Copyright John T. Reed 2015
The Swiss central bank (called the Swiss National Bank or SNB) abandoned its previous rule (since 2011) of not letting the Swiss franc (CHF) rise above a value of 1.2 euros (EUR).
This is a big deal. It’s the top of page one big headline story in the 1/16//15 Wall Street Journal. It is causing big turmoil in financial markets around the world.
I bought CHF at $1.10 on 6/20/12. Yesterday, they were worth a mere 98.15¢. Today, they are worth $1.17. So I just made a bunch of money on paper, as did my readers who followed my advice.
My other foreign currencies—AUD, CAD, and NZD—were not affected by the Swiss move.
But that’s irrelevant. I bought the CHF and recommended others to do the same to hedge against USD hyperinflation, which has not yet happened. So I was not concerned when the CHF fell to 98¢ nor am I happy about them rising to $1.17. If I spend them, it will probably be in the country in question where the value of that currency in relation to the USD will be irrelevant and there would likely be little change in, say, the price of a Big Mac in Zurich before or after the rise in the value of the CHF in relation to the USD. In other words the cost of a Big Mac in CHF is probably unchanged in Switzerland. If you convert USD today to go to Switzerland, they will cost a lot more. But CHF you arelady owned will not buy you more in Switzerland today.
I am concerned about possible future hyperinflation of the U.S. dollar (USD). Accordingly, I researched it and wrote a book titled How to Protect Your Life Savings from Hyperinflation & Depression. It is now in its second edition.
Between the first and second editions, I read a lot of books about German and Austrian hyperinflation in the early 1920s. It was crystal clear in those books that the great salvation for individuals during hyperinflation is having stable foreign currency.
Then I looked into which currencies and how and where do you hold them.
I concluded the best four were the Australian (AUD), Canadian (CAD), and New Zealand (NZD) dollars and the Swiss franc (CHF). If you want two more, I recommend the Danish (DKK) and Swedish (SEK) krona. I only bought the first four. And recommended my readers do the same. Many have.
I am a big believer in simple. So I just opened checking and savings accounts in the countries in question except for Switzerland. If you use futures contracts or ETFs to invest in foreign currencies, you add complexity and unnecessary additional risks like exchange risk (the risk that the exchange where your assets is traded will close down or change its rules in a way that hurts you) and credit risk (the risk that your bet or hedge will pay off, but that the brokerage or other entity who needs to come up with the money to pay you can’t or won’t).
I tried but was unable to open a Swiss banking account. The Swiss essentially refused to allow Americans to have bank accounts there because of various fights with the IRS and recent U.S. laws. No problem. Instead, I bought Swiss francs in cash in Vancouver, Canada and put them in my safe deposit box in that country in the Bank of Montreal which is also where my checking and savings accounts are.
Most Americans think holding money in cash is dumb because you get no interest and inflation in the currency held in cash could hurt you. True. But you seem to assume that inflation is ubiquitous and that savings accounts always pay interest.
I fact, CHF has had deflation for years and they pay negative interest on savings accounts there. So you have literally been better off with CHF in cash than in the form of a Swiss bank account in the last several years.
Also, you must report foreign financial accounts to the IRS and US Treasury on two different forms each year but you do not have to report foreign cash that you own.
The savings accounts and safe deposit box cash must be outside of the U.S. because when hyperinflation strikes, the governments in all countries invariably pass five quick laws: price controls, capital controls, financial repression laws, rationing, and anti-hoarding laws. Capital controls make it illegal to possess foreign currencies and, often, gold, and force you to sell any you have to the U.S. government at lousy rates. The U.S. did this in 1933 with gold.
But capital controls do not apply to money held in foreign banks in foreign countries. Everbank, a U.S. bank, will let its customers hold deposits in foreign currencies. But the way in which they do it is squirrelly to me—some sort of contracts—plus they are a U.S. bank and their boilerplate says if they are ordered to convert your foreign currency to USD at a lousy rate by the government they will comply with that order whether you like it or not.
Did I know or forecast that the CHF would jump in value 30%? No. I sure as hell said it would go up a lot farther than that if the USD hyperinflated, but I made no predictions about CHF movement in relation to the USD absent USD hyperinflation.
But I did say the following which is sort of a prediction and an extremely accurate one as today’s events reveal, in the “Why no inflation?” article linked below,
[SNB head] Mr. Jordan’s current monster bet—he’s long the euro and short the Swiss franc—would wipe out much of the capital of the Swiss National Bank if the swiss franc moves up more than 10% in relation to the euro.
The Brits tried to play this game in 1992. They decided to try to prop up the pound with these kinds of games. Their opponent was a then not very rich George Soros, who is now known as “The Man Who Broke the Bank of England” because he won that game. The basis of Soros’ fortune is the one billion he made that year betting against the Bank of England. That is also about the amount the British taxpayers lost as a result of the Bank of England trying to bluff the forex market.
The Bank of England is a big boy. U.K. has a GDP of $2.5 T.
Switzerland has a GDP of $.6T.
Switzerland is the size of Tennessee and has the population of Tennessee.
George Soros is still around. He now has lot more money than he did when he defeated the Bank of England. He is not retired. I wont predict he will bet against Jordan and drive the Swiss into a huge loss. He may or may not. I would not be in a position to predict. But I will guarantee you there are lot of people who know what Soros did and who would like to be as rich as him.
But my position on Swiss francs is I think Jordan is bluffing. I say what I said in the above-linked article. If Mr. Jordan wants me and the rest of the world to believe that Switzerland is permanently pegged to a fixed value vis a vis the euro, he can persuade his fellow Swiss to join the euro zone and abandon the Swiss franc. Until then, I’m keeping mine and urging my readers to do the same. I don’t think the people of Switzerland are willing to sacrifice all for the half of the country that is in the export business, nor do I think they have the money to buy enough euros to make it happen if the market does not believe their bluff.
I was really pissed off about the SNB decision to hold the value of the CHF at 1.2 EUR and raised hell about it in some web articles. That decision was banana republic bullshit—a beggar-thy-neighbor policy designed to artificially help Swiss exporters at the expense of holders of CHF—like me and the Swiss people. Accordingly, I am quite happy that the SNB decided to let the free market set the value of the CHF.
By the way, the Swiss people ought to be really pissed, too. Do you know how the SNB kept the CHF from going above 1.2 EUR? By trading large quantities of CHF for EUR. So the SNB’s action of letting the CHF float again the EUR cost the Swiss people about 30% of the about of the EUR that the SNB had bought and was still holding.
Central banks should only worry about keeping the value of their currency stable, not exporters or general prosperity. And their only legitimate tools are expanding and contracting the money supply. Quantitative Easing, messing with interest rates, fixing the currency to a particular exchange rate, are all bullshit risky moves that are intended to prop up incumbent politicians. Central banks should not be in that business.
Here are some of the various web articles I have written about my CHF:
The first sentence of my hyperinflation book is “It could happen tomorrow.” For holders of the euro currency, today was “tomorrow.” Not hyperinflation per se, but a sudden, without-warning, 30% change in the value of their currency in relation to some other currencies.
John T. Reed