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Central Banks Are PoisonThe day before yesterday the Swiss Central Bank (yes, Switzerland has one of those nefarious institutions just like any other "modern" democracy and it is called the Swiss National Bank) decided to stop its cap on the Swiss Franc. Basically, the SNB maintained a fix ratio between the Swiss Franc and the Euro to a ratio of 1.2 to 1 for the last three years. The day before yesterday the SNB decided to let the Swiss Franc "float". You can read the story in Bloombers under the title "Casualties From Swiss Shock Spread From New York to New Zealand". The result? You can see it for yourself in the graph below.

A jump of roughly 41% in the price of the CHF against the EU in a matter of seconds. This created a significant market catastrophe because the SNB was "expected" to actually de-value the CHF to increase "competitiveness" of Swiss products considering that the EU market is tanking and Quantitative Easing is now on the agenda. Everybody bet that the SNB will protect manufacturers. Well… it didn't. Why or how we don't know. What matters is that it did and the consequences are there. Many trading companies have suffered massive loses.

CHF versus EUR

This has been described as:


"People feel hurt and betrayed"

"Unprecedented Volatility"

"Market turmoil…"

"…significant loses…"

"…left the clients with a negative balance…"

And so on. You get the idea.

However, the question that nobody is asking is why should this happen? If we return back to basics (see Fake Money For A Fake Economy and Real Money For A Real Economy) you will notice that money is a means of exchange and nothing more. Consider the following example. Gadget AB is being manufactured in Switzerland and Zimbabwe and you live in Brazil. When you buy AB from Switzerland you pay 1 gr of Gold for it. When you do the same from Zimbabwe, you pay 0.9 gr of Gold. The price differential (0.1 gr of Gold) reflects the differences in manufacturing costs and nothing more. Over time you would expect that the price in Switzerland would tend to approach 0.9 so that they may compete with Zimbabwe. Eventually, the price will either be 0.9 or manufacturing would cease in Switzerland. However, what you would not see is a 40% price jump from 1.0 gr of Gold to 1.4 gr of Gold in seconds for AB gadgets manufactured in Switzerland. The only possible scenario under which this could happen is if a large percentage of manufacturing capacity in Zimbabwe was wiped out for whatever reason. Short of that, these kinds of variations simply do not happen. Yet, yesterday this is exactly what happened but there was no cataclysmic event that suddenly wiped out 40% of the stock of CHFs. What happened was a decision from the SNB to stop "selling" CHF's below their real value. This whole debacle is down to a decision of a few people taken in secret meetings behind closed doors and armed guards. That's it!

Worse. This is not an anomaly. This is exactly what Central Banks do (see for example Central Banks Engines Of The Evil Empire and Central Banks Must Go). Interestingly enough, it would seem that no large Swiss Banks have suffered any major loses at this time. Hummm…. it would seem that the "right" people was indeed "communicated" in time… Allegedly.

This is precisely why we are Austro-Libertarians. Central Banks are dangerous to your pocket, your wealth, your health and ultimately your life.

Unless, this is, you believe that markets should be "managed" and "stabilized" through the wise use of Monetarist "models" (aka spreadsheets) by "enlightened public servants". OK then. May we forward your address and phone number to the millions of people that just lost a good portion of their savings so that you may explain to them all this "stability" and "protection" they are getting?

Note: please see the Glossary if you are unfamiliar with certain words.

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