Since the EU referendum, all eyes have been on sterling.
The pound has fallen.
But take a look around. The Bank of England must be the envy of the world’s central bankers. Everyone wants a weaker currency.
And I suspect that this particular race to the bottom is about to pick up sharply…
The Swiss problem is going global
The Swiss National Bank (Switzerland’s central bank) doesn’t get quite as much attention as its biggest peers around the world. But it’s certainly been one of the pioneers in experimental central banking.
The problem for the Swiss is that everyone thinks they’re safe and boring. So any time something bad looks like happening – the eurozone completely melting down, for example, or Britain deciding to leave the EU – foreign investors tuck a little bit more money away in their Swiss piggy banks.
As a result, you end up getting a stronger Swiss franc. And that’s a bit of a problem for the Swiss economy.
In the days before the 2008 financial crisis, notes Reuters, one euro would buy you 1.6 Swiss francs. Nowadays, you’re lucky to get much more than one franc. Put simply, that means that stuff from Switzerland is an awful lot more expensive for anyone who doesn’t get paid in Swiss francs.
I don’t own a watch – almost every other portable object I own already tells the time, so I don’t really feel the need. But I know lots of people like them, and that Swiss ones are among the best in the world. Trouble is, there’s only so much money your average person is willing to pay for a watch – even a decent one. And the same goes for every other Swiss product.
Exports from the Swiss watch industry fell by around 10% in May. Watchmaking giant Swatch issued a profits warning last week.
This is one big reason why Switzerland has negative interest rates. The country really doesn’t want more foreigners stashing their cash there. The central bank charges as much as 0.75% on some deposits.
These charges haven’t been passed onto retail customers (except for one small bank) by the Swiss banks. But there are charges for institutions and other big users. And UBS recently threatened to charge wealthy private customers new fees, reports Reuters.
The Swiss central bank also intervenes in the currency markets regularly – trying to prevent the Swiss franc from growing too strong.
But it’s fighting a losing battle. Swiss government bonds all now trade at negative yields. The Swiss government is in the position where it can effectively charge people for the privilege of lending to it over a 50-year period.
That’s hard to get your head around. But just imagine if you could take out a 50-year mortgage with an interest rate of 0%, plus the bank would give you cashback of £100 a year, say. It’s a bit like that.
Nice work if you can get it, eh?
Why low interest rates have turned markets into casinos
The Swiss dilemma is just a microcosm of what’s going on around the world. No one – from the US to China to Japan to the eurozone – wants a strong currency.
You can debate why this is. One argument is that it’s partly because the world has too much capacity. There is no pressure on prices because there are too many people and companies producing too much stuff, and not enough people buying that stuff.
Thing is, if you buy the global overcapacity argument – and I’m not saying I don’t, but I do think it’s more complicated than that – then central bank policy really isn’t helping.
Central banks are printing money in an effort to boost demand. But easier money doesn’t just boost demand. It also makes it easier for all that excess capacity to continue to exist.
If you keep monetary conditions easy, and create a world where investors will throw money at literally anything that promises a positive yield, then you create an environment where capital doesn’t differentiate between good projects and bad ones.
And we wonder why we have a productivity “problem”.
The point of markets is to allocate capital efficiently. A dead interest rate world cripples that function. In turn, that begs the question of having markets to allocate capital.
Which, in turn, creates an environment in which the government decides it has to step in to do the job of capital allocation. Which leads to talk about things like “industrial policy” and “infrastructure spending”.
And of course, “helicopter money”.
What’s the end point? Interestingly enough, the US, which is still arguably the world’s most efficient economy, is probably the closest to having an actual inflation problem.
But even then, Federal Reserve boss Janet Yellen has made it very clear that she doesn’t want to raise interest rates if she can avoid it.
The rest of the world will keep competing to have the weakest currency, while the Fed will act to keep the US dollar capped, because it can’t allow global stockmarkets to take the hit that a stronger dollar would unleash.
It’ll all blow up at some point. My guess – and it’s only a guess for now – is that the trigger will be the point at which US inflation grows too strong to ignore, and markets start to worry about central banks reversing course.
We’re not there yet. But Albert Edwards points out that the Federal Reserve Bank of Atlanta’s wage growth tracker – an alternative way of measuring US wage growth – is now rising at 3.6% a year.
That’s pretty punchy. Something to keep an eye on.