At least that’s the claim of the US government.
Today, the US government accused Switzerland of artificially depressing the value of its currency in the foreign exchange market. This is rather odd, as Switzerland is generally considered to be the country with the strongest currency in the entire world. Since 1971, the value of the Swiss franc has soared from 23 cents to $1.12:
The US government might argue that this is the nominal exchange rate, and what matters is the real exchange rate. I agree. But most measures of the real exchange rate (such as The Economist’s’ Big Mac index”), also show the Swiss franc to be the strongest currency in the world. The “real exchange rate” is just a fancy term for the relative cost of living. So to put this claim in terms that average people can understand, the US government is claiming that the cost of living in Switzerland is being held too low. Have you ever taken a vacation is Switzerland?
If you want to understand the US claim in graphical terms, look at the Economist’s Big Mac index graph. The Swiss franc is the blue dot on the far right, 21% “overvalued” versus the dollar. The US is essentially claiming that the Swiss have manipulated that dot too far to the left. No, I’m not joking.
The US government might argue that while Switzerland has the strongest currency in the world, it should be even stronger. But what evidence do we have for this claim? The Treasury department would cite Switzerland’s large current account surplus. But a current account surplus does not mean a currency is overvalued undervalued. Many American states run current account surpluses with other states. Does that mean the Massachusetts dollar is undervalued relative to the Texas dollar? Switzerland’s current account (CA) surplus is merely an indication that the Swiss save more than they invest.
The US government might argue that the Swiss CA surplus is unusually and unjustifiably large. But most northern European countries run CA surpluses. Switzerland is significantly richer than other European countries, and the Swiss are also unusually thrifty. It’s exactly the sort of country one would expect to run an especially large current account surplus, even if there were no manipulation.
The US government might argue that the Swiss saving rate is artificially inflated by government intervention in the foreign exchange market. But the Swiss purchase of foreign assets is motivated by a huge rise in the demand for Swiss francs, which has caused the Swiss National Bank’s balance sheet to balloon to well over 100% of GDP. There are not enough Swiss government bonds for the SNB to purchase. A failure to meet that demand for francs would result in deflation and depression.
In fairness, you could argue that the Swiss should set a higher inflation target, and/or engage in price level targeting. But that’s true of the EU and Japan as well. And it’s also true of the US. Or the government might argue that Switzerland should run massive budget deficits. In other words, the Swiss should abandon the economic system that produced arguably the most successful small country in human history, and throw in their lot with the MMTers.
I’m guessing that the Swiss will say, “No thanks, we are doing just fine without your advice.”
PS. Keep in mind that the US government is currently run by a team that launched a trade war because its economists told them that trade barriers would reduce the US trade deficit. The deficit actually increased, just as most sensible economists predicted.
PPS. The report actually named two countries as currency manipulators, Switzerland and Vietnam. When we put tariffs on China it caused some low wage industries to move to Vietnam. The game of trade “whack-a-mole” continues.
READER COMMENTS
Philo
Dec 16 2020 at 5:50pm
“The game of trade ‘whack-a-mole’ continues.” But only for five more weeks! (I hope; how much protectionism do you expect from the Biden administration?)
Mark Brophy
Dec 16 2020 at 6:53pm
Trump used to be a Democrat and that’s where he got the idea that protectionism is desirable so Joe Biden will continue Trump’s policies. Biden may have been in Congress when NAFTA was enacted in 1992 so how did he vote? If he is like most Democrats then he was against it.
Mark Brophy
Dec 16 2020 at 6:56pm
Joe Biden was one of the few Democrats who supported NAFTA.
Brent Buckner
Dec 17 2020 at 7:09am
@Mark Brophy, you wrote:
“Joe Biden was one of the few Democrats who supported NAFTA.”
Using the word “few” strikes me as at odds with the 1993 votes in the House (102 Democrats voted “yes” and 156 voted “no”) and Senate (27 Democrats voted “yes” and 28 voted “no”) and subsequent signing by President Clinton.
Scott Sumner
Dec 16 2020 at 11:02pm
Most presidents (of either party) are more in favor of free trade than the average congressman. Trump was an exception.
Lord Canes
Dec 16 2020 at 6:49pm
The gigantic increase in the Swiss National Bank balance sheet (relative to Swiss GDP) is interesting. The SNB said the intended effect was to depreciate the Swiss franc .
The SNB balance sheet explosion appeared to have little or no effect on Swiss domestic GDP and inflation, although one could argue Switzerland would have had deflation otherwise.
One could wonder if other nations, attempting to stimulate domestic economies, can do so only through quantitative easing.
Michael Pettis ahs interesting observations on nations that, through policy, obtain high domestic savings rates, perhaps sometimes called repressed consumption.
Pettis contends that changes in German policies resulted in much higher savings rates, leading to Germany’s chronic trade surpluses. Much the same happens in China.
The theory of free trade as applied to the modern world appears to be deficient as a policy tool. Likewise there is now a confused understanding of what is the difference between monetary and fiscal policy, if any, given quantitative easing.
Phil H
Dec 16 2020 at 9:22pm
Michael Pettis famously predicted in 2010 that the Chinese economy was going to collapse or flatline in a few years, and that it would not achieve the stated goal of doubling in size from 2010-2020. It did. I don’t know enough economics to assess the quality of his thinking otherwise, but this was a very public, very big failure of prediction. I used to read him a lot, and now I don’t.
Scott Sumner
Dec 16 2020 at 11:06pm
I don’t think it’s anything specific the German government did; most countries in Northern Europe run CA surpluses.
Switzerland made a mistake in 2015 when they let the franc appreciate. That just whet the appetite of currency speculators, who then bought even more francs.
Alan Goldhammer
Dec 16 2020 at 7:27pm
This might be of concern if the Swiss were one of our major trading partners and the “currency manipulation” is causing a big imbalance in trade. They are not and the value of the Swiss Franc has about as much impact on America’s trade deficit as a grain of sand under an elephant’s foot.
Airman Spry Shark
Dec 16 2020 at 8:22pm
OT: The issue of measuring stocks (e.g., the SNB balance sheet) against flows (e.g., Swiss GDP) has bothered me for a while (especially when leftists decry an individual whose wealth (stock) exceeds the GDP (flow) of some country), but I’ve had a minor epiphany reading this: since the units of flow are stock per time, the two could be more reasonably compared by stating the amount of time of the flow that the stock represents. For instance,
Phil H
Dec 16 2020 at 9:24pm
Scott, one of your mantras is “don’t reason from a price change.” But look at your para 1:
“Today, the US government accused Switzerland of artificially depressing the value of its currency in the foreign exchange market. This is rather odd, as Switzerland is generally considered to be the country with the strongest currency in the entire world. Since 1971, the value of the Swiss franc has soared from 23 cents to $1.12”
Below you go on to give better evidence. But it’s a funny example of how tempting those price changes are.
Scott Sumner
Dec 16 2020 at 11:08pm
Yes, the nominal exchange rate data by itself doesn’t prove very much, as you say.
Rajat
Dec 17 2020 at 5:06am
Did you mean ‘undervalued’?
Scott Sumner
Dec 17 2020 at 5:32pm
Yes, that was a typo on my part. I’ll fix it.
Henri Hein
Dec 17 2020 at 2:39pm
I hope they will.
Ted Durant
Dec 17 2020 at 3:40pm
Interesting … in pulling money supply data from FRED the other day, I noticed this:
https://fredblog.stlouisfed.org/2019/08/switzerlands-mountainous-monetary-base/
Scott Sumner
Dec 17 2020 at 5:34pm
I don’t believe that graph is accurate. I think their base is more like 140% of GDP, but I’m not certain.
Ted Durant
Dec 18 2020 at 4:28pm
I just followed the links to their source data, and October monetary base is 719,289 million CHF, Q3 GDP is 177,903.6 million CHF, for an updated ratio of 404%.
Ghost
Dec 18 2020 at 2:44pm
Scott: the only way your statement works is if the US government is claiming that the cost of living in Switzerland for Americans is too low.
If the SNB was to stop intervening and let the Swiss franc appreciate, as the US govt wants, the cost of living for Swiss people would go DOWN – they would benefit from lower Swiss franc prices for all the things they import (coffee, computers, etc).
Arno Grüter
Dec 28 2020 at 5:14am
Funny that you picked a picture of a German or Austrian village.
Whoever acuses Switzerland of manipulating its currency should take notice of the fact that e.g. the US Fed is manipulating the whole economy! And its been doing that since the early 2000s. In my view that is the heck of a lot more reprehensible.
Cheers from Switzerland
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