Duncan’s Economic Blog

Currency wars redux or the birth of a new international monetary system?

Posted in Uncategorized by duncanseconomicblog on September 6, 2011

Remember the currency wars?

After a relatively peaceful 2011 – some yen intervention and by now traditional Chinese moaning aside – they seem to be flaring up again.

The appreciation of the Swiss Franc has been causing the Swiss National Bank (SNB) headaches for months and today they have shocked the markets by announcing a unilateral peg to the Euro.

As the Macro Man blog notes in perhaps the best bit of analysis so far: 

SNB just announced that they are the World’s issuer of currency and liquidity provider of last resort.

This is the boldest response we have seen from anyone during this crisis. They must have been watching Crocodile Dundee ..”That’s not an intervention…. THIS is an intervention”

SNB have handed monetary control of Switzerland to ECB

SNB have lost control of their balance sheet.

SNB may also lose control of their mandated responsibility towards price stability

Is pegging yourself to a currency that may split in two the wisest thing to do?

Is the act of pegging to euro to be read as a huge vote of confidence in it?

Swiss rates “should” converge with Europe if currencies are pegged.

BUT If you have the choice of buying CHF or EUR assuming that they are pegged, then on a “will it be there tomorrow” front you always buy CHF  

So  that means that interest rates CAN be different and will solely reflect Euro blow up risk plus SNB failure risk.

A rebirth of the currency wars matters for Britain.

The current consensus of independent economists (tables 1 & 4) is that net trade will contribute 100% of 2011 growth and 30% of 2012 growth. Anything which makes exporting more difficult will have a serious impact without a change of policy.

As I’ve noted myself, perhaps the best contributionBritain could make to resolve these fraught international issues is to establish a State Investment Bank.

The Swiss have shocked the markets with this unilateral move and there are questions as to if it will work – if the Eurocrisis worsens and risk aversions rises again then the SNB is going to have to intervene very heavily to prevent appreciation.  

But what if it does work? Could this possibly, 30 years after the end of Bretton Woods, be seen as the start of a new system of fixed exchange rates? Mervyn King has audibly pined for something similar in the past – it can’t be ruled out. This might not be the start of a new round of ‘currency war’ but the birth of a new international monetary system.