People on the far left tend to overstate how all the world’s problems are caused by bad U.S. policies, while I suspect the average American has no idea how much the U.S. bullies smaller countries. For example, some people say that other countries “take advantage” of the U.S. in trade agreements, when in fact it’s quite the opposite: the U.S. uses its economic power to force trade concessions from smaller countries. And in terms of GDP at market prices, all countries are “small.”
Over the past few decades, Switzerland has been in a state of deflation due in part to a strong currency. Here is the inflation rate in Switzerland: Trading Economics:
Due to the relative flexibility of the Swiss economy, these short, mild deflationary periods have not caused significant macroeconomic damage, but to prevent a further slide into deflation, the SNB has often had to slash interest rates to ultra-low levels and implement asset purchases (QE) many times larger than those undertaken in the US and EU. Financial Times:
The SNB then launched a series of interventions to stave off the deflationary effects of a continuing strong currency, including the sale of newly minted electronic Swiss francs. These interventions saw the SNB’s balance sheet balloon to a peak of around 140% of GDP.
In 2022, the SNB lost the equivalent of 17% of GDP due to rising interest rates and falling bond prices. So why doesn’t the SNB adopt a monetary policy that leads to a weaker currency to avoid being forced into ultra-low interest rates and an extremely inflated balance sheet? Part of the problem seems to be that the SNB misunderstands the root causes of its dilemma (I discuss this issue at length in my book). Latest BooksBut one factor is pressure from the US government to pressure the Swiss to further strengthen the franc.
With interest rate cuts unlikely to improve the situation and capital controls also unthinkable, the options are further intervention or a truly free floating exchange rate. In 2020, the US Treasury correctly labeled Switzerland a currency manipulator and applied diplomatic pressure on the SNB to stop manipulating its currency.
Think for a moment about the strange nature of this situation. In the last 50 years, no currency has been stronger than the Swiss franc. Nobody. And how would the U.S. government respond to this situation? Would it try to blackmail the Swiss into changing their currency? Even stronger.
When we have achieved more than any other country on earth and we are told that the problem is that we are not doing enough, that is a clear sign that we are being advised by people with a deeply flawed economic model.
I often argue that low interest rates and large-scale quantitative easing do not mean easy money, and that many conventional economists confuse causality. But why should you believe my contrarian view?
In January 2015, I said that Switzerland had made a mistake by allowing its currency to appreciate too quickly after more than three years of pegging it to the euro. I suggested that this could push Switzerland back into deflation. Conventional economists suggested that this step was necessary to avoid a large increase in the Swiss National Bank’s balance sheet. All my fears came true. Switzerland quickly fell into deflation, leading to negative interest rate policies. Demand for Swiss currency increased significantly as investors realized that the Swiss franc was likely to appreciate against the euro. The Swiss National Bank responded by expanding its balance sheet to 140% of GDP.
Switzerland is not the only country that the United States has forced into deflation. Our government also forced Japan to appreciate its yen, with similar results.
P.S.: It is interesting to look at the current account surplus (2024) as a percentage of GDP (from The Economist).
Singapore: 19.7% of GDP
Taiwan: 14.2% of GDP
Netherlands: 8.6% of GDP
Switzerland: 7.3% of GDP
Germany: 6.6% of GDP
Japan: 3.2% of GDP
Eurozone: 3.1% of GDP
China: 1.2% of GDP
Which country in this group has the smallest trade surplus as a percentage of GDP? Which country has the US media obsessed with a trade surplus? Which country is considered an enemy by both political parties and many in the media? Do you notice a pattern? (China’s actual surplus may be somewhat larger than 1.2% of GDP due to measurement error, but it is still much lower than many other countries.)
