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The
Swiss Sovereign Money Initiative, known as the
“Vollgeld-Initiative” in German (VGI): Five questions with
answers. [Read the Vollgeld Initiative here.]
"1)
What is sovereign money? Sovereign money is the money that a central bank brings
into circulation. At the moment, this consists only of the coins and bank
notes in circulation. This legal tender makes up only 10% of the money in
circulation in Switzerland. 90% is electronic money or book-money, which is
created by the banks at the click of a button to finance their business (bank
loans, mortgages, financial products). Most people believe that the money
they have in their bank accounts is real money i.e. real Swiss Francs (or
pounds Stirling etc). This is wrong! Money in a bank account is only a
liability of the bank to the account holder, i.e. a promise the bank makes to
provide money, but it is not itself legal tender.
"2)
What would change with the Swiss Sovereign Money Initiative? The way the money system
works today doesn’t comply with the intention of the Swiss Constitution
(Article 99: “The Money and Currency System is a matter of the
State”). The sovereign money initiative will correct this. The Swiss
National Bank alone will be able to create electronic money. Banks won’t
be able to create money for themselves any more, they’ll only be able
to lend money that they have from savers or other banks, or even, if
necessary, money that the Swiss National Bank has provided them.
"3)
What are the fundamental advantages of sovereign money? Sovereign money in a bank
account is completely safe because it is central bank money. It does not
disappear when a bank goes bankrupt. Finance bubbles will be avoided because
the banks won’t be able to create money any more. The state will be
freed from being a hostage, because the banks won’t need to be rescued
with taxpayers’ money to keep the whole money-transaction system afloat
i.e. the “too big to fail” problem disappears. The financial
industry will go back to serving the real economy and society. The money and
banking systems will no longer be shrouded in complexity, but will be
transparent and understandable.
"4)
What will happen to banks after a sovereign money reform? After a changeover to
sovereign money, the banks will continue to offer all the normal financial
services (giving credit, enabling transactions, wealth management etc.).
However, there will only be central bank money in our current accounts at the
bank. This electronic money has value exactly like today’s coins and
bank notes have value. The banks can only work with money they have from
savers, other banks or (if necessary) funds the central bank has lent them,
or else money that they own themselves. Banks won’t have an unfair
advantage over all other market participants any more, as they won’t be
able to create money any more.
"5)
What will be the effect of sovereign money for bank customers? From the moment that
sovereign money is introduced, there’ll only be money guaranteed by the
central bank in all transaction bank accounts… "
In
my opinion, at first sight this initiative appears too radical, and hence
with almost zero chance of success.
However,
at second glance, when one studies the detail, the sole simplistic demand of
the initiative is to return to, and respect, a paragraph of law that is
already anchored in the Swiss Constitution. The observer is now confronted
with a new scenario, that the current application of the Swiss Law is
not respecting Article 99? Otherwise why bother to launch an initiative? QED
Opposition
from the big Swiss Banks has already commenced:
In
her newsletter about the Swiss Sovereign Money Initiative on 18th of December
2015 - Emma Dawnay said:
The
Swiss Bankers Association wants to keep their money-creating privileges
On
1st December the Swiss Bankers Association published this statement.
We've
written a detailed (9-page) reply answering the misinformation and scare
tactics of theirs! The full German version is here. This hasn't been translated into English, but is
summarised as follows:
·
The
Swiss Bankers Association (SBA) firmly rejects the Swiss Sovereign Money
Initiative", claiming, amongst other things, it would put the
"prosperity of Switzerland" at risk.
·
The
criticism of the Swiss Bankers Association is baseless: The credit supply
will remain secure with the Swiss Sovereign Money Initiative. There is also
no direct impact on interest rates. Only the creation of money is transferred
to the Swiss National Bank; lending to companies, private individuals and the
state remains as it was: exclusively with the banks.
·
With
a closer look at the statement of the Swiss Bankers Association, the
criticisms dissolve away. It's a mix between ignorance of the Swiss Sovereign
Money Initiative, misinformation and scare tactics. This reaction is
understandable taking account of the fact that the Swiss Sovereign Money
Initiative wants to abolish the distortive privilege of money creation by
banks. Of course, the profiteers of this hidden state subsidy defend
themselves against it.
·
The
statement by Philipp Hildebrand, Vice-Chief of the US financial giant
BlackRock and former president of the Swiss National Bank in the Spiegel on
23 November 2015 is relevant: "I have learned in recent years that one
should not always listen to the whining of the banking lobby."
·
The
Swiss Bankers Association mainly represents the interests of the big banks.
The smaller and medium-sized banks do not feel represented by the Swiss
Bankers Association, as a survey showed: to the question "Do you, the
regional banks, feel represented by the Swiss Bankers Association?" more
than 90% of the Directors voted "No." …" (end of quote)
So
now taking a closer look at some of the most important elements and the
effect on various Swiss Institutions, here are my comments:
SNB Swiss
National Bank:
- In
theory it gains in power by regaining the sole issuer of money status.
- In
practice its job may become more difficult to carry out, e.g. the PEG
– see below.
- More
serious issues such as the SNB Management structure and selection,
Monetary Policy (HedgeFundesque recently), and legal conformity thereof,
appear at first site not to be addressed by the Initiative. However
indirectly the SNB could easily be forced into policy changes, if the
Initiative passed.
Commercial
Swiss Banks:
- The
Global players, ie the Majors will be the most affected by the
Initiative.
- Existing
contracts, e.g. Hypothek fixed x years would either have to be
Grandfathered, or passed to the SNB to run to maturity.
- Passing
from say 10% reserves to 100% would entail a reduction of 90% of certain
types of business, e.g. Credit of all kinds. (or would it perhaps simply
replaced by other means of funding rather than fractional reserve
monetary creation).
- Loss
of Banks Market Capitalisation by downgraded share price, or the
contrary?
- Credit
Rating of Bonds issued by Swiss Banks would achieve a new highest ever
grade AAAA+ rating.
- Cost
of coupons on issuing Bonds would fall, and currently would be ZIRP
zero.
The
Infamous PEG of the CHF to the Euro
- The
fixed PEG at 1.20 collapsed in Jan. 2015 as I predicted in my PP on the Swiss Gold Initiative in 2014.
- The
fixed PEG has now, (de facto but not de juris), been clandestinely
replaced by a floating PEG, managed in an undisclosed range by the SNB.
The current range is 1.07 to 1.10 but if the Initiative passed this
might have to be reduced to Parity or below.
- The
Establishment are protesting loudly, that an “overvalued”
CHF would be bad for the Swiss economy but the CHF has been a very
strong currency for 50 years or more, and the Economy has always adapted
and flourished, so this is déjà vu, and the actual
evidence is to the contrary.
Summary
Conclusions
The
VGI if it passed would affect the financial sector of the Swiss Economy, and
in turn the Global Financial markets:
- The
large Swiss Commercial Banks might lose some business
temporarily, but would more than regain this in the medium term through
new inflow of funds and new customers in a classic SAFE HAVEN effect.
- The
SNB
would have to adapt its Monetary Policy to the new environment.
- The
CHF PEG
could be controlled by the SNB in a range around Parity to the Euro.
- Exchange
Control
might be a better instrument for this end rather than Negative Interest
Rates, with the latter becoming less effective as they are adopted
globally.
- Switzerland would experience a
temporary deflationary wave, which would put further downward pressure
on interest rates to ZIRP and NIRP.
- The
Swiss Financial markets would regain a Safe Haven aspect through the VGI,
replacing the Banking Secrecy advantages it offered historically, now
somewhat dismantled.
- Other
Financial Centres,
London, New York, etc. would initially have difficulty in following the
Swiss VGI, because they lack the Direct Democracy Initiative instruments
necessary to obtain its speedy introduction.
- The
global excesses of debt and derivatives ($1 Quadrillion) Ponzi scheme
driven by QE and Fractional Reserve Banking would gradually (or
suddenly) unwind as Capital flowed into Switzerland.
- Bubble
valuations
of certain favourite assets, e.g. Google, Apple, FaceBook, and high end
Real Estate and Collectables would start to deflate.
- The
share prices of Swiss major Banks, e.g. UBS and Credit Suisse,
could rise 10 to 100 fold, after an initial drop, as the realisation of
the beneficial effects replaced the initial fear mongering and
downgrades that the Establishment Banking sector would likely wheel out
in an effort to kill the VGI before the vote.
- The
Swiss major Banks recapitalised at these new multiple levels
could then even selectively acquire some of their domestic and foreign
competitors through non-dilutive equity take overs. The acquired Banks
could then be restructured on the same VGI base, upgrading their status
and credit worthiness.
- Gold would regain its role
as a safe haven as low interest rates globally were seen to become a
permanent feature of the new 100% reserve Banking System.
- The
Global financial markets would gradually over a period of a few years be
forced to adopt a VGI system in order to retain Capital which otherwise
would flow to Switzerland.
- A
Bretton Woods 2 type Conference would be set up to reset the
Global System.
- There
would be no more Bail-Ins, Bail-Outs, Banking Runs, Financial crisis,
excessive Bank Bonuses, and all the other negative aspects of the current
system for the Banks and the Countries that adopted the VGI methodology.
The
VGI is both radical and innovative and needs a lot of research, reflection,
debate, and input from not only the Swiss voting public but also
internationally, given the global knock-on effect it will have, if adopted.
There
is now a period of 18 months or more for this discussion process before the
vote is cast by the Swiss electorate.
All comments
are welcome.
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