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The SNB’s Lunch is Hard-Earned

There is a wrong notion that the Swiss National Bank (SNB) is somehow getting a free lunch because it appears as though it can create money out of thin air and use it to buy real assets such as stocks.

While this is possible, it is not what the SNB is doing. In reality, it accepts pre-existing Swiss claims on other countries as deposits and hands out certificates of deposit (aka Swiss Francs) to the owners of these claims.

These claims were hard-earned in the first place by Swiss businesses and individuals in their dealings with their foreign counterparties, as manufacturers, traders, service-providers and investors.

A typical example of the misled notion that the SNB is getting a free lunch is voiced in “As Markets Crashed, The Swiss National Bank Went On A Tech Stock Buying Spree” published on zerohedge and syndicated at snbchf.

The actions of the SNB are grossly misrepresented in the article. The SNB is not acting as a hedge fund financed by debt, much less by “thin air” as suggested. Quite the contrary, the SNB is acting as a conservative and diligent savings-and-loan bank.

How so? The SNB accepts the hard savings of Swiss individuals and companies vs. abroad and hands out certifcates of deposit aka Swiss Francs. At the same time and on the assets side of its balance sheet, it re-lends these savings to foreign entities, 80% to foreign governments while a fixed percentage of 20% is invested in foreign stocks in a purely passive way.

Focusing on SNB stock holdings is wrong, the recent investments correspond to algorithmic rebalancing operations to maintin the 80/20 allocation, while purchases of individual stocks simply reflect their part in the global stock market.

Whether it is a good thing that the Swiss are saving so much more than they manage to invest domestically (about 80bn USD per year) is debatable. Whether the SNB should accept these savings as deposits is another question. But there are good reasons both for savings to be so high and for the SNB to accept them as deposits.

If one insists on judging the SNB, let me ask: how is it morally defensible that US hedge funds and private equity companies are soaking up the excess savings of the rest of the world and buying up the productive capital in those same countries with the money they sent the US for safe-keeping? And how does that compare to the SNB who invests only their own Swiss domestic savings, lending a full 80% of it to foreign governments while demanding hard productive assets for only 20%? As a Swiss citizen with concerns regarding nominal assets in today’s low-interest rate world, I would prefer a more aggressive ratio than the current 80/20 asset allocation of the SNB.

In summary, the depiction of the SNB as a debt-financed hedge-fund is grossly unfair and detrimental to Switzerland because it suggests that the Swiss are getting a free ride. That is not true. The SNB, much like in the days of the gold standard, accepts as deposits the excess savings of the frugal and industrious Swiss in their aggregate dealings with the rest of the world. Since gold has been demonetized, these claims against foreign entities cannot be settled in gold anymore. Instead, they are settled in 80% government bonds and 20% foreign shares. How is the SNB getting a free ride?

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SW/2020-09-10

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