In the wake of the SNB decision last week to remove its infamous 1.20 euro floor rate, the ever ingenious – and no less self-assured – Willem Buiter has been expressing his outrage that any central banker might dare to deviate from a consensus which shares three articles of faith, each engraved by the Deity on the tablets he handed down to His prophets at MIT.
For, you see, the True Believer knows to blame all of humankind’s woes on the fact that it is struggling in that Carollean snare of a ‘liquidity trap’ (‘Beware the Jabberwock, my son! The jaws that bite, the claws that catch!); he and his peers worship at the clay feet of the fetish they have erected of prosperity being utterly dependent upon the attainment of the entirely arbitrary goal of a 2% p.a. rate of ‘inflation’; and he is also firm in his resolve to do anything in his power – constitutionally conferred upon him or not – to achieve such a rate, no matter what the violence wrought on concepts such as law, equity, and republican virtue, much less to the lessons of economics itself, along the way.
In brief, Friend Buiter’s fevered theorizing has lead him to believe that the Swiss National Bank should not have committed apostasy by untethering the franc but instead it should have afforded itself the power to set deposit rates not just at -0.75%, but at -7.5% – and presumably at -75% if required – in order to repel the influx of unwanted monies from abroad. For our Willem, you see, it is the artificial and anachronistic hindrance imposed by the ‘Effective Lower Bound’ on interest rates that prevents a Sorcerer’s Apprentice such as he from magicking up full employment and bulging state coffers at a wave of his wand.
Among the proposals he therefore makes to eradicate this monstrous blockage on the road to Cockaigne, are that the SNB should have chosen to destroy the last vestiges of individual choice (not to mention residual property rights) in the monetary system by (a) prohibiting all issue of currency – freeing it to do what it will with rates on the deposits everyone faute de mieux will be forced to hold; (b) by taxing currency according to the time it is held [that old Gesellian chestnut]; or (c) by passing a law establishing an internal exchange rate between bank money and currency [no, we are not making this stuff up!], the parity to be set at the Bank’s convenience and so giving it almost unlimited scope to wreak monetary mischief upon the unsuspecting Eidgenossen.
This truly is highbrow monomania in action. Jonathan Swift himself would be hard pressed to satirize a tangle of intellectual rope-tricks of this calibre.
In fact, it is all very well dreaming up these lurid scenarios, but to take issue with just the technical rather than the psychological aspects of his wild scheme, does our dear Mr Buiter not stop to consider for one brief moment that, by arranging for ludicrously large negative rates to come into being, he will eliminate any ability we possess to try to co-ordinate spending decisions across time frames – the very failure to accomplish which more closely has led us to the predicament he is now seeking to remedy? That, further, he will instantly rob pensioners blind and throw banks and insurers into extreme jeopardy with a policy which would mimic nothing less than a rapid inflation? That all this might just turn out to be far more destructive than could any one-off revaluation of the currency, no matter how wrenching?
He might – if he were not a case study in Hayekian fatal conceit – even pause to reflect on the fact that the weekend’s snap opinion polls on the matter showed that the Swiss were more than 2 to 1 in favour of the move with the bulk of the opposition coming from the inveterately inflationist left, the fifth column of backdoor EU-wannabes, the highly vocal exporter lobby, and one or two upstart bank economists. It may well be that, if the change does start to cost too many jobs, the ever flickering barometer of mass opinion will swing again in the opposite direction but, nevertheless, it does say something about the local mentality that this was initially seen in broadly positive terms. One suspects from its treatment in the press there, that large sections of German society wish they, too, could be shot of Mario’s machinations in an equally summary manner.
Do you not find it also amusing that the Global Inflationist Witchfinders-General always abhor those who run persistent current account surpluses even where the malefactors are not what they consider to be a bunch of barely respectable, price-gouging resource grubbers, but are those whose industry, enterprise, and sound institutions allow them to do so in the face of remarkably high real wages and a near complete lack of any mineral endowment at home to exploit?
In the zero-sum Purgatory of these macromancers’ unfond imaginings, such despicable global misers are a hateful, ‘deflationary’ influence on the rest of us. They are constantly being upbraided for their selfishness and hectored to abandon all prudence and to start spending more on our (at least partly inferior) goods and services – instead of resignedly taking the increasingly tattered IOUs which are the only payment we, the unproductive, have to offer. In so doing, these economic vampires can finally atone for their sin of success by helping drag us up a few inches from a slough almost totally of our own making while pulling themselves headlong into the same mire as they do. That way we get to feel better, not just on account of the slight improvement in our parlous condition, but also in invidious glee at their much larger decline.
Well, if the Helvetopessimists are correct in their presentiments of doom, the good Swiss burgers will have done exactly that. They will henceforth sell us fewer, now more expensive exports (which were – Yaboo-Sucks! – ‘deflationary’ for us), and buy more, suddenly cheaper imports (Hurrah! Stimulus at last!). Their piffling GDP will suffer (no more than they deserve, the profit-mongering wretches), but ours will get a boost (at least arithmetically if not, in truth, necessarily qualitatively). What’s a (non-Swiss) Keynesian not to like about this?
And, by the way, is it SUCH a crime if those voting with their wallets by shuffling their hard-earned capital away from the immediate clutches of (and so, if the drain is left unchecked – or at least unTARGETed – hastening the demise of) their clueless and often corrupt politicians at home now have to buy their Bunds in their OWN names, rather than by routing the funds through a costly Swiss FX wrapper as they pass north of the Alps to their final resting place? One set of windfall gains for such people of the scale entailed by Thursday’s move is surely quite enough to compensate them for any future anxiety on that particular score.
And a windfall of the most unlooked-for kind it most certainly was since the very fact that they had chosen a ‘safe haven’ in a currency effectively pegged to the one they already owned proves that it was solely political risk against which they were trying to insure and not a speculative profit which they were hoping to accrue. Indeed, the noble Swiss have just delivered a CHF60-70 billion ‘stimulus’ to those amid their less fortunate neighbours who hold these accounts and have that way made material the hidden subsidy they have been extending to buyers of their currency by selling it far below the going market rate these past three years or more.
Given that this hefty instalment of foreign aid also came at the expense not just of the irritatingly well-off Gnomes of Zurich, but of a credulous host of incautious margin speculators everywhere (and someone please explain why on earth they were not simply short the euro?), how could a card-carrying bien pensant not have extended a rapturous welcome to this belated attack of Pikettyan altruism?
So, given all the above, do you know why exactly it us that all we Mercantilists moaning so loudly? Largely because Thomas Jordan has switched his aim from the apple sliding ever closer to his own dear son’s heart (CHF13bln in flight capital in a week? Nearly CHF50bln since the end of November?) and instead has pointed his crossbow bolt squarely at that of the Gesslers lording it over us all in Frankfurt.
But take heart, you OMT fans everywhere, if Draghi really does get to light the touch-holes of his heavy batteries this week (not so much ‘Ultima Ratio Regum’ as ‘Utcumque Capit’), amid all the disruption which will ensue you’re not really going to notice the lil’ itty-bitty SNB’s lack of a continued contribution to the wholesale falsification of capital market pricing, now are you?
NB The foregoing is for educative and entertainment purposes only. Nothing herein should be construed as constituting investment advice. All rights reserved. ©True Sinews