American commenters, especially those of an Austrian hard-money inclination, often criticise the Swiss National Bank for inflating its balance sheet. While their ideals are to be lauded, they are picking the wrong target, for the SNB is not magically conjuring money like the Fed and the ECB with their Quantiative Easing. Rather, it is the Swiss who knock at its door to exchange their foreign profits for Swiss Francs. The SNB obliges them by taking their claims on its balance sheets and handing them fresh Swiss Francs as a sort of depositary receipt.

Let me further explain this by taking an example. On November 21st, 2017, John Mauldin published a post on snbchf.com, (SNB: It’s A Bonfire Of The Absurdities), tipped off by his friends Dennis Gartman and James Grant. In his post, he does not outright condemn the SNB but does not let on that he can understand the motives of the SNB for its actions, and certainly not the adequacy of its policy.

Rather, he seems to echo a misperception among American experts that the SNB is creating money out of  “thin alpine air” (James Grant) with which it (undeservedly ) buys hard assets. But unlike the Fed, the SNB is not creating currency in a Faustian plot. In reality, it is a fiduciary depositor for real claims of Swiss savers against abroad.

In more detail: Switzerland has had excess savings for as long as anyone can
think. I am aware of reports dating back to the 17th century. Maybe it had something to do with the Reformation a century earlier that created a moral code of hard work and no defensible way to spend the fruits of it. Or maybe the underlying attitudes pre-date the Reformation, who knows? In any case, the Swiss have bankrolled kings and their wars as well as countries and foreign ventures starting in those times.

During normal times, the claims on abroad resulting from frugal industry across borders are reinvested abroad. Ever so often, those savings abroad that had not been re-patriated shrink or evaporate when monarchs or states go bankrupt, when inflation hits or when foreign holdings are confiscated.

With this long experience as foreign investors in the background, the Swiss read the 2007 crisis as a clear signal to run for safety. Since that year, the channel for reinvesting foreign profits is clogged for a number of reasons (among them sentiment, investment opportunities and regulations).

At this point, it is useful to look at the orders of magnitude involved: the total Swiss holdings abroad are in excess of 5trn USD (the stock variable). The yearly current
account surplus fluctuates around 80bn USD (the flow variable).

Somewhat generalised: since 2007, the Swiss have frozen their stock of
foreign holdings and started to take delivery of the annual fresh flow of real
savings in their dealings with abroad, to the tune of approx. 10% of GDP per
annum (the current account surplus). What to do with the onslaught of such an avalanche of foreign titles every year?

In this situation, the SNB does not create CHF out of thin air, it simply
hands Swiss savers new CHF against their real claims on abroad which they
want to change into CHF, and in turn takes the real claims on its balance
sheet as a fiduciary.

Now, there is a lot to say about this, most notably if it is up to a central
bank to insure savers against potential currency and/or investment losses at
the expense of the general public. But it is also true that the real options
are limited if the free flow of capital is to be upheld and if the local
manufacturing base is not to succumb to the Dutch disease.

SW/2017-11-23
Stefan Wiesendanger