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For us non-economic people, can you break this down a bit more: "Of course, the mainstream headbangers are now promising inflationary doom in Switzerland as a result of all of the CHF created.  But the simple fact is that while these CHF held by foreigners may - insofar as the Swiss permit - be used to buy Swiss assets, such as stocks and houses, it is not going to get out into Swiss retail demand other than through fiscal action."

How does this work? How does it lead to the purchase of assets but not stoke retail?

by Upstate NY on Mon Oct 3rd, 2011 at 09:10:26 AM EST
Because it's hot money - it's not going into CHF because its owners have any newfound appreciation for Swiss engineering, or because they want to move to Zurich and eat Swiss chocolate. It's going into CHF because people think CHF is a good sort of money to have in your mattress right now. And when they don't think it makes good mattress filling anymore, they'll give the money back to the Swiss central bank in exchange for the D-Mark and dollars the SNB bought with the CHF.

So the probability that it's ever going to go anywhere other than a mattress is negligible. And money cannot create inflation if you're using it as mattress filling - you have to spend it in order to have any influence on prices.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Oct 3rd, 2011 at 10:13:45 AM EST
[ Parent ]
Thank you.
by Upstate NY on Mon Oct 3rd, 2011 at 10:15:40 AM EST
[ Parent ]
But when a foreigner buys previously Swiss-held assets, it does increase the stock of Swiss money held in Swiss hands, potentially filtering into increased consumption within Switzerland. But a lot of that consumption may be of foreign goods. So a Swiss house owner might sell his house to a foreign inverstor and then use the proceeds to buy a German luxury yatch, in which case the net effect is to buy the German yatch with the Euros of the foreign investor. This might encourage the Swiss Central Bank to unload the reserves Euro reserves it accumulated when the foreign investor bought the swiss house.

Then when the hot money decides to leave Switzerland, the Swiss Central Bank might find itself in a pinch with stronger downward pressure on the Swiss Franc than it can allow, and without the Euro reserves to contain the pressure.

So it's complicated. But the simplistic view that all this new Swiss money must translate into a proportional increase of prices in Switzerland is not warranted.

In any case, it might be that the very fact of the Swiss Central Bank announcing its policy and giving a 20-sigma kick to the exchange rate to prove the point has discouraged people from attempting to buy Swiss Francs, and so the Swiss Central Bank will find it much much cheaper to enforce the exchange rate ceiling than one would otherwise expect.

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Mon Oct 3rd, 2011 at 10:25:51 AM EST
[ Parent ]
Yes, if foreigners go to the trouble of actually buying Swiss real estate, you might get these sorts of effects.

But (a) it is unlikely to happen in any great volume - buying real houses involves not insubstantial transaction costs. It is much cheaper to buy bonds of various sorts, which does not do anything for the Swiss nonfinancial private sector that the SNB would not have to be willing to do in order to defend its interest rate target. And (b) as of Google's last update, the CHF/€ exchange rate is at 121, which indicates that the CHF is still under upwards pressure. Which in turn means that leakage from increasing imports of the sort you describe must be relatively minor.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Oct 3rd, 2011 at 10:32:50 AM EST
[ Parent ]
On that see Swiss real estate will become the new gold, which I find not entirely convincing.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Mon Oct 3rd, 2011 at 10:36:17 AM EST
[ Parent ]
What, you mean massively overpriced and lacking any convenient industrial use?

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Oct 3rd, 2011 at 10:40:45 AM EST
[ Parent ]
Currency speculators & etc. fleeing the euro for the "safe haven" of the CHF aren't about to tie-up the money buying real estate.  Nor are they going to take their newly purchased CHF and buy Hungary -- whose real estate has all too much exposure to the CHF.

Currency speculation is a business and like any business the business stays in the business it is in.  Nobody expects MicroSoft to take it's billions o' bucks Cash Reserve and buy coal mines in the Ruhr but idiots some people think Deutsche Bank will get into the Real Estate Management business?

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Mon Oct 3rd, 2011 at 11:58:54 AM EST
[ Parent ]
Given that actual mortgage lenders avoid real estate management like the plague (hence the huge foreclosure backlog here in the US), no one with two brain cells to rub together would expect anyone else to jump into that game.  Which means there are a lot of people out there with just one brain cell.  At most.
by rifek on Wed Oct 19th, 2011 at 02:33:09 PM EST
[ Parent ]
There goes Switzerland. The dirty underwear of economics will haunt also swiss.
by kjr63 on Tue Oct 4th, 2011 at 05:45:53 PM EST
[ Parent ]
That's what I thought as well. But Updstate NY is asking about the reference to it being used to buy assets, not for inflating mattresses. If they do buy Swiss houses, it could drive up housing prices and eventually other costs. Presumably the "insofar as the Swiss permit" means that they will put a stop to this if it starts to be significant.

( in exchange for the D-Mark and dollars the SNB bought with the CHF.  Is the SNB really buying D-Marks already?....)

by gk (gk (gk quattro due due sette @gmail.com)) on Mon Oct 3rd, 2011 at 10:32:19 AM EST
[ Parent ]
Presumably they would have bought German Bunds.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Mon Oct 3rd, 2011 at 10:37:03 AM EST
[ Parent ]
That's what I thought as well. But Updstate NY is asking about the reference to it being used to buy assets, not for inflating mattresses. If they do buy Swiss houses, it could drive up housing prices and eventually other costs.

In principle, yes, but (a) as noted above it is more likely that the hot money will buy bonds, which does not change the de facto money supply as long as those bonds are eligible collateral for rediscount with the SNB. And (b) higher-order effects like the ones you describe take time to happen, and this is hot money - it's not gonna stay that long.

Is the SNB really buying D-Marks already?....)

Yes. It's buying French and German government bonds, which de facto means that it's buying Franc and D-Mark, since that's what those bonds will be denominated in if the €-zone goes tits-up.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Oct 3rd, 2011 at 10:39:08 AM EST
[ Parent ]
The SNB should be taking action to slow down the rate at which the 'hot money' can bail on the CHF.  These jokers need to 'share the pain' when they play their little games.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre
by ATinNM on Mon Oct 3rd, 2011 at 12:28:56 PM EST
[ Parent ]
Preventing people from exiting long positions is difficult. Doable, but difficult. What's easy is making sure that nobody piles on by shorting the currency as the long positions are unwound.

Which means that what they should be doing is make sure they have enough reserves to handle the long positions coming unwound, even if this may depress the exchange rate below their target.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Oct 3rd, 2011 at 01:26:31 PM EST
[ Parent ]

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