Penn Wealth Publishing

2015.01.25 Journal of Wealth & Success Vol 3 Issue 4

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8 wealth & success volume 3 issue 4 January 25, 2015 wealth & success Copyright 2015. All Rights Reserved. investment intelligence Nearly every middling public school classroom has one. The kid who, despite mediocrity being the path of least resistance, aspires and works to be something better. If you equate the European Union to a touchy-feely public school classroom (not that hard to imagine), the kid—at least last week—would be the country of Switzerland. The audacity. The unmitigated gall. Despite being told that they were nothing special, just another member of the gang, Switzerland passed the basketball and walked off the court. By unpegging the Swiss franc from the euro, the Nordic country made it clear that financial irresponsi- bility, ala John Maynard Keynes, was no longer the path it would take. By looking at the headlines, you would have thought they boarded Viking dragon- ships, crossed the North Sea, and Invaded Belgium. What exactly did they do? First, let's consider what the Swiss National Bank, their ver- sion of the Federal Reserve or the ECB, had been doing for the good of the union. Since Switzerland, like the United Kingdom, refused to begin using the euro as its national currency back in 1999, it was strong-armed into giving a pseudo-promise that it would not let the Swiss franc fluc- tuate too much against the euro. After all, Switzerland is unofficially tied to the European Union. Specifically, this amounted to the Swiss assuring the ECB that it would not allow the euro to weaken below 1.20 against one franc. How does a currency weaken? Look at the wanton and unrestrained printing of dollars in the US following the financial crisis of 2008. Anytime you put a larger supply on the market, the value drops. A weak currency, we are told (by all of the pointy-headed elitist economists who are from the Keynes school of economic theory), stimu- lates an economy back to life. Of course, it also leads to record national debts that future generations must cope with, but I digress. Next week, on 22 January, it appears that the European Central Bank will continue down its delusional path of "stimulus," buying everything in sight (except for gold) and pumping euros into the market, in an attempt to stave off another recession. While the Swiss do not use the euro, by pegging the franc to the euro the same results would occur. But the Swiss have been relatively fiscally responsible. Why, they ask, should they suffer the actions of fools? In fact, Switzerland has a strong reputation for its exceptionally solid and stable financial system (hence, the legendary "Swiss bank accounts"). In the dark days of 2011, as the EU was grappling with recession, money flooded into Swiss banks as a safe haven for cash. This made the value of the franc go up rapidly (being in such high demand), in stark con- trast to the euro. Because a strong cur- rency makes it more expensive to export your goods (and Switzerland has a lot of goods to export— from Swatches to IKEA furniture to Swiss drugs), they agreed—with some coaxing from the ECB—to cap the franc at a high-water mark of 1.20 euros (in 2011 the franc had moved from .70 euros to 1:1 parity). What made the Swiss change their mind? So, you are asking, if a strong currency makes it tougher to export your goods, why did the Swiss unpeg the franc? Great question. If you are one of those pointy-headed elit- ists, you are looking down your nose at the Swiss National Bank right now for their dunderheaded move. But let's revisit the kid who knows he (or she) is exceptional, yet is surrounded by mediocre peers. For years, Sweden has succumbed to the peer pres- sure. Despite their foreign exchange prestige in the eyes of the world, they have printed half a trillion Swiss francs in an effort to artificially prop up the euro, devaluing their own currency. Finally, they simply said enough is enough. Swiss Shocker Why Switzerland is the most responsible member of the European Union...and why they are now the most vilified. Foreign Exchange After the SNB move, the Swiss franc jumped 30% against the euro.

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