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Isn't there a simpler solution: You want CHF? Sure, let me print some for you. Here you are. Want more? I will print more.

Precisely. That's how you "put a hard cap on the rate of appreciation and use the opportunity to score some hard currency seigniorage."

If people noticed that the SNB would be willing to print, they would lose trust in the CHF as a store of value... No?

Doesn't matter.

If they do, then Mission Accomplished. If they don't, then they give you hard currency for free. Heads they lose, tails you win.

It seems to me that they are in the better situation: Printing to lower the value of the currency not because they are in debt and need to service it.

Yep, that's precisely what they're doing.

My concern is that they may not be doing it enough if the CHF is appreciating noticeably. Because this is hot money - it's not in Switzerland because it believes in the virtues of Swiss engineering. It's in Switzerland because it believes that Switzerland is a safe place to watch the €-Mark come undone. Once the crisis is resolved - one way or another - they will move back out.

And the Swiss central bank can't print German money, so when they do, the Swiss CB had better have enough German money in its vaults if it does not want an object lesson in the difficulties of defending the lower bound of an exchange rate.

Of course, this is a notorious flag of convenience country we're talking about, so I won't precisely be crying my eyes out if they end up in a tailspin.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Aug 12th, 2011 at 03:53:40 PM EST
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