
Things to Read at Night on January 17, 2015
Must- and Shall-Reads:
- : [ECB Set to Bow to German Pressure Over QE](http://www.ft.com/intl/cms/s/0/98b78292-9da3-11e4-8ea3-00144feabdc0.html
- : What Does the End of the Swiss Peg Tell Us About Central Banks?
- : The world’s worst idea: taking out a mortgage in a foreign currency
- : “Psychologist Laurie Santos trains monkeys how to use money, and has learned that they attempt to solve the same sort of financial problems humans have attempted…”
-
: There Are No Friedmans Today, Except Maybe Friedman: “No economist on the right is asking ‘Where are the Galbraiths of yesteryear?’? It’s because Milton Friedman won the debate, and John Kenneth Galbraith lost…. By sheer chance, I found a Brad DeLong post…. In an alternate universe, Galbraith won and Friedman lost, and economics would be very different today. So I decided to post this…. We are all Friedman’s children and grandchildren. The way that New Keynesians approach macroeconomics owes more to Friedman than to Keynes: the permanent income hypothesis; the expectations-augmented Phillips Curve; the idea that the central bank is responsible for inflation and should follow a transparent rule. The first two Friedman invented; the third pre-dates Friedman, but he persuaded us it was right…. Friedman had a mountain to move, and he moved it. And because he already moved it, we simply cannot have a Friedman today…”
-
: A 2017 Agenda
: “A 160-page white paper from a think tank titled Report of the Commission on Inclusive Prosperity is not exactly designed to set the world ablaze. But the timing and circumstance of its authorship make it the best guide… endorsing fiscal stimulus and a strong pro-labor union agenda… downplaying the strong education-reform streak… liberal ambitions it pushes aside. There’s no cap-and-trade or carbon tax in here, no public option for health care, and no effort to break up or shrink the largest banks. Nor is there an ambitious agenda to tackle poverty. Instead, you get a multi-pronged push to boost middle-class incomes. After an extended period in which Democratic Party politics has been dominated by health care for the poor, environmental regulation, and internecine fights about Wall Street… back-to-basics middle-class populism…”
-
: Marriage Decline in U.S. Didn’t Increase Inequality, the Economy Did: “David Leonhardt claimed that liberals overlook evidence that… the relative decline of… married couple [households] increases inequality… cited a paper by Professor Molly Martin of Penn State. But Martin… ‘cannot determine the degree to which family structure changes caused the observed changes… family formation probably reacts to prevailing economic conditions and, in that response, sets the conditions for perpetuating broader inequality patterns’…. She notes that ‘the relationship between family formation behavior and inequality appears to be declining over time’ and even during the period where it was most influential, it accounted for very little of the change…. Bruce Western writes, ‘Most of the increase in family income inequality was due to increasing within group inequality that was widely shared across family types and levels of schooling…. Though family structure, more than the educational inequality in earnings, is closely associated with the rise in inequality from 1975 to 1995, both effects were small after 1995’…. The evidence shows that family structure has changed because economic opportunities for most people have worsened…” -
:
The Yellen Fed: Model-Based Policy:
“The dots matter more than Eurodollars…. This is heresy to a generation of investors, who became accustomed to the “Greenspan put”–the view that the Fed would always be there to bail out the equity market–and trust that the prices in the bond market at any point in time reflected the likely forward path of policy changes…. We’ve heard for five years that all of the Fed’s actions have helped Wall Street but done nothing for Main Street. Easy money’s been available to corporations, who have done buybacks but not invested in their businesses…. The wealth effect from elevated asset prices has helped the 1%. But mortgage and household credit to non-pristine households and small firms has remained tight…”
Should Be Aware of:
- : “Sometimes soft targets are the bars on the cage. You grab them and rattle them and howl because they’re the only thing you can grasp. But if there are hacksaws or other tools around, it would be a shame to keep rattling the bars rather than patiently filing through them, one millimeter at a time”
- : “The ‘reformocons’, the small coterie of pundit-adviser-activists trying to coax the Republican Party back toward sanity, may be doing the most politically significant work of any faction in America today. But the task of talking sense to the senseless is tricky business, involving lots of soft whispering and noble lies. Peter Wehner, the former Karl Rove aide, has taken on an important role in this movement, but his recent New York Times op-ed urging conservatives to be less crazy, reveals just how cautiously the reformocons must tread.
“ - : “Many are treating the news of this year’s flu shot as if there’s some monstrous difference from other years, and that we should behave differently this year than other years. That’s just not the case. The difference between 60% effective and 23% effective is subtle. It’s real, but not that huge. Yes, you should get a flu shot, because the NNT is still pretty great. Herd immunity is important. But you should always, always practice good infection control as well.”
- : ‘The Organised Mind’, by Daniel J Levitin; ‘The Life-Changing Magic of Tidying’, by Marie Kondo
- : Ross Douthat ponders the Liberal Marriage Hypothesis
- : Half Of The United States Lives In These Counties
- : Conservatives Misfire on ‘Pagan Green’ Pope’s Encyclical
-
: Rebooting: “A growing sense of perplexity and unease about online discourse… academia… the political moment… as if I’m losing my voice… it’s not worth speaking up… sometimes, that the risks to speaking outweigh any benefits… my middle-aged anomie… a narcissism that encourages them to confuse a confessional for an analysis…. I started this blog uncertain about whether to trust my own readings and arguments, and have become less trusting with each passing year…. I want to start a new year of writing in public with a series of fragments that will repeat each other, as well as some old themes…. Call the whole thing Grasping the Nettle…” -
: Lunch with the FT: Marc Andreessen: “He asks what I have been struck by on this visit to Silicon Valley, and, when I cite its collaborative culture, he beams as if it is a personal compliment. ‘I couldn’t believe that people were volunteering to help [me],” he recalls of his own arrival 20 years ago. “It didn’t match anything where I grew up’…. Waggling his iPhone affectionately, he says: ‘This little guy right here is the equivalent power capability of the $20m supercomputer I was using. This thing is in two billion people’s hands’…. His interests on Twitter are promiscuous, ranging from multi-part tweet epics on economics to immigration. His tech-optimism attracts both admiration and mockery…. In person, it is not so much his voice as the speed at which he talks that makes lunch like navigating conversational rapids…. All will be well, he says, provided we allow more technology. ‘If we don’t get it quite quickly, we will not be able to afford things like social security, Medicare. We need far higher productivity for the shrinking percentage of people who are going to be working’…. He leaves as I pay, but soon sends a text about an app that fights your parking ticket for you, confirming his faith: tech has an answer for everything.” -
: Why Republicans are starting to sound like Elizabeth Warren
: “Lynn Vavreck’s… The Message Matters is by far the best analysis of the interplay between campaign messages and economic fundamentals…. If the recovery really does continue strengthening… Republicans [must] pursue… an ‘insurgent’… strategy…. Setting the agenda on something other than the economy. Persuading voters the insurgent has a novel position…. Clarifying and framing the insurgent stance in a popular way. The poverty and opportunity frames may work for Warren… but they essentially fail for Republicans… don’t really change the conversation from the economy.. cuts against the existing Republican brand… doesn’t tie in to any notably popular Republican policy positions…. Faced with the strong economic climate of the late 1990s, [George W.] Bush… distanced Al Gore from economic success, emphasizing divided government and… Alan Greenspan… changed the subject to… restoring ‘honor and dignity to the White House’, military preparedness, and management of K-12 schools. His agenda for steep tax cuts was framed as a common sense corrective to budget surpluses…. It was clever and it worked. Sort of. Bush, famously, received fewer votes than his opponent even though Gore simultaneously had to fend off a Ralph Nader campaign to his left…. There’s plenty of time for things to take another turn for the worse. But if they don’t, trying to sell themselves as the real progressives on economics isn’t an especially promising means of coping…” -
: Nit-Picking Piketty: “I attended a panel convened by right-wing Harvard economist Greg Mankiw that should have been entitled ‘Nit-Picking Piketty.’… At one point, Mankiw even put up a slide, ‘Is Wealth Inequality a Problem?’ Any economist who ventures across the disciplinary ramparts will, of course, find a veritable genre of research on the dangerous impacts of extreme inequality…. Mankiw, at another point in his presentation…. Piketty, he intoned, must ‘hate the rich.’ Piketty’s financial success with his best-selling book, Mankiw added, just might lead to self-loathing. These clearly well-rehearsed quips, aimed at knee-capping the humble French economist, fell flat. Mankiw’s presentation, entitled ‘R > G, so what?,’ came across as little more than an apologia for concentrated wealth…. Piketty observed that he has nothing against the rich and said he believes that capital has a useful role to play. He would like to see more of our wealth, he explained, reside with the middle class and the poor. Piketty’s one poke back at the nitpickers came in response to their unanimous support for a progressive consumption tax as an alternative to any other progressive income or wealth tax.
‘We know something about billionaire consumption,’ Piketty observed, ‘but it is hard to measure some of it. Some billionaires are consuming politicians, others consume reporters, and some consume academics.’ And therein lies the point: Too many in the economics profession are ideologues masquerading as mathematicians… hired guns for the privileged classes…”
Afternoon Must-Read: Nick Rowe: There Are No Friedmans Today, Except Maybe Friedman Himself
…’Where are the Galbraiths of yesteryear?’? It’s because Milton Friedman won the debate, and John Kenneth Galbraith lost…. By sheer chance, I found a Brad DeLong post…. In an alternate universe, Galbraith won and Friedman lost, and economics would be very different today. So I decided to post this…. We are all Friedman’s children and grandchildren. The way that New Keynesians approach macroeconomics owes more to Friedman than to Keynes: the permanent income hypothesis; the expectations-augmented Phillips Curve; the idea that the central bank is responsible for inflation and should follow a transparent rule. The first two Friedman invented; the third pre-dates Friedman, but he persuaded us it was right…. Friedman had a mountain to move, and he moved it. And because he already moved it, we simply cannot have a Friedman today…
Sokrates and Friends in Davos, or, the SNB and the Berne Whale: The Honest Broker
Septima: My good friend Omar, whom I love so dearly! You just ran into that tree!
Axiothea: And why are you walking about muttering to yourself with your eyes glued not to the beautiful mountain afternoon but to your smartphone?
Omar Khayyam: THAR SHE BLOWS! THREE POINTS OFF THE LARBOARD BOW!! IT’S THE BERNE WHALE!!!
Glaukon: What?!
Sokrates: 48 hours ago it was generally expected that the Swiss National Bank would continue its large quantitative easing program for the foreseeable future, in order to hold the Swiss Frank at its peg of 1.2 to the euro. Thursday morning it abandoned that policy, with results that were pretty exciting. People thought it might be a hoax. The Swiss franc immediately rose in value from 1.2 to 0.87/€–with somebody very unwisely liquidating a short-CHF position in a hurry–before settling in a trading range of 1.00-1.05/€. It is right now at 1.01. This is a tightening of monetary policy in Europe–some fraction of the anticipated quantitative easing program of the ECB will now simply soak up the Eurozone government bonds that the SNB will not be buying. This is an instantaneous mark-to-market portfolio loss of about 100B CHF for the SNB. Others outside Switzerland who were short CHF-denominated assets have probably lost 150B CHF. People outside Switzerland who were long CHF-denominated assets have gained 250B CHF. Swiss exports will fall for the next two years. And Switzerland is now highly likely to fall into a recession.
Glaukon: “CHF”?
Sokrates: “Confoederatio Helvetica Franc”–the formal name of Switzerland’s currency.
Aristokles: And “Omar Khayyam”? Haven’t seen you around here before…
Sokrates: Just because you only put my–overwhelmingly rich, Athenian-citizen, Hellenic, male–friends in your dialogues does not mean that everyone has to follow your example.
Aristokles: But isn’t he a tentmaker, and a drunken poet?
Silenos: You have a problem with wine?
Erato: You have a problem with his–and my–type of poetry?
El Shaddai: You have a problem with people who live in tents, or who make them?
Septima: Actually Omar is not a tentmaker. His day job in Bokhara is as a mathematician and a physicist–his Treatise on Demonstration of Problems of Algebra was absolutely groundbreaking…
Aristokles: But this is about finance!
Septima: And what else do underemployed physicists do in this degenerate age to pay the rent?
Glaukon: And “The Berne Whale”: what’s with that?
Sokrates: The reference is to Moby Ben, or, The Washington Super-Whale: Hedge Fundies, the Federal Reserve, and Bernanke-Hatred http://delong.typepad.com/sdj/2013/05/the-washington-super-whale-hedge-fundies-the-federal-reserve-and-bernanke-hatred.html. Back in 2012 a number of traders noted that it was cheaper to buy credit default protection on the 125 companies that made up the CDX IG 9 index by buying the index than by buying protection on the 125 companies one by one. So they bought the index, sold its components short, and waited for the index to rise or the components to fall so they could close out their positions at a large profit. As of April, however, the gap between the price of CDX IG 9 and what the traders thought it should be and grown, and their bosses were asking them questions like: ‘What have you missed here?’
It turned out that the London Whale, JPMC’s Bruno Iksil, had gone long CDX IG 9, gotten underwater, and started rolling double-or-nothing. Bruno’s bosses Ina Drew and Jamie Dimon then found they had a choice: They could go all-in, hold the portfolio until maturity, and either make a fortune if a fewer-than-expected number or lose JPMC if a greater-than-expected number of the CDX IG 9 125 companies went bankrupt. Or they could eat their $6 billion loss and go home. And so the traders had their happy ending.
‘Similarly’–or so traders said–from late 2008 to today the US Treasury bond has, from traders’ perspective, gone similarly haywire. The interest rate on the nominal 10-Year Treasury Note was pushed down to 2.1%/year in the panic as the Federal Reserve opened the liquidity floodgates. As of now the note yields 1.84%/year as the Federal Reserve has continued to push and keep Treasury bond prices way below ‘fundamentals’, and in the process expanded its balance sheet to $4 trillion.
Axiothea: I can hear the scare-quotes when you say ‘similarly’ and ‘fundamentals’. Would you care to elucidate right now? Or is elucidation the project of this dialogue?
Sokrates: Elucidation is the project of this dialogue.
Axiothea: I await…
Sokrates: Traders concluded that sooner or later the Federal Reserve would have to allow interest rates to return to fundamentals–that the policy of trying to keep interest rates away from fundamentals indefinitely was ‘unsustainable’–because unsustainable policies cannot be sustained indefinitely. And so traders sold US Treasury bonds short, banked their positions, and sat back to wait to take their profits when the correction came…
Omar Khayyam: And waited, and waited, and waited, and are still waiting…
Sokrates: Exactly. They ran into the widowmaker. And they were puzzled. Bruno Iksil, after all, had been pulled up short by his boss Ina Drew and her boss Jamie Dimon’s unwillingness to risk betting JPMC on a single roll of the dice. Ben Bernanke, they thought, ought to have similarly been pulled up short by the risks entailed by permanent ‘disequilibrium’ easy-money policy. But Ben Bernanke and after him Janet Yellen have not been pulled up short by rising inflation and the fear it will rise further. They have no supervising CEO to tell them that they are running risks too-large to manage. They dominate the Federal Open Market Committee. And, the traders think, they are engaged in behavior as unprofessional as it would have been for Jamie Dimon and Ina Drew to tell Bruno Iksil: ‘You turn out to have made a large directional bet that we can sell unhedged protection and profit? Let’s see if you are right: let it ride!’ And so they went public with their concerns about Bernanke the Washington Super-Whale just as the London Whale’s counterparties and gone public, in search of someone who could tell first Bernanke and then Yellen that it was time to unwind the Federal Reserve’s balance sheet.
Omar Khayyam: Jeremy Stein, perhaps?
Sokrates: Like Ben Bernanke and Janet Yellen at the Federal Reserve, the SNB embarked on a super-easy-money policy–in Switzerland’s case to minimize the damage to Switzerland’s export sector it feared would result from a value of CHF greater than 1.2/€. And up until Thursday morning that super-easy-money policy was the cornerstone of SNB plans, commitments, and forward-guidance communications. The SNB said that it could and would sustain it indefinitely. Now it is gone…
Omar Khayyam: And in the process of its going Switzerland now faces a near-term likelihood of recession, Switzerland’s taxpayers will now get $100B/€ less of seigniorage from the SNB…
Aristokles: Am I allowed to ask why it is “CHF” but “SNB”?
Septima: No.
Omar Khayyam: Central-bank commitments all across the North Atlantic are now viewed with grave suspicion. Those outside Switzerland long CHF are now 250 billion € richer. Those outside Switzerland short CHF–Polish homeowners with what they thought were cheap Swiss mortgages and others–are now 150 B € poorer…
Aristokles: What could make the SNB assign a positive benefit-cost value to this sudden action?
Axiothea: And you have to elucidate what you mean by the scare quotes around ‘similarly’, ‘fundamentals’, ‘unsustainable’, and ‘disequilibrium’…
Thrasymakhos: Yes, Sokrates. We want answers!
Sokrates: Aristotles of Stagira gives answers. I only ask questions. Apollo’s oracle at Delphi would not have said that I was wisest among the Athenians were I so great a fool as to offer answers…
Omar Khayyam: One perspective is provided by the very sharp Matthew of Alphaville, who writes that this is indeed a return to fundamentals:
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Switzerland’s problem isn’t an expensive currency but anemic consumption | FT Alphaville
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The whinging of Swiss exporters… does not mean the policy change was an error….. Ridiculously large current account balance…. export[ing] economic weakness… clearly engaged in currency manipulation…. The SNB… argued… Switzerland… a victim… just trying to shield itself from outside forces…. We’re skeptical…. [The] exchange rate that balances the flows of money in and out… [is] just might be a lot different than… Swiss exporters [wish]…. Swiss consumers won’t need to save as much…. Imports should… rise… a boost to neighbor[s]…. Exporters will be forced to become more competitive…. Switzerland… has monetary sovereignty [that]… it used… for ill. The recent move by the SNB could be the first step in Switzerland’s long-awaited transition towards less savings and more consumption. Swiss households should be pleased…
Glaukon: The argument appears to be that the SNB has been exercising a currency war against the Eurozone–exporting its unemployment elsewhere and impoverishing its citizens by forcing them to face adverse terms of trade–and that it is time for it to let the exchange rate find its “natural” level…
Hypatia: Or we could say boosting its domestic employment while recompensing Eurozone residents by providing them with the opportunity to buy well-made Swiss stuff cheap. I never know what to do with these arguments that give only the costs while ignoring the benefits or give only the benefits while ignoring the costs…
Sokrates: Perhaps the authors of such arguments should be put on trial for teaching things up in the clouds and under the earth, and making the worse appear the better cause, and so corrupting the youth of Athens?
Barry: The SNB’s quantitative easing program does have a zero-sum expenditure-switching aspect–boosting Swiss at the expense of outsiders’ employment–and a zero-sum terms-of-trade aspect–boosting the well-being of outsiders who buy cheap Swiss goods at the expense of Swiss who sell their goods cheaply. But it also has a positive-sum component: by raising present and expected future world money stocks and by taking risk off of private-sector balance sheets, it is a global monetary stimulus.
Sokrates: But there is a ‘disequilibrium’?
Barry: There is indeed. But you can resolve disequilibria by balancing global demand up or balancing global demand down. This policy move balances down, a bad mistake in a world in which we have not an excess inflationary-gap level but a deficient deflationary-gap level of North Atlantic demand.
Omar Khayyam: Another perspective is provided by the learned Markus and Harold of Princetown, who see this as the triumph of destructive politics over central-bank credibility economics:
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Making Sense of the Swiss Shock
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The SNB was not forced to act by a speculative run…. But domestic criticism of the SNB’s large buildup of exchange-rate reserves (euro assets) was mounting…. Swiss conservatives… fearing… eurozone government bonds were unsafe… agitated to… acquire gold…. The prospect of large-scale quantitative easing by the European Central Bank… intensified the political pressure…. Economists have… little stud[ied]… when political pressure becomes unbearable…. Politics… prevailed over central-bank commitments…. The uncoupling from the euro came as a huge shock…. The risks created… have a fat tail. The negative effects for the Swiss economy… may already be showing that abandoning the euro peg was not a good idea…
”
Glaukon: Markus and Harold appear to say that there was no economic logic behind the decision at all…
Aristokles: Just a fear that politics would force the end of the peg and that it was better for some reason for the SNB to manage the end itself and so preserve its independence…
Axiothea: I do not think that that is quite accurate. There is an economic argument–that a very large balance sheet is risky because of currency mismatch. If the value of the euro collapses for some reason, Swiss taxpayers will be left holding the bag–and so it is better to hold a stable store of value like gold than euros on your central bank’s balance sheet, and not let your central bank’s balance sheet grow too large.
Charlie: Guarding against the danger that the euro will collapse–that there will be a large outburst of inflation in the eurozone that will turn euros into waste paper that buy little or nothing in the way of useful commodities–seems to me to be like buying fire extinguishers instead of wood for your ark when it has been raining for forty days and forty nights. Do not expect me to approve of what old Ralph used to call: ‘Crying: “Fire! Fire!” in Noah’s Flood’.
Glaukon: But the political argument? If politics will place a limit on monetary expansion, it is better not to push those limits and so generate additional uncertainty, confusion, and risk?
Axiothea: I am still having a difficult time understanding why there should be political pressure to exit the euro on the side of appreciation. The value of the euro is not going to be inflated away. Having the Swiss price level move in the long run in step with the price levels of its neighbors seems not a bad thing. And as long as there is excess demand for CHF-denominated assets at a parity of 1.2/€, satisfying that demand is a source of resources for Switzerland: print CHF, buy interest-paying bonds with it, and pocket the interest. A central bank that can print the currency people want to hold can and should be the ultimate patient investor. Print money, buy bonds with it, and hold them to maturity is not usually thought of as a risky activity.
Glaukon: Unless a political referendum forces you to sell your euro bonds before maturity at a substantial loss and buy gold…
Axiothea: So the one economic risk–that the Swiss economy will be prevented from undergoing deflation driven by a steadily-appreciating exchange rate–is not a risk at all given that Eurozone inflation is simply not in the cards. And the other economic risk–that the Swiss will be forced to unwind their position at an inopportune time at which Eurozone bond yields are low rather than hold the bonds to maturity–is a risk only if goldbug politicians rile up voters and eliminate central bank independence. That second is a risk, I agree. But why are there goldbug politicians to rile up voters and eliminate the independence of a central bank that seems to be doing a good job of managing the Swiss economy in the interest of maximum employment and price stability?
Omar Khayyam: Perhaps a full-fledged red-meat believer like Jim Rogers can add some insight. As quoted by Hayley Hudson:
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Jim Rogers: I Predicted The Swiss Franc Shocker:
‘I explained carefully and at length that it was coming and why,’ he said in an email to Business Insider.I am still astonished they would ever have done something so foolish, but politicians throughout history have always done some amazingly foolish things…. Switzerland has… long provided monetary refuge from the wealthy evading the consequences of political turmoil in Europe, from French nobility fleeing the guillotine to the Jews escaping Germany…. Banks are supposed to keep your affairs quiet…. In America… that is no longer the case. The government can look… anywhere it wants…. [even] in Switzerland [it] is not as sacrosanct as it once was…. [People] want stability… a sound currency… [what] the Swiss franc has always offered. The question, now, is whether that is going to last…. Every citizen of Switzerland benefits from a stronger currency. Our dental technician down in Geneva is… happy…. But the big exporters get on the phone and the government takes their call….
The bank’s currency manipulation will turn out to be disastrous. One of two things is going to happen. In the first scenario… the SNB will just have to keep printing and printing and printing…. If you debase the franc, eventually nobody will want it. You will have eroded its value…. The money will move to Singapore or Hong Kong, and the Swiss finance industry will wither up and disappear. The alternative scenario is… [in 2010] the Swiss central bank, after quadrupling its foreign currency holdings, abandoned the effort…. The country lost $21 billion…. The Economist has described the Swiss currency as:
an innocent bystander in a world where the eurozone’s politicians have failed to sort out their sovereign-debt crisis, America’s economic policy seems intent on spooking investors and the Japanese have intervened to hold down the value of the yen.’
All of which is true, but I think the problem runs deeper than that. The Swiss for decades had a semi monopoly on finance. And as a result they have become less and less competent. The entire economy has been overprotected…. I still have those original Swiss francs that I bought in 1970…. Had I kept the money in an American savings account, it would have gone down 80 percent against the franc.
Axiothea: So Jim Rogers says that either the Swiss government will print so many CHF that it will lose its value, and finance will leave Switzerland because of the debasement of the currency; or the Swiss government will print too few CHF and so its value will keep rising and it will lose money on its interventions. Is that correct?
Glaukon: Yes. And it has lost money on its interventions–100 billion € worth…
Axiothea: But can’t it print the golden mean? Not so much that the Swiss franc loses value vis-a-vis other competing potential safe nominal assets, but not so few as to require a painful grinding unemployment-generating deflation of the Swiss export sector?
Walter: It should print the ‘natural’ amount to meet the needs of trade, clearly. The problem is that Rogers provides no guidance as to what the ‘natural’ amount is…
Milton: I used to think a steady k% growth rate for broad monetary aggregates would provide the best attainable feedback rule for approximating the ‘natural’ stock of high-powered money. But that position seems less and less defensible with each passing day…
Charlie: The best way to understand this, I think, is as an exaggerated version of the Rubin Doctrine that “a strong dollar is in America’s interest”. For Jim Rogers, a stronger CHF than currently exists is always in Switzerland’s interest–in the interest of everyone in Switzerland, of the dental technician in Geneva, with the exception of a few big exporters who want CHF depreciated below its “natural” leve…
Barry: And what is the “natural” level of the CHF, in Jim Rogers’s view?
Sokrates: If unemployment afflicts only the non-enterprising who deserve it, then for anyone long CHF–as Jim Rogers is–there is no “natural” level of the CHF. Stronger is always better…
Omar Khayyam: Indeed, Socrates, you are, as Apollo said, the wisest of the Athenians…
Glaukon: But surely very few people think like Jim Rogers?
Walter: Very few people think like Jim Rogers, but a lot of people have elements in their thought that partake of the Rogers-nature. We saw this in the views of the very sharp Matthew C. Klein, who thinks that Switzerland’s export surplus is a signal that the Swiss franc is in disequilibrium, rather than a signal that the supply of safe assets in the world economy is in disequilibrium–too low, needs to be boosted, and because it has not been boosted to its equilibrium level there is this knock-on effect on the value of CHF.
Omar Khayyam: Indeed, Walter, you seem considerably wiser than your successors at your little weekly magazine:
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Currencies: Going Cuckoo for the Swiss:
Some analysts speculated that political pressure may have caused the Swiss to abandon the policy…. Others felt that the SNB may be expecting the European Central Bank to announce quantitative easing… weaken the euro and require even more intervention to cap the franc. Already in a hole, the SNB may have decided to stop digging…. 60% of Swiss exports go to the euro zone and the United States…. The [Swiss] equity market has plunged in response…. The whole episode is a useful reminder that currencies are a zero sum game; if some countries pursue policies (such as quantitative easing) likely to weaken their exchange rate, other currencies must gain. The ripple effect can be significant…
Barry: Am I allowed to point out that the CHF strengthened not because anticipated ECB QE is zero-sum, but because the SNF abandoned its exchange rate-feedback QE program itself? Repeat after me: relative policies determine exchange rates; the absolute North Atlantic-wide total values of interest rate and QE policies determine the monetary stance of the North Atlantic as a whole. And there is a distinct positive-sum aspect to QE: few now are unhappy with the consequences of Japan’s current QE policy, for example…
Omar Khayyam: We see the same “the SNB removal of the currency peg ends a distortion” argument from the intelligent John Authers…
Sokrates: Not “the end of the SNB’s QE policy reduces an intra-European distortion at the price of increasing the disequilibrium safe-asset shortage, and so carries the world economy away from its best self”?
Omar Khayyam: No:
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Lessons from Switzerland doffing its cap:
A distortion has been removed from international markets…. A recurrent puzzle of the eurozone sovereign crisis was that the euro never weakened much, despite the fears for its existence. We can now see that the SNB at least deserved part of the blame…. Eurozone competitiveness should rise, while the US grows less competitive. This would be healthy…. The SNB… had every reason to fight the ‘currency war’… with greater fervour than others. Abandoning that fight, with inflation heading towards zero and growth low, tacitly accepts that Switzerland will have a recession…. The most lasting lesson… investors… have been shown there are limits to how large a central bank’s balance sheet should grow–and hence… how much they should trust central banks…
Axiothea: It is as though Switzerland has bravely sacrificed itself–accepted a recession, and thrown away 100 billion €–for the sake of helping the adjustment of the Eurozone…
Sokrates: Accepted a recession and thrown away 100 billion € I get. Helping the adjustment of the Eurozone?
Axiothea: A higher value for CHF against the dollar, a lower value of the € against the dollar, more exports from the Eurozone to the US and Switzerland, fewer exports from Switzerland to the Eurozone and the US, fewer exports from the US to the Eurozone…
Barry: But fewer safe assets in the North Atlantic economy as a whole–hence a greater North Atlantic-wide deflationary safe asset-shortage gap–less trust in the ECB’s willingness and power to keep its QE commitments, and a world seen to be a more dangerous place and hence one in which the demand for safe assets is greater. I do not see how this makes the ECB’s task easier. A lower € is a plus for the merchants of Hamburg and Amsterdam and the manufacturers of the Rhineland. But Europe as a whole–including Switzerland–is surely a loser. And I don’t see how the export benefits outweigh the monetary-credibility minuses even for the Eurozone considered in isolation.
Omar Khayyam: And then there are those who believe that the policy of pegging to the euro at 1.2/€ was a reasonable one, that if the SNB has abandoned that policy for economic reasons it has made a big mistake, and if it has abandoned it for political reasons that shows a major failure of democratic governance.
We have Willem Buiter:
: Did the SNB Score an Own Goal? Francly, Yes: “1. The removal of the 1.20 floor on the CHF-euro exchange rate was a mistake. 2. Superior policy alternatives existed. 3. The old regime was indefinitely sustainable. 4. Removing the lower bound on nominal interest rates would have been the best choice. This can be done one of three ways. 5. The economic damage can be limited by restoring the exchange rate floor at a level not below the old one, and/or by eliminating the lower bound on nominal interest rates. 6. The rest of the world can learn from the SNB’s experience with a -0.75% deposit rate.”
We have Simon Wren-Lewis:
: What Does the End of the Swiss Peg Tell Us About Central Banks?: The interesting question is why the central bank ended the cap…. As a result of ending the peg, the Swiss Franc has appreciated substantially, from 1.2 CHF per Euro to around 1 CHF per Euro, even though the central bank has lowered the interest rate on sight deposit account balances that exceed a threshold to −0.75%. There seem to be two alternative interpretations. The first is that the central bank simply made a serious mistake. For some, the mistake was to impose the cap in the first place. If you do not take that view, and assuming the market’s immediate move is not a very temporary overreaction, the large appreciation partly undoes the benefits of the original peg. Either way, a major mistake has been made at some point…. The second interpretation is that the open ended money creation that the policy implied just became too much for the central bank. In theory the central bank could go on creating money and buying Euros forever…. If it ever decided… there was too much Swiss money around, the policy could be reversed by selling Euros. The central bank might make a loss… but economists generally dismiss this as a non-problem…. But perhaps central banks do not see things this way (HT MT), because they worry about the political consequences of such losses. If this is the case, then this is something that economists need to respond to in one way or another…
And we have Paul Krugman:
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Regime Change in Switzerland: These days it’s fairly widely accepted that it’s very hard for central banks to get traction at the zero lower bound unless they can convince investors that there has been a regime change…. On Thursday, however, the Swiss National Bank managed a credible regime change. Unfortunately, it was a regime change in the wrong direction. By throwing in the towel on the peg to the euro, the SNB immediately convinced markets that its previous apparent commitment to do whatever it takes to avoid deflation is null and void. And this expectations effect trumped the concrete, immediate policy of drastically negative interest rates on reserves…. Having in effect thrown away its credibility… it’s hard to see how the SNB can get it back…. There will be spillovers: the SNB’s wimp-out will make life harder for monetary policy in other countries…. All in all, quite a day’s work.
And:
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Francs, Fear and Folly: Switzerland’s monetary travails illustrate in miniature just how hard it is to fight the deflationary vortex now dragging down much of the world economy…. In 2008 we entered a looking-glass world…. In many cases, economic virtues became vices: Willingness to save became a drag on investment, fiscal probity a route to stagnation… having a reputation for safe banks and sound money… a major liability…. In 2011, the Swiss National Bank tried a psychological tactic… announced that it would set a minimum value for the euro…. And for three years it worked. But on Thursday the Swiss suddenly gave up. We don’t know exactly why; nobody I know believes the official explanation, that it’s a response to a weakening euro. But it seems likely that a fresh wave of safe-haven money was making the effort to keep the franc down too expensive. If you ask me, the Swiss just made a big mistake. But… Switzerland isn’t the important issue. What’s important, instead, is the demonstration of just how hard it is to fight the deflationary forces that are now afflicting much of the world…
Omar Khayyam: And perhaps the learned Edward Harrison sums it up best:
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What the Wild Swiss Franc Appreciation Really Means | Foreign Policy
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The Swiss franc, traditionally a safe-haven… rose some 30 percent over the course of the the European sovereign debt crisis… a huge blow to near-term growth in Switzerland…. The SNB’s balance sheet is now about 500 billion francs, 80 percent of [annual] gross domestic product…. This expansion has become too much for the SNB to bear politically. The Swiss pride themselves on sound monetary policy–and a balance sheet of this size due to currency intervention just isn’t the quintessential hallmark of sound money…. In a perfect world, a central bank could have a balance sheet that is equivalent to… even 200 percent… [of annual] GDP… take mark-to-market losses on those assets… the easy monetary policy of a currency war could be like a coordinated devaluation. But in the real world, it’s not. Central banks move unilaterally, due to their own narrow political and economic exigencies…. The world is addicted to monetary stimulus. And central banks are doing their best to meet that addiction…. Monetary policy is in an abnormal state. And this has created serious macro imbalances…. The Swiss franc move is just the scary canary.
Hyman: I don’t like the “addiction” metaphor. The world’s central banks are not pushers. They are, instead, shoring up the foundations of a building that is sinking due to improper banking and fiscal foundations. No, stop-gap shoring-up timbers are not meant to be permanent. But you do not want to take them away until the proper concrete has been poured for the banking and fiscal foundations so that full employment, balanced growth, and price stability are consistent with monetary-policy normalization…
Aristokles: Did the SNB expect this? Did they possibly expect their move to negative interest rates on deposits to weaken the CHF by as much as the removal of expected future QE to maintain the peg would strengthen it?
Glaukon: That is my guess. But we really do not know, do we?
Sokrates: Perhaps the best note on which to end! But I cannot help but direct all of you to one more passage:
Trust Me, I’m a Swiss Central Banker:
“One trade structure I have always liked is the peg break…. If I had had the confidence to put it on in EURCHF…. Sell 1.2000 Eur puts Chf calls and buy twice as many 1.1750 or there about Euro puts choosing the period to make this 2×1 put spread at zero premium. The payoff being zero if no break, but if there is to be a break I lose between 1.15 and 1.20, but make on everything below. The theory being that when pegs break they don’t mess around….
I had complete faith in what I was told by the SNB with respect to their attitude towards the everlasting floor…. Why did I have faith in what the SNB said? Because removing the prop of central bank credence in the midst of a market that is completely controlled by central banks and the expectations of what they will do to save the world leaves a financial world orphaned…. We have to question the worth of analysing Fed dots or every word from Draghi…. I feel betrayed and I feel confused. How could they do this to me?….
The SNB have stepped back from an impending wall of Euro about to hit the market through [ECB] QE and they are avoiding future costs in continuing the policy…. The [ECB] QE… is going to provide a massive bid for European bonds into which, should they chose, the SNB can hand their holdings painlessly…. How ironic if market positioning looking for the ECB QE to support their long Bund positions is usurped by the SNB has filling their bid….
To summarise the potential reasoning for the SNB removing the floor and in the process undermining all faith in their future commitments:
- The pressures on the CHF through real economic functions has mounted to a level to make the CHF no longer expensive at 1.2000
- To get out of the way of up to EUR 1trillion of EU QE.
- Yields are so low on their reserve holdings there is no cost benefit.
- EU QE will provide a bid into which to exit their existing holdings.
- And let’s add–Popular opinion in Switzerland towards the size of the SNB’s balance sheet has made the whole policy a political hot potato…
Sokrates: I cannot but feel that (5) was the most important reason in the SNB’s mind for it to do this now–but do remember why Apollo claims that I am the wisest of the Athenians: I do not think that I know things that I do not know…
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