- Published on Wednesday, 11 July 2012 15:50
- Written by Bill Bonner, Founder, Agora Inc.
- Hits: 655
In the world of currencies, everybody is cheating. But when it comes to the best of the worst, the Swiss take the prize.
What's the most reliable currency in the world?
Not the euro. It keeps sliding. It's at $1.22 today. Close to a two-year low. People are afraid that the eurozone might fall apart, like a bad marriage. Germany might pack up and leave it... or the peripheral economies might be forced out of the house, leading to bank runs and chaos.
Nor is the dollar the world's strongest money. The buck has lost about 98% of its value over the past century. The official inflation rate -- CPI -- may be less than 2% now. But how long will that last? If Ben Bernanke has any say in the matter -- not long.
And the British pound? Even worse than the dollar, over the long run. Much worse. In 1925, a pound was worth $4.87. Now, it's worth only $1.50.
According to a report from the London Business School, the world's strongest currency, since 1900, has been the Swiss franc (CHF). And now that currency is getting even stronger. Switzerland is suffering from deflation, not inflation, with consumer prices falling at a 1.7% annual rate.
When money flees Europe and the euro, where does it go? Well, much of it goes to Switzerland. There, people feel their money is secure. This rush of incoming money helped push up the CHF to 1.20 to the euro.
That may be good news for Mitt Romney, who is said to have multiple accounts in Switzerland. In dollars or euros, the value of a Swiss franc account has gone up. But it's not good news for the Swiss themselves.
Switzerland is a small country. It lives on exports and services. It has to be careful that its bankers and its watches don't become so expensive that people no longer buy them. Which is what sent the Swiss National Bank (SNB) to work to try to lower the price of the Swiss franc.
How does it do that? It prints more of them. Then it uses them to buy foreign currencies... selling Swiss francs in the process. Last month alone the SNB printed up an additional $60 billion. Its foreign currency reserves rose to 63% of output.
So you see, the whole world is doing it. Everybody is printing.
According to the volume theory of money, printing more money reduces the value of the money you printed last year and the year before. But it's not working. CPI levels in most of the developed world are low. And possibly declining. The private sector is pulling back. It borrows less. It spends less. The extra money rarely gets beyond bank vaults. Especially in Switzerland.
That's why QE is so important. It turns monetary stimulus into fiscal stimulus. Monetary stimulus may get stuck in the banking system, but when central banks buy government bonds they are printing money that goes almost directly into the consumer economy. The government takes the money and pays salaries... contractors... chiselers and boondogglers. The money gets around, in other words.
And that's why the Swiss might not be quite as vulnerable to the eventual bond market blowup as everyone else. When bonds turn down, interest rates rise and currencies fall. The Swiss, however, can put their money-printing program into reverse. They can use their accumulated reserves to buy back their bonds... and their currency.
Paper money may be a form of larceny. But in a world of criminal currencies, the Swiss franc is still the one most entitled to work release.