September 8, 2011
Switzerland Caves
“Scenes are now to take place as will open the eyes of credulity and of insanity itself, to the dangers of a paper medium abandoned to the discretion of avarice and of swindlers.”
—Thomas Jefferson
Not Taking it Any More
In a move which, to us, signals a new phase of the race to debase global currencies – Switzerland has decided it can no longer allow its Franc to remain as strong against the increasingly debased United States Dollar and the Euro. The Swiss National Bank (SNB) stated, “The massive overvaluation of the Franc poses an acute threat to the Swiss economy…” and announced it would “no longer tolerate” a Franc any stronger than 1.20 Euros.[1]
In other words, as the United States, Euro-zone, Britain and other fiscally mismanaged countries continue to debase their currencies – it’s caused the Swiss Franc to rise comparatively. And it’s killing the Swiss Economy – especially exports.[2] So now the Swiss too will print, and debase, the Franc.
Welcome to the paper-money-race-to-the-bottom club Switzerland.
Japan and the Yen Next?
Economic instability has in the past caused conventional investors to buy the Swiss Franc and the Japanese Yen. Now, as the Swiss begin to water down the Franc, certain conventional eyes (not ours) begin to gaze longingly at the Yen.
But, not so fast say the Japanese! Japan has already recently moved to weaken (print and debase) the Yen (ostensibly to protect exports).[3] And Japan has warned it may “intervene” (print and debase) the Yen again if the United States enacts more quantitative easing (printing and debasing of the Dollar).[4] And we don’t believe the U.S. is the only economically shaky country getting ready to heat up the printing presses once again.
Paper Money Options Running Out
We believe the latest move by Switzerland to water down the Franc is profound. To us, it may herald a new era of currency debasement, which could catch many by surprise.
What’s the next “safe” currency haven? We don’t believe there is one not backed by gold. It is our belief a currency not backed by/redeemable for gold — runs the risk of being printed into oblivion by governments.
At the first sign of significant money flowing into the Yen, we believe Japan will begin to print and debase it. Then what? As others print and debase, we don’t think countries like China, Brazil, etc. will sit by idly only to be priced out of the export market. We believe they’ll print more (China does already with its Yuan peg to the Dollar).
With all the money printing going on in the world – the real losers are those whose hard-earned savings are denominated in currencies being purposefully devalued by their own governments and central banks. Also hit hard are those who live on fixed incomes whose budgets will become increasingly strained as prices rise as currencies are watered down.
Opportunity
To us there is always opportunity in every situation, but we don’t believe there will be a middle ground as governments ramp up money printing to new levels.
As the Dollar is increasingly debased, we believe those who remain conventional and invest in government debt (of any type), CD’s, and perhaps even the broad-based stock market, could see their purchasing power dramatically eroded – even while nominal values go up.
On the other hand, it’s our opinion those who invest in what tends to thrive when paper money dies could see just the opposite.
While there is a lot of tough reality going on out there – we maintain our positive outlook. That outlook is based on our belief that a bear market in one thing is often a bull market in another.
As we enter this critical time – now, more than ever – we believe investors need to focus on their investment strategies. Those readers who are clients are fully aware of the strategies we’re implementing in light of unfolding economic circumstances. Others may feel free to contact us to learn more.
Sincerely,
Stephan R. Ernharth, JD
Vice President
Ernharth Group
www.ernharth.com
Go to www.ernharth.com/economic-commentaries to read past articles from our Economic Commentary series.
[1] Telegraph.co.uk, “Switzerland Abandons Floating Exchange Rate in
Dramatic Currency War Twist” September 6, 2011[2] Ibid
[3] Bloomberg, “Swiss National Bank Pledges Unlimited Currency
Purchases” September 6, 2011[4] Telegraph.co.uk, “Switzerland Abandons Floating Exchange Rate inDramatic Currency War Twist” September 6, 2011
