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Nobody has to "inflow" to use the CHF to play the "Financial Engineering" Game.

They do have to buy or borrow CHF if they don't have any to begin with. So they do create an inflow into the currency, even though they do not create one into the country.

Now, this can affect Switzerland in four ways: First, their buying of CHF can cause the CHF to climb relative to RoW. This is bad news for Swiss net exporters. Second, when they get tired of playing with the CHF they bought, they can exit their positions by buying stuff in Switzerland. That is not a serious problem for the Swiss unless they have very little slack in their economy, and even then only a minor problem. Third, they can exit their positions by buying other currencies with their CHF. This will be bad news for Swiss importers, including some net exporters. Fourth, they can move in and out of CHF in ways that increase the volatility of the exchange rate. This is bad for everybody except the noise traders.

The Swiss CB, meanwhile, can defend perfectly against the first effect if they want to. The second is not a serious problem. The fourth effect can be reduced by capping appreciation, which will simultaneously net the Swiss CB hard currency, at the "cost" of an overall net depreciation.

That leaves the third effect - a massive exit from CHF positions when the €-zone crisis is resolved (one way or another). This, the Swiss CB can only defend against if they either (a) have considerably more hard currency than they need in order to simply pay out all those who wish to exit (since the Swiss CB can't distinguish between people exiting long positions and people shorting, so the latter can use the former to cover as they set up a Soros attack). Or (b) cut the balls off any Swiss bank that assists the attackers in shorting the CHF (since you need the cooperation of Swiss banks to create CHF for shorting).

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Aug 13th, 2011 at 02:12:21 PM EST
[ Parent ]
to the Wonderful World of International Finance, where reality is how you calculate it.

International currency traders and hedge fund managers have bugger-all interest in buying stuff in Switzerland.  There's nothing Switzerland produces they want or need.  They do care about this, but not all that much.

International currency traders and hedge fund managers do not have to own CHF to play their little mathematical game - and it is a Game.  All they have to do is have exposure to options:

CurrencyShares Swiss Franc Fund (NYSEArca:FXF): Option volume 579 percent above average. Activity surged in the August 126 puts and the September 126 puts. FXF fell 4.43 percent to $130.02.

or futures or financial instruments exposed to the CHF, e.g., Hungarian or Polish CMOs.  

Hell, a large trading company, making billions of CHF trades a hour, can "make" millions of CHFs, per year, by extending the mantissa on their trades a couple of decimal points to the right.

Or they can lie.  If Goldman Sachs is telling you they want to make a small trade of 50 million CHF how the hell do you know if they DO have it sitting in their coffers?  A desk trader doesn't have time to waste double checking their Cash Balance¹, if it is in his advantage to make the trade, he will.  All GS has to do is come-up with the cash, or pretend to, in a Financially Acceptable Kind of Way - which is, at the bottom, a Financial calculation! - at settlement.  

Nobody knows the actual monetary value of Forex trading done in a day.  Firms who do this estimated in 2007 it's in the neighborhood of $4 trillion (US) a day, or about one year of US GDP every four days, and it is certain the volume has increase over the last four years.  In the Forex market traders go about "buying France" in the morning, "selling Greece" in the afternoon to offset the trade is all in a day's work.  Thus, the affects and effects of their trades in the CHF on the Swiss economy is of only idle interest - if the trader can have any interest at all since a goodly portion of these trades are done by computers.  (How much? Don't know.)

Since US regulators can't rein-in this trading the SNB sure as hell can't.  The system is set-up so no national government can.  The best any national government can do is light a match in a hurricane.

The only way to slow down this nonsense and erect a buffer against damage it causes is to change the damn system by creating a global clearing house that can exact a Tobin Tax on each and every trade and a transfer fee when moving from one currency to another.

¹  Which you can't know until the end of the trading day in the best of circumstances.

Skepticism is the first step on the road to truth. -- Denis Diderot

by ATinNM on Sat Aug 13th, 2011 at 03:38:27 PM EST
[ Parent ]
And Switzerland should care about any of that why?

If somebody wants to Soros attack them, then somebody can. Plenty of operators out there who have better hard-currency credit than a small sovereign. There are ways to cut their balls off, but those ways require quite heavy-handed intrusion into your domestic banking system,1 which I am not confident the Swiss have the political stomach for.

If people do not want to Soros attack them, or even buy their stuff, then why, precisely, should they care that somebody is conjuring up some Monopoly money and playing with it? A run on fake CHF will not do anything the Swiss CB can't defend against if they want to.

- Jake

1Hike liquidity requirements above total outstanding sovereign bond volume, restrict rediscounts to notes collateralised by domestically held non-financial assets - or just to non-financial assets if you're feeling generous. Then publicly announce these measures, along with the fact that they mean that most of the alleged CHF being sold is not backed by any Swiss bank or government institution. That is, it is counterfeit in every way that matters.

If idiots persist in buying counterfeit CHF off Goldman or some other high street bank, well, that's their problem when Goldman can't deliver.

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Aug 13th, 2011 at 03:58:26 PM EST
[ Parent ]
Because the Swiss could wake-up one day and find they no longer own their banking system or large manufacturing companies.  The 1997 Asian Financial Crisis is instructive.  At the last stages the Indonesia rupiah fell such an extent that it was possible, exaggerating only slightly, to buy companies producing $50 million worth of goods a year for $50 million.

As I've already said, currency traders don't give a hang about the relative valuation of the Real Economy of the country whose currency they are manipulating.  There are, however, trans-national companies who do; their purpose of being is to seek out "under-valued" assets and grab 'em on the cheap.  This process, confined within the US, is how Warren Buffet took a $3 million textile company and in 45 years turned it into a $372.229 billion conglomerate.  At the point everybody goes stampeding out of the Swiss Franc it's going to fall and if it falls low enough¹ it exposes Swiss companies to the predators.  

¹  something nobody can predict

Skepticism is the first step on the road to truth. -- Denis Diderot

by ATinNM on Sun Aug 14th, 2011 at 01:21:54 PM EST
[ Parent ]
At the point everybody goes stampeding out of the Swiss Franc it's going to fall and if it falls low enough¹ it exposes Swiss companies to the predators.

Unless the Swiss National Bank has accumulated enough foreign reserves. But I guess your point is that it's impossible for the SNB to accumulate enough reserves to counter the possibility of massive naked short selling of its currency in the international FX market.

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Tue Aug 16th, 2011 at 08:39:50 AM EST
[ Parent ]
And my point is that if the Swiss regulator has its eyes on the ball, it can kill the hostile takeovers during any the potential CHF panic dead by requiring cash settlement of all stock market transactions before they are valid. Which means that naked short selling counterfeiting CHF will not enable Mr. Buffet and his colleagues to buy up real assets in Switzerland. They will have to short using real money to provide for takeover bids. Which means they will have to go to the Swiss banking system, which is the only place on the planet that can make genuine Swiss money.

And the Swiss CB/financial regulator can grab the Swiss banking system by the short and curlies quite literally overnight.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Aug 16th, 2011 at 08:59:01 AM EST
[ Parent ]
At the risk of whip-sawing, or even crashing, the Hungarian economy where 44% of all household debt and 55% of mortgages are denominated in Swiss Francs.  

 

Skepticism is the first step on the road to truth. -- Denis Diderot

by ATinNM on Tue Aug 16th, 2011 at 02:00:04 PM EST
[ Parent ]
Bank lending denominated in hard currency, like inflation-indexed bonds, is an abomination onto God and must be exorcised with fire, garlic and holy water.

Or a severe currency crash. Y'know, whichever comes first.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Aug 16th, 2011 at 02:16:09 PM EST
[ Parent ]
It gets better:

[Emphasis added]

The potential for a debt spiral is very real, as any deterioration in the economy causes the HUF to weaken further, creating a negative feedback loop with Swiss Franc loans and further deterioration in non-performing loans.  With another peak in gross government re-financing coming next year amounting to about 20% of Hungarian GDP, and the foreign debt burden denominated in HUF worsening, the markets are watching closely.

Interestingly, the Swiss themselves weren't foolish enough to do any of this lending. [!] Austrian banks provided about 40% of CHF loans in the euro-zone. And between 15-25% of the balance sheets of the top four Greek banks are exposed to SE Europe, including almost 40% and 30% of loans to the private sector in Bulgaria and Romania respectively, according to Macquarie Bank.  In turn, German, French and other northern European banks are heavily exposed to Greece. No wonder then, that the EU fears the chain reaction which would ensue from a Greek default.

Wheeeeeeeeeeeeeeeeeeeeeeeeeeeeeeee!

I'm beginning to think there are two scenarios:

  1.  Everybody gets together and writes off and offsets their debt, one to another, to reduce the mutual plunder via interest payments to a realistic level

  2.  A cascade failure ripples through the system and everyone's FIRE sector goes bye-bye


Skepticism is the first step on the road to truth. -- Denis Diderot
by ATinNM on Tue Aug 16th, 2011 at 02:35:17 PM EST
[ Parent ]
The entire continent is run by EPP or, at the very best, the Quisling wing of the PES.

#1 is not even within shouting distance of the Overton window.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Aug 16th, 2011 at 02:48:20 PM EST
[ Parent ]
Bank lending denominated in hard currency, like inflation-indexed bonds, is an abomination onto God

The problem is that central bankers are idiots and didn't do their job properly. Moreover, they used the EU's free movement of capital for cover:

"There is nothing we can do to stop foreign exchange borrowing, and we don't even try. As members of the European Union, we have to respect the free flow of capital," he [Hamezc Istvan, director of Hungary's Central Bank] said.


Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Tue Aug 16th, 2011 at 05:09:48 PM EST
[ Parent ]
See also: this thread from 3 March 2009, and this thread from 27 October 2008.

In the interim, an IMF intervention and a rescue of the Central-Eastern European economies by encouraging Western Banks to not bail themselves out of their Central-Eastern European investments, going by the name of "the Vienna Initiative" has been in place since 2009.

We're going to have another round of currency crises in the same countries we have already had to rescue?

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Tue Aug 16th, 2011 at 05:07:59 PM EST
[ Parent ]
Not as such.

You're going to have countries going further into recession, making it harder for them to service their debt, that will be seen and responded to as a currency crisis.

The ECB, et.al., is dealing with the symptom, not the problem.

Skepticism is the first step on the road to truth. -- Denis Diderot

by ATinNM on Wed Aug 17th, 2011 at 12:40:46 PM EST
[ Parent ]
You're going to have countries going further into recession, making it harder for them to service their debt, that will be seen and responded to as a currency crisis.

So you're saying another three iterations of Teh Stupid: One to realise that it's a currency crisis (European Tribune: Get your news two years early), but deal with it by the IMF playbook. Another one to realise that maybe it's time to dust off the proper policy response (John Maynard Keynes: Get your policy response eighty years early). And a third one to actually get their act together and convince even the dumbest Bild Zeitung reading meatbrain that Keynes was right all along.

What great fun. Maybe I should move to Germany.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Aug 17th, 2011 at 12:47:09 PM EST
[ Parent ]
Got no idea how many more iterations.  Apparently our global Masters, as advised by people with neo-liberal brain rot, are feverishly working on the premise, "If you're in a hole.  Keep digging."

The recent boffo-socko idea of a BALANCED BUDGET!!1!11!!eleventyone!!!! is Yet Another bit of evidence showing how removed from reality TPTB are.

Skepticism is the first step on the road to truth. -- Denis Diderot

by ATinNM on Wed Aug 17th, 2011 at 01:04:14 PM EST
[ Parent ]
Maybe I should move to Germany.

Why bother? German policy, at a minimum, is coming to you.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Aug 18th, 2011 at 03:55:55 PM EST
[ Parent ]
Germany policy is designed to benefit Germany.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Aug 18th, 2011 at 08:16:07 PM EST
[ Parent ]
And the former West Germany, to boot.

Skepticism is the first step on the road to truth. -- Denis Diderot
by ATinNM on Thu Aug 18th, 2011 at 09:22:42 PM EST
[ Parent ]
Germany policy is designed to benefit Germany.

It might not work out that way and, in any case, it is designed to benefit only a few Germans, on whose behalf the others are resolutely sacrificing their prospects.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Aug 19th, 2011 at 12:23:35 AM EST
[ Parent ]

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