Switzerland goes to negative NGDP growth: it won’t end well

A James Alexander post

With no one to blame but itself, Switzerland has slipped into negative YoY NGDP growth in the third quarter 2015.

The credibility-busting move of  the hard money chief of the Swiss National Bank, Thomas Jordan, to abandon the ceiling vs the Euro in January led to a dramatic and mostly sustained currency appreciation.

One of the purported reasons was that the size of the SNB balance sheet had expanded too fast and got too large relative to Swiss GDP. Actually, the balance sheet hadn’t risen, or at least there had been no further EUR purchases, since the hard-fought battle to win credibility for the ceiling back in 2011 and again in early 2012.

There were also rumours of mysterious pressure on the SNB from some of the regional cantonal governments who supposedly relied on dividends from the central bank to support their budgets. The depreciation of the Swiss Franc had led to paper losses and suspension of the dividend. We will have to wait until later in 2016 for the 2015 accounts to see if the SNB is back making paper profits and paying a dividend.

On the abolition of the ceiling, the surge in the Swiss Franc was only controlled by further money creation. The balance sheet rose even further. We now have another quarter of data and see that these FX reserves are still climbing, as is the SNB balance sheet as the currency floats dirtily. Well done the SNB.

JA Swiss_1

The third reason Jordan seemed to give was that he just couldn’t stomach further depreciation vs non-Euro currencies.  For sure, as the Euro rose and fell relative to other countries so did the Swiss Franc.

Whatever the reason he’s ensured hard money and the currency has been stronger that it would otherwise have been. The evidence of further FX purchases comes from the fact that the SNB is still intervening to hold back the currency from even stronger appreciation.

Monetary tightening impacts Nominal GDP and thus Real GDP

And what is this tight money policy doing to the economy? The markets (and thus Market Monetarists) predicted it would lead to weak NGDP growth and that this would drag down RGDP. This is precisely what has happened with NGDP now in actual decline. Well done the SNB.

JA Swiss_2

We’ve already commented  on how weird it is that some people think this deflation is welcome. The Swiss don’t think so themselves.

And declining nominal GDP can only be a bad thing for wages and for unemployment too. This UBS 2016 Swiss Compensation Survey has some fascinating charts, almost all highly supportive of the basic theory at the heart of Market Monetarism, low (or negative) expected Nominal  GDP growth is a really bad thing given downwardly sticky wages. It sometimes feels as if it is the only useful insight of macro-economics.

You have to ignore the foolishly optimistic notion that Swiss workers will be enjoying their “high real wages” as their job security collapses. I say “nearly all” the charts are supportive as there is some room to reduce the bonus element of total compensation (Slide 15). And don’t forget Swiss unemployment is also impressively low by international standards, even if it is rising (Slide 7).

JA Swiss_3

JA Swiss_4

JA Swiss_5

Swiss National Bank On The Defensive At Jackson Hole

A James Alexander post

Although it appeared that the VSPs gathered in Jackson Hole could only worry about non-existent inflation, I detected a defensiveness too. There were several considerations of alternative policies, in particular a higher, or more flexible, inflation target.

The Chairman of the Swiss National Bank, Thomas Jordan, could see the problem clearly, and had thought about a solution:

“Given that Switzerland is confronting an overvalued currency and negative inflation, one might argue that a higher inflation target or a looser definition of price stability is beneficial. A prolonged period of Swiss franc overvaluation is usually linked to the fact that the central bank has limited scope to cut nominal interest rates. A higher inflation target that induces higher average nominal interest rates could increase the SNB’s room for manoeuvre in times of crisis.”

But then starts the confusion:

“However, a looser quantitative definition of price stability would not be in line with the SNB’s mandate of ensuring price stability.”

This makes little sense, a different definition of stable would not be, well, stable. Mmm.

“A higher level of inflation often goes hand-in-hand with large fluctuations in inflation rates, which lead to the misallocation of resources, as well as to random and undesirable income and asset redistributions.”

A flexible target doesn’t automatically mean higher target. But anyway, isn’t a flexible target meant to be, well, flexible?

“This, in turn, could undermine public confidence in the SNB.”

The confidence that was so well established by the unbreakable CHF 1.20 floor through which the Euro would not be allowed to drop versus the Swiss Franc. Yeah, right. How did that work out?

“Furthermore, likely indexation, combined with a failure to anchor inflation expectations, would diminish the effectiveness of monetary policy and lead to greater fluctuations in interest rates, economic activity and employment.”

Greater fluctuations than the 20% intraday rise in the Swiss Franc on 15th January 2015? Greater fluctuations than the negative RGDP in 1Q15 and the measly 2Q15 outturn compounded by a negative GDP Deflator of 1.2% and now plunging consumer confidence. Bravo! And things look set to get worse.

“As a result, higher inflation is likely to be associated with considerable costs in the longer run and thus does not seem to be a suitable solution (see Ascari and Sbordone 2014). It also seems highly unlikely that marginally more scope for cutting interest rates would, on its own, have been sufficient to significantly dampen Swiss franc appreciation during the ‘Crisis Period’.”

But printing money was working very well. Monetary Policy 101 says that Policy is implemented  by control of base money, not by moving around target interest rates. And the SNB was doing a great job satiating foreign demand for Francs first by printing and then merely by threatening to print.


And now the SNB is back printing to buy FX to hold down the Swiss Franc, just like it did before the Euro floor, as it has no clear target or “anchor”. One of the supposed reasons for ending the floor was the growing balance sheet of the SNB.

It had stopped growing due to the hard won confidence in the floor.  Only for it to surge again as the breaking of the floor caused currency chaos and the SNB had to intervene heavily to ensure some form of stability. Maybe this intervention was a little understandable at first. But it is still growing the balance sheet according to the latest figures for the Feb-April period. The SNB is still actively intervening to stop the too tight monetary policy causing the Franc to appreciate vs the Euro. The prospective tightening by the Fed may help ease pressure vs the Dollar as both appreciate into a recession together. A silver lining of sorts, I suppose.

The SNB’s credibility has been destroyed by Jordan and his speech shows remarkable blindness from the man at the top who flip-flopped in panic when the ECB adopted a far better monetary policy.

Worse than his own loss of credibility is the damage his policy is now causing to the Swiss economy. Perhaps one of the world’s richest per capita economies can take the damage in it’s stride, but we shall see.