28
Jan
2015
Swiss National Bank vs. the Federal Reserve
In light of the recent announcement of the Swiss National Bank abandoning its peg to the euro, I thought people should realize just how much the SNB had inflated. The following chart compares the SNB “monetary base” (you can think of it as its balance sheet, close enough) with that of the Fed. They are both indexed to 100 at the start of the graph:
As the chart shows, by mid-2011 the SNB had expanded more (percentage-wise) than the Fed, and it’s never looked back. Currently, the SNB’s base is eight times what it was in late 2007.
One last thing: Keynesians around the world denounced the SNB for throwing in the towel, showing an insufficient willingness to inflate in order to promote prosperity.
“Keynesians around the world denounced the SNB for throwing in the towel, showing an insufficient willingness to inflate in order to promote prosperity.”
Gotta love those imaginary counterfactuals.
“One last thing: Keynesians around the world denounced the SNB for throwing in the towel, showing an insufficient willingness to inflate in order to promote prosperity.”
That is a bizarre, ignorant statement. Most Keynesians support fiscal policy as the effective way to stimulate an economy, not monetary policy or QE.
The neoclassical Keynesian critique of QE would be that it is an ineffective policy in a liquidity trap and the Post Keynesians would say it is nearly always an unreliable and feeble way to stimulate aggregate demand. The Post Keynesians argue that this is because the money supply is endogenous and the loanable funds theory is a false model of both interest rates and the level of investment — the correct explanation.
You complain that “people should realize just how much the SNB had inflated”, despite the fact that you should already know that QE in other countries has not caused massive or even high inflation.
If you doubt this in the Swiss case, look at the Swiss inflation rate:
Switzerland Inflation Rate %
2007 | 0.7%
2008 | 2.4%
2009 | -0.5%
2010 | 0.7%
2011 | 0.2%
2012 | -0.7%
2013 | -0.2%
http://data.worldbank.org/indicator/FP.CPI.TOTL.ZG/countries?page=1
LK,
Just to have you on record. You are saying that the 8th fold increase of the monetary base will never pose an inflationary problem for the Swiss? Can you confirm that?
I think in this case the majority of money printing washed out into Europe. The only purpose it served was discouraging any European from thinking about a safe haven in Swiss banks.
With the peg removed a bunch of investors will be reconsidering the option of unloading their Euros and putting some away in Francs (even without gold backing). That’s going to give short term buoyancy to the franc.
Obviously Europeans really think Draghi has finally wrestled Merkel into submission. I don’t believe it for a moment. Draghi has always been full of (you know, words we don’t write in Bob’s blog) and Merkel has a bunch of trigger happy Constitutional conservative litigants right at her shoulder.
As soon as people see that Draghi has once again done nothing more than empty jawboning it will come back to square one.
It’s pretty stupid and unproductive that every investment consists of nothing more that double-guessing the politics, so nothing is real anymore but there you go.
“With the peg removed a bunch of investors will be reconsidering the option of unloading their Euros and putting some away in Francs (even without gold backing). That’s going to give short term buoyancy to the franc.”
Well, the question is what happens after the short term buoyance, when the franc stops increasing its value and with it CHF denominated asset values?
If you are right with Draghi, then this will only make things worse for the CHF.
Yeah I think the long term will bring the CHF back down as the intrinsic value asserts itself. I’ve no idea about Draghi but he’s bluffed his way so many times before, I wouldn’t give him any credit.
I suggest that grabbing Swiss Francs and just sitting and holding would be pretty risky, but I think a lot of people are going to do just that.
Then again, it could all just be some manipulative scheme to move the Swiss onto the Euro, it is trading suspiciously close to parity right now. There could have been a quiet deal done. If it seems to stick to Euro parity too firmly I’d call shenanigans.
“skylien
LK,
Just to have you on record. You are saying that the 8th fold increase of the monetary base will never pose an inflationary problem for the Swiss?”
No, not “never pose an inflationary problem for the Swiss”. Under some conditions, it **might** pose some risk. But under present conditions, the risk is small: the inflation “risk” is grossly overrated, and as we see in the actual CPI Switzerland has slipped into actual deflation in 2012-2013.
But isn’t this condition under which it “might” pose an inflationary problem to be out of the liquidity trap?
And isn’t the goal of Keynesian policies to get out of the liquidity trap, which means it is not a question of “might” but only of “when”? Well I guess your answer is, that when the economy is out of the liquidity trap then the CB can easily unwind its balance sheet without pushing the economy back into recession (another liquidity trap) right?
“But isn’t this condition under which it “might” pose an inflationary problem to be out of the liquidity trap?”
No. That is a New Keynesian idea.
I support Post Keynesian economics. That even now you cannot understand this speaks volumes. I even explained it above:
“The Post Keynesians argue that this is because the money supply is endogenous and the loanable funds theory is a false model of both interest rates and the level of investment — the correct explanation”
The money multiplier is a myth. Orthodox loanable funds theory is a myth. Our money supply is endogenous. Demand for credit is not some simple function of interest rates. Since the central bank already meets the demand for high powered money in our system, you and Austrians in general cannot and will not understand that excess reserves don’t behave in the way you think with your money multiplier nonsense.
I forgot how nice you can be. I don’t believe in the money multiplier. And it is non-sequitur to attribute that believe to me for thinking a high monetary base created during a liquidity trap is a problem after you are out of the liquidity trap. It speaks volumes that you don’t understand that!
“you and Austrians in general cannot and will not understand that excess reserves don’t behave in the way you think with your money multiplier nonsense.”
What is this nonsense, LK? Cannot and will not?
http://libertarianpapers.org/articles/2010/lp-2-43.pdf
LK,
ummmm… Inflation versus CPI increases are two very different things.
Finally as far as CPI, QE is not targeted at CPI. It would either increase asset costs ( stocks etc ) or artificially lower Bond rates ( due to the central bank purchasing the ‘safest’ bonds )
This has little to do with the question of inflating money supply, which it does. Ergo it ’causes’ inflation. It could be argued that QE will cause a negative growth in CPI, though this could also be a bit of a chicken and egg argument.
What will really be interesting is what occurs in the next downturn. What happens if the only one buying your bonds IS the central bank? Hard to say at that point. QE more than anything else seems to be slick way for bankers to hand themselves additional funds at no or very low cost.
LK,
I think when Bob speaks of “inflating to prosperity”, he is talking of inflation not as per the modern definition of “a steady rise in prices” but as an increase in money supply in excess of any offsetting increase in demand to hold money.
” Bala
LK,
I think when Bob speaks of “inflating to prosperity”, he is talking of inflation not as per the modern definition of “a steady rise in prices” but as an increase in money supply in excess of any offsetting increase in demand to hold money.
“
So he takes an idiosyncratic definition of “inflation” that his opponents do not accept, and then charges his opponents of wishing to “inflate” — increase the money — but not having any effect on prices? This is incoherent.
No, LK. He takes the original and meaningful definition of inflation.
The core point is that you did not even bother to understand what he said but went ahead to counter his point by shooting truckloads of information that was completely unrelated to what he said. Typical….
I mean the original and meaningful definition that was used till the late 1970’s but which has since been superseded, for no sound reason, by a far less meaningful and insightful definition that only serves to sever the connection (in people’s minds) between money supply and the purchasing power of money.
“Bala
No, LK. He takes the original and meaningful definition of inflation.”
False. That was not the original definition of inflation:
http://socialdemocracy21stcentury.blogspot.com/2014/08/the-original-economic-use-of-word.html
http://socialdemocracy21stcentury.blogspot.com/2014/08/the-original-economic-use-of-word.html
LK, do you know what the definition of “definition” is?
LK:
“So he takes an idiosyncratic definition of “inflation” that his opponents do not accept, and then charges his opponents of wishing to “inflate” — increase the money — but not having any effect on prices? This is incoherent.”
LOL. Just because his opponents do not define what they want as more inflation, it does not mean that they don’t want more inflation as defined the way Bob defines it. Bob was not criticizing his opponents for using the wrong definition of inflation.
You’re again engaging in linguistic prescriptivism.
Since you mentioned QE, my guess is that Bob considers QE as inflation and price inflation as one possible effect of that inflation.
LK,
If someone were to say, “The SNB is showing an insufficient willingness to inflate in order to promote prosperity,” would you agree or disagree with that statement?
And if you agree with that statement, what would you have the SNB do differently?
“Andrew
LK,
If someone were to say, “The SNB is showing an insufficient willingness to inflate in order to promote prosperity,” would you agree or disagree with that statement?”
Disagree.
Why? Because the person saying that would almost certainly be a monetarist who believes the quantity theory, the money multiplier and the loanable funds theory (all false theories) and (and this is the crucial point) thinks that a sufficiently large QE program per se would be an effective way to restore full employment.
That is NOT a Keynesian perspective. Certainly not a Post Keynesian one. Keynesianism says fiscal policy is the effective way to control aggregate demand.
This is the point I am making above, and it speaks volumes that none of you can even distinguish monetarist from Keynesian theory.
So, you (and Post Keynesians) have no opinion on central bank policy aside from its role in raising money for your desired fiscal policy?
“So, you (and Post Keynesians) have no opinion on central bank policy aside from its role in raising money for your desired fiscal policy?”
http://socialdemocracy21stcentury.blogspot.com/2013/03/post-keynesian-policy-on-interest-rates.html
Thanks LK. Based on my reading of that article, there are some Post Keynesians (who you call “activist Post Keynesians”) that would argue that monetary policy can promote “output, investment or capacity utilization.” You go on to say that you feel this viewpoint is incorrect, but nevertheless, these people are out there.
My point is that Bob’s last sentence is not as “bizarre” or “ignorant” as you would have us believe given that he meant monetary inflation (or the normal effect of lowered interest rates) rather than price inflation.
LK:
Persistent government budget deficits, such as we have seen for many decades with few exceptions, requires continual inflation from the government’s central bank, or else the government will go bankrupt. An institution cannot possibly keep spending more money than it takes in for such long periods of time without its central bank buying back its own debt and preventing borrowing costs from rising above taxes..
LK,
==> You may have a point that my “Keynesians around the world…” could be construed as unfair, if in fact a lot of prominent Keynesians said, “Yeah, didn’t think it would work.” I may have been unduly influenced by Scott Sumner more than Krugman on this one; I am open to that.
==> As far as your quibbling on the term “inflation,” no normal person could read my post and not know what I was saying.
LK,
You like to berate others on this site for their ignorance and bias.
You should be aware that when you say things kike “The Post Keynesians argue that this is because the money supply is endogenous and the loanable funds theory is a false model of both interest rates and the level of investment” as an argument again monetary policy you are displaying these very same attributes yourself.
Implicit in monetary theory is a very clear understanding of the endogenity of money, and no-one much believes in the simple “loanable funds” and money multiplier models you like to parody your opponents as being adherents of.
There are undoubtedly aspect of PK theory that are worthy of deeper study – but this frequently observed tendency to misunderstand and misrepresent other school of thought just makes one wonder what you guys have to hide.
Transformer,
It’s my understanding that the money multiplier is just standard theory and isn’t uniquely Austrian. Where are you getting this idea that it’s completely rejected?
As far as loanable funds theory goes, are you saying that interest rates are not affected *at all* by changes in the supply and demand for loanable funds?
Any remnants of belief in the multiplier surely died since 2009 when base money has increased dramatically but M2 has not.
So no comment on loanable funds theory? I seriously don’t understand how someone can deny it. Hell, it’s related to liquidity preference, so at last some (non-kooky, non University of Missouri-KC affiliated) Keynesians should believe it has some power.
You have to build in money endognicity (is that a real word?), CB policy, liquidity preference (aka demand for money), expectations about future price level and other things into a model that explains current interest rates.
All of this seems beyond the scope of a simple loanable funds model.
Am I wrong ?
“endogeneity” 😉
I think the word is “endogeneity.”
Yes, all those things impact interest rates. However, we have to use ceteris paribus conditions to understand what’s going on. Ceteris paribus, an increase in the supply of loanable funds puts downward pressure on the interest rate.
Why can’t people understand that there is a Wicksell Effect (loanable funds) AND a Fisher Effect (nom = real+inf)? Yes, an increase in the quantity of money will increase loanable funds and put downward pressure on the interest rate, but expectations of future inflation will tend to push it up. All this whining and moaning (primarily from LK) about endogeneity and “WHAT ABOUT THIS EFFECT YOU STUPID IDIOT!!!!!” really misses the point when talking about THEORY. When talking about empirical reality, yes, we have to have discussions about which effect dominates, but whether one effect dominates another doesn’t invalidate a given theory.
I don’t disagree.
Remember my initial point was that LK seems to think that we all believe in a naive Loanable Funds model and only Post-Keynsians are smart enough to see those other things.
Transformer, sorry if it sounded like I was biting your head off. I was being facetious when I said, “You guys tell me why the SNB did it then, since my worries are so obviously stupid.” I know why they did it.
I guess what I’m trying to say is, when Josiah talks to me like I’m 5, I act out.
No problem, Bob.
Your response was probably earned given I missed the facetious nature of your question. The witty reply I should have given will probably occur to me around this time tomorrow.
“and no-one much believes in the simple “loanable funds” and money multiplier models you like to parody your opponents as being adherents of.”
-Murphy certainly used to view these as true in 2009 and even as late as 2010, but abandoned them in January 2011.
Actually, E. Harding, as Transformer clarified here his point was that we don’t believe in simplistic or naive versions of those theories. I think most of us understand that there’s a Fisher Effect just like there’s a Wicksell effect and that other issues can come into play.
Now, remember, we can take a single theory and talk about its effects under ceteris paribus conditions. We can say that according to theory X, if A happens, there will be pressure on B in one direction or another. When we talk about empirical analysis we have to consider other theories and make predictions based on which effect is stronger.
I don’t recall any of Bob’s more thorough analyses from the years you mention ignoring any of this.
“Transformer
Implicit in monetary theory is a very clear understanding of the endogenity of money, and no-one much believes in the simple “loanable funds” and money multiplier models you like to parody your opponents as being adherents of.
Sounds like you have never done an introductory course in neoclassical economics — or read neoclassical textbooks.
I would have said the same thing, LK, but perhaps it’s a time issue. Do you really think banking textbooks haven’t changed since 2009?
Actually, you are right.
But on the other hand it sounds like you have never read much of what recent Monetarists, Austrians, and even New Keynesian economists have actually written in the last few years (in blogs or published papers).
BTW: What is this “neo-classical” thing you keep banging on about – what does that even mean in terms of today’s economic debates ?
“The Post Keynesians argue that this is because the money supply is endogenous and the loanable funds theory is a false model of both interest rates and the level of investment — the correct explanation.”
-So what? The central bank can always print money to make up for the nominal demand deficiency. Loanable funds has no relevance here unless the central bank successfully targets a certain rate of inflation.
“Because the person saying that would almost certainly be a monetarist who believes the quantity theory, the money multiplier and the loanable funds theory (all false theories) and (and this is the crucial point) thinks that a sufficiently large QE program per se would be an effective way to restore full employment.”
-All blatant and trivial untruths, LK. This quote of yours simply shows you don’t understand any economic perspective at all other than the personal variety of PKism you espouse and, possibly, Marxism.
LK:
“The Post Keynesians argue that this is because the money supply is endogenous”
Post Keynesians are wrong on that point.
The Fed increases the money supply when it buys treasuries from the banks.
QE is inflation (of the money supply). The reason there is more money in existence today as compared to say 100 years ago, is not because the banks have kept expanding credit which then resulted in expanded deposits. Without an expansion in the monetary base, continuous credit expansion will eventually result in system wide bank insolvencies, as the need for money to pay for normal withdrawals and expenses exceeds the money supply banks have on hand. In order to enable the historical extent of credit expansion that took place, there was required expansion of the base money supply by the central bank.
Bank credit is endogenous, but base money is exogenous.
Exactly, MF.
M_F, it is clear you have no idea what “endogenous money” even means.
You are just another loud-mouth, embarrassing ignoramus.
Nobody denies the central bank creates high-powered money. However, it normally does this just to meet the demand for high-powered money from banks.
Endogenous money theory denies the money multiplier and conventional story of how money is created. The quantity of broad money cannot be directly controlled by the central bank. That is correct. Money supply is demand-led. This is why QE around the world — in Japan, the US, the UK etc. — has failed and does not result in increased investment sufficient to restore high employment.
Resorting to insults is a dead giveaway that you’re losing an argument. M_F was making the point that as banks increase the money supply by lending and deposit-creation, their need for high-powered money will increase. Obviously true, as more bank deposits means more transfers between rival banks and to customers who want cash. This need must be met by the central bank to avoid a collapse of the banking system.
You say “Money supply is demand-led.”.
For 2 decades before 2008 most CBs had an inflation target (normally 2%) that they successfully hit. They did this by slowly increasing the qty of base money over time (and adjusting for fluctuations in velocity and the infamous “money multiplier”).
How is that demand led ?
You heard it here first, folks! LK says there is NO SUPPLY EFFECT whatsoever in money markets. It’s demand led! Duh! Let’s fiscal policy this recession!
LK,
I’m still waiting…
http://consultingbyrpm.com/blog/2014/12/using-fred-graphs-to-evaluate-keynesian-model.html#comment-1445507
Hey Bob,
Have you seen this article from Keith Weiner? Well if his analyses is true then this would spell disaster for the Swiss in the future. I am not a 100% sure that I can understand the complete chain of logic behind his reasoning yet.
However the charts that show with which force (nearly) the whole yield curve on Swiss bonds literally drops below 0 is just staggering. What do you make of this?
http://monetary-metals.com/the-swiss-franc-will-collapse/
@ Daniel Kuehn or LK,
What do you make of this dropping yields into ever more negative territory? Would be nice to know what you think about this before we see what will happen..
For the record. I don’t dare make a prediction what will happen to the Swiss France because I know that I haven’t fully grasped what dynamics are at play and how they will work out. However I know enough to not touch the CHF with even a ten foot pole as of yet.
Ironically maybe it is now the time, when all those borrowers in the EU who took out CHF loans in the past to fund houses etc are crying of pain, to heed Rothschild’s advice to buy when ‘blood’ is on the streets, which means take out CHF loan now to buy a house!
Let’s see what is going to happen.
It seems weird to be predicting that a currency that appreciates 20% in one day after its own CB decides to stop holding to down is on the verge of collapse.
Does that guy take bets ?
“holding it down”
BTW: Is it only me that finds it annoying that you now have to scroll to the bottom to reply to a comment, by which time you’ve forgotten what the comment you were going to reply to actually said ?
Yeah it’s annoying Transformer. (I don’t notice it as much if I reply from the Captain’s chair on my blog control panel, but I know what you are saying.) I am going to try to fix stuff but I’m swamped with work right now. I’m also annoyed that there is no thumbnail preview if I post a link from here onto Facebook.
Transformer,
You misconstrue his argument. It is not about one FX move of 20% within one day. It is about the complete yield curve going negative.
I guess the gist of his argument is that with negative yields across the whole yield curve there is no way anyone can fund its liabilities carrying positive interest acquired before. It works as long as your assets increase in value but when that stops you got a real problem, especially the lower the yields the higher the leverage! Additionally this wrecked risk and time market causes capital consumption. So the real asset base is shrinking not increasing although people might think that due to rising nominal asset values.
If the process turns around (markets take the escalator up and the elevator down) then all the CHF created by the SNB which chased up CHF denominated assets can only go one place, because assets across the whole board (bonds, stocks, real estate etc) were lifted, and then of course crash. And in this scenario there is nothing the CB could do to stop this… Selling its own assets to suck CHF would make things only worse, not even to mention that with crashed asset prices the SNB might be technically insolvent having higher liabilities than assets.
As I have said, I am not understanding completely what he means and why he is so sure to make this grave prediction, why for him the trigger is basically when the whole yield curve goes negative etc.. But be fair to his argument, it is not as simple as you state it, and I don’t know if I even have adequately summed it up.
And well ask him if he takes bets. I am sure you will find a way to contact him on the site of the article. Let us know if you actually made a bet.
😉
For someone with their savings in Euros who expects central bank devaluation of the currency and engineered inflation, the feeling of security in holding a few Francs might be worth the lack of yield.
Think of it as hedging against inflation buy buying up tins of gold paint.
Right, and why wouldn’t that be possible over the entire yield curve? That is what I don’t get. On the other hand it is clear to me that it can’t go on forever, having ever lower yields, something’s got to give at some point. But what is the point, the trigger?
Good analogy BTW. And it might also be possible to just bet on further asset value increases. So you don’t care about the negative yield, because you want to sell the asset for a higher price before it comes due anyway…
Bob,
Switzerland seems pretty prosperous to me. What bad things do you expect to result from the SNB’s actions?
Cheese and choclate may become expensive ?
Let me try it this way, guys: What is your theory for why the Swiss National Bank stopped expanding its balance sheet? If it’s so patently obvious that there were no risks in what they were doing, then why did they stop? Sure, some bald Austrian guy on his blog might be an idiot who doesn’t even know how to measure CPI or who foolishly believes in “the money multiplier,” but it’s interesting that the SNB itself screwed their own people by discontinuing a policy that Josiah here can justify in 6 words.
The reason seems very likely to have been due to immanent EU QE and the SNB didn’t want to have to buy up a shed load more Euros to hold the Franc down.
Doesn’t mean its a good reason though.
Of course that’s the reason.
Oh wait I forgot–if Josiah thinks expanding the SNB’s balance sheet by 8x is good, then doing it 80x is awesome!
Hey Bob,
You are making the “minimum wage fallacy”. Just because people are for minimum wages of 15 Dollars and the think they are great and don’t cause unemployment etc.. that doesn’t mean they believe a minimum wage of 1000 Dollars were fine. Of course they just don’t want to tell you what the problem with the 1000 Dollar minimum wage is, because then they would get into trouble defending the 15 Dollar minimum wage…
I do not understand why anyone would want to the Swiss to continue to subsidize all of the big spender countries of the EU with this currency peg? This is just theft from Swiss citizens in the form of INFLATION and that real wealth is being squandered in loans by the Greek and other governments. It is simply not the responsibility of the Swiss to make sure some other EU countries can take out loans at lower interest rates than they would be able to do otherwise.
If you want to know where the inflation is, you need look no further than the big spending countries to see increases (Krugman calls it austerity) in government spending from loans made cheaper by the Swiss.