Swiss  Negative rates
In the past [even the recent past] investors have often ÂparkedÂ
their funds in a Âsafe-haven currency, when fears about the dollar or other
currencies rose. The leading candidates have always been the Swiss Franc and
the Yen, with gold, in the last three years usually being excluded, because
of its declining trend against the dollar and the limited amount of stock
relative to the availability of these currencies. While goldÂs trend seems
to have changed to the upside now, the developed world is still Âout of goldÂ.
But gold has never forfeited its role as a Âsafe-havenÂ
for long. It is distinguished by the fact that there is no lasting link
between gold and national governments and their national currencies. What
gold has always had is the respect and the belief that it is money Âin
extremisÂ. For governments, through institutions to individuals, gold is
always money, even between enemies.
In the last 40 years and more, the world led by the U.S.,
has sought to sideline gold as money, but inevitably it has proved its worth,
most notably when currency crises appear. The success the dollar has had in
these four decades has been largely due to two factors:
1)It is riveted to oil as the only currency with which
oil could be bought.
2)It has the largest economy in the world, until now, as
China appears to be moving into that place.
But as 2014 closed and a volatile, dramatic 2015 and 2016
entered our lives, this is changing. With oil at less than half its peak
value today, only half the dollars that were used in the past for oil are
being used now. Add to this that payments for oil in currencies other than
the dollar, particularly by China, are being made. This is massively reducing
the need for the dollar, globally. All theses excess dollars will become
redundant, but the impact of this has yet to be seen or appreciated.
Euro Crisis masking the dangers
With the euro crises throwing a smokescreen over the
dollar picture, as euros are exchanged for the U.S. dollar or through the Âcarry
trade borrowed and sent into high yielding emerging market currencies, the
dollar looks as though it is a strong currency.
Markets, market players and commentators tend to be
myopic, focussed on short-term profits and only distracted when larger issues
actually arrive. This is whatÂs happening now.
We feel that what is happening now on foreign exchanges
is an early signal of much bigger issues that will appear in the next couple
of years.
Now we will look at the traditional Âsafe-havenÂ
currencies of the Swiss Franc and the Yen to see just why currencies could
only act as Âsafe-haven for a short time, while the monetary system
remained free of fundamental crises, such as the ones we see now and on the
horizon:
The Yen  The Yen hit its peak when it stood at 76 to
the U.S. dollar before the leading source of energy [nuclear] was discarded
and replaced by imported fuel.
As JapanÂs population ages and spending habits become
conservative, the real function of a currency has become apparent. It is used
to allow the local economy to function smoothly as the only local means of
exchange. Internationally, it is used as a basis for international trade and
investment. As such, it functions well when the economy and Balance of
Payments is healthy.
But when the Balance of Payments and the economy fail to
function well, it hurts the international value of the currency as we have
seen as Abenomics kicked in to lead Japan and the Yen into the future.
More importantly it now defines the trade competitiveness
of the nation. Hence, the exchange rate itself, inevitably, is managed to the
nationÂs benefit and not that of its citizens or its own integrity. Its
integrity as a measure of value has been abandoned alongside its role as a Âsafe
havenÂ.
While the G-20 agreed that nations would not purposely
weaken their exchange rates, the stark realities of today have overwhelmed
these commitments and will continue to do so Âwhere deemed necessaryÂ.
Translated, that means it is now OK to weaken ones currency in the interests
of the nationÂs export competitiveness. As most currencies follow this line
and enter into the Ârace to the bottomÂ, any advantage to a nation becomes
short-term as the one against whom the advantage was gained then does the
same.
TodayÂs exchange rate of the Yen is 118 to the dollar a
55% fall from its recent peak. This fall is far bigger than the fall in the
Ruble, albeit the Yen fell over a longer period of time. The fact that
it has taken longer is OK as it can be absorbed in trade over that time. This
makes the policy more palatable? The consequences of such myopia will focus
on confidence. Confidence is the only ingredient that makes a currency viable
and a quality that if lost takes a currency with it.
Hence the Yen is no longer a currency Âsafe-havenÂ.
The Swiss Franc
The Swiss franc has been a hallowed currency Âsafe-havenÂ
for generations, consistent with the earned image of Switzerland as a Âsafe-havenÂ
for foreigners assets and a nation that will fight to protect these
investors. The events of the last three years have cost the Swiss dearly
wiping out the confidence it had gained over the previous century. As of now,
at least 10% of the Swiss economy depends upon the banking/asset management
industry built up over this time.
But the rest of the economy doesnÂt rely on this image.
As a world-respected manufacturer, Switzerland needs an exchange rate that supports
its international trade competitiveness, most importantly against the euro,
its main trading partner.
One would have thought that the two aspects of the Swiss
economy could co-exist together easily. But when pressure on the global
monetary system mounts, they canÂt.
The pressure on the Swiss Franc has been heavy in the
last three years when the Swiss National Bank [SNB] took severe action to
hold the ÂSwissy to euro at a ceiling of 1.20 to guard SwitzerlandÂs
exchange rate against the euro without even contemplating the possibility
that the worldÂs second most important currency could weaken so dramatically
and so quickly from its peak against the dollar.
The pressures proved too much last week and to the great
surprise of the whole world the ÂSwissy was unpegged! As we look around at
the damage the Swiss National Bank caused by Âunpegging from the euro and
now linking it to a Âtrade weighted basket of currenciesÂ, including the
U.S. dollar, we see once more, national interests elevated far above those of
the people using the ÂSwissy both inside and out of Switzerland.
Perhaps you are thinking that the ÂSwissy can once
more serve as a Âsafe-haven currency. A look at the intentions of the SNB
in now linking the Swissy to the Âbasket of currenciesÂ, is to keep the
Swiss Franc down against them. This means that the SNB will continue to
intervene in the foreign exchanges and hold it down against these other
currencies.
So it will not return to Âsafe haven status, as we are
now seeing in the market place as it slowly slips down against gold and other
currencies. In addition, the Swiss National Bank has imposed an interest rate
of Â0.75% on sight deposit account balances at the SNB. In an effort to
relieve the upward pressure on the Swiss franc, from 22 January the SNB will
charge an interest rate of 0.75% on account balances above a certain
threshold held with it by banks and other financial institutions. But will
this work?
In what can only be described as a break in the integrity
of the Swiss National Bank, a week before unpegging the Swiss Franc, the SNB
reaffirmed its commitment to the minimum exchange rate of CHF-EUR1.20, and Âwill
continue to enforce it with the utmost determinationÂ, they said. Further
they said, ÂIt remains the key instrument to avoid an undesirable tightening
of monetary conditions resulting from a Swiss franc appreciation. Over the
past few days, a number of factors have prompted increased demand for
perceived Âsafe-haven investments. The SNB is prepared to purchase foreign
currency in unlimited quantities and to take further measures, if required.Â
And now?
The end of Currency ÂSafe-havensÂ
The very concept of a currency acting as a Âsafe-haven has now been
destroyed by the actions of the currencies held up a one before. This
reputation will not change because no country can afford to let it do so
without mortally wounding its exports. It is hoped that the monetary system
will survive a long time despite the undermining of the value of currencies.
The loss of confidence in the currencies can go to the point of collapsing it
because it is a currency managed by people who have differing agendas to the
one that demands a solid value for their money. As examples of this in the past
we look at how a currency is still used in a local economy while it is
collapsing. Please note that governments impose it use on an unwilling public
until it has collapsed.
We repeat, when a currency collapses internally, governments force its
citizens to use it in day-to-day transactions until it becomes practically
impossible to use it.
-In the Weimar Republic after the first World War the German Mark fell
from 4.63: $1 to 4.63 billion: $1.
Germans were going around with wheelbarrows to transport the money needed
for day to day transactions. Workers, when paid would rush to the gates of
the factory and threw their money to wives who raced to the shops to buy
whatever they could as prices rose.
One story has it that a person left their money in a bag on a bicycles
outside a shop and when they returned the bag and bicycle was gone and the
money left on the pavement. Nevertheless it took the total collapse of the
currency before the central bank changed the currency to the Rentenmark, a
currency issued against property [that could not be printed]. By this time
the middle and upper classes of Germany had been wiped out financially [in
the nationÂs interests].
-In Zimbabwe, After the Z$: $1 U.S. traded at 1:1 it took Z$70,000 just to
catch a bus to work late in the collapse of that dollar in Harare. Now in
Zimbabwe, the U.S. dollar is used, in a shattered economy with 95%
unemployment. But again for the benefit of the government the Z$ was used
right through until it was completely unacceptable as a currency [in the
national interests] It even persisted with notes that had an expiry date.
-In a tried and tested manner over the life of currencies, gold has always
held international value. A Zimbabwean could go to Mongolia and get the world
price for his gold. Not so with the Z$. The author has a
Z$100,000,000,000,000 note in his desk that is worth less than a sheet of
toilet paper.
Such is the history of fiat currencies and will be in the future when the
games governments play reach their climax.
The U.S. $ is now in the position of being the retreat from other
currencies, because the worldÂs currencies are the branches off the
tree-trunk of the dollar. But the dollar itself is under siege too. The
Treasury department has made it clear that it does not want to see a strong
dollar! It too must guard its international trade competitiveness by
retraining a strong dollar. At the moment it is silent on this, but for how
long?
Thus we have two opposing flows in the U.S. dollar:
1)The inflow of dollars sold as they are excess to requirements and
2)The newly bought flows of dollars back to the U.S. as other currencies
fail to provide sufficient safety for investors.
The pressures on the dollar will take time to come to fruition and will be
signaled by the failure of other currencies [such as the euro] and by the
stumbling of the monetary system itself first.
Can the dollar collapse?
At the moment the dollar is the strongest of the worldÂs currencies and
is reflecting that in its exchange rates. But this is relative strength as
the dollar will, if push comes to shove be the last currency standing, even
if it is itself inherently weak. It will be used as there is no alternative
to it in the Western world. [ThatÂs why China is trying to free itself from
dependence on the dollar and be able to stand alone.]
If the dollar collapses it will be the last currency to collapse, after
the breakdown of the monetary system itself. Even if the Yuan can stand
alone, the developed world will not be permitted to exchange all other currencies
for the Yuan. So no matter what the state of the dollar is, it will be used
in the developed world.
Then, exchange rates will not be the measure of the dollar. When that
happens, once more, the dollar, relative to other currencies will still look strong.
The lack of confidence in currencies [and the dollar] will be reflected in
volatility, instability and uncertainty, with many Âhallowed currency
standards being abandoned along the way. In turn, the Treasury and equity
markets alongside institutions in the financial markets will stumble and
fall. But everyone will be trying to turn to items that will be effective
measures of value and means of exchange.
Among these internationally, precious metals will be at the head of the
list. While individuals and institutions will turn to these markets, so will
governments. As happened in 1933, governments will take such items to add
credibility to their currencies and be able to say that the banking system
will be Âlending against good assetsÂ! At that time the price of gold will
not be measured by the dollar, but gold will measure the dollar.
Until that day comes we can expect growing currency volatility and to
the extent the precious metal markets allow, a turning to gold and then
silver slowly but surely!
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warranty and accepts no responsibility or liability as to its accuracy or
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