To SNB Head Thomas Jordan: Please Stop Politicizing The Gold-Initiative Debate With Propaganda

A thoughtful paper was submitted by M. Pryce. Below are the first four pages as well as the conclusion, readers are recommended to read the entire document which is embedded below.

On 23 November, the head of the SNB Mr. Jordan took his opportunity of speaking at the Ustertag commemoration to politicize the debate regarding the Save Our Swiss Gold initiative, which is scheduled this weekend at the polls on 30 November. This politicizing of debates by central bank officials has all become too common in recent times. The duty of public officials of national monetary institutions should be to offer a balanced, informed and un-biased assessment of the pros and cons for the general public to make up their mind. Instead, what we frequently get is a series of biased statements from these officials that are more akin to propaganda and fear mongering.

The passage in question is the one where Mr. Jordan calls the gold initiative “unnecessary and dangerous”.

He goes on to say that, “The initiative is dangerous because it would weaken the SNB. The connection between a minimum share and a ban on selling which it embraces would very greatly restrict our monetary policy room for manoeuvre, since the SNB only retains its full capacity to act when it is in a position to adjust its balance sheet to monetary policy requirements – in other words, if the SNB can expand or shrink it – without any restrictions. The value of this flexibility in reality has been impressively demonstrated in the past few years by two measures which allowed us to avert substantial damage from our country. First, the SNB supported the country’s biggest bank by establishing a stabilisation fund, thereby stabilising the Swiss financial system. Second, it combated the massive overvaluation of the Swiss franc by introducing a minimum exchange rate of CHF 1.20 to the euro. With the minimum share of gold and the selling ban demanded by the initiative, enforcement of measures like these would have been very much more difficult. Consequently, the initiative would make it considerably harder for us to intervene with determination in a crisis situation and fulfil our stability mandate. For this reason, the gold initiative could result in worse money instead of better money, totally in contradiction to the intentions of the originators.” [Highlighted sections are mine]

Central Bank credibility or Propaganda and Fear mongering Let us put aside the validity of these arguments for a moment. Taken at face value, the message from the highest official at the SNB is that the gold initiative is both dangerous and that it could result in worse money. And this is precisely where the problem lies; there is no balanced, informed or un-biased debate of the pros and cons. These statements are thrown in as a given where in reality the precise choice of words is better suited to political propaganda and fear mongering, period.

From a public official that should know better, these cannot be seen as anything other than sound-bites intended to swing the perception of the general population that is not generally expected to have a deep understanding about the workings of his or her country’s monetary system. After all, which member of the public would want to vote in favour of an initiative that is labeled as, both dangerous and that could result in worse money. Well, the answer should be obvious. However, there is far more to it than that as I will attempt to explain.

The intended result can be read from the news headline of the Englishspeaking news website, The Guardian. Presto, job done!:

“Fears that ‘dangerous’ Switzerland referendum could spark gold rush”

“Poll could force Swiss central bank to triple reserves, leading to price of gold soaring on international markets, experts say”

SNB deep into QE

Before I go on, I would like to point out an important admission by Mr. Jordan, one that is crucial to be aware of and understand in the current world environment where the central banks of the major economies (Fed, Bank of England, Bank of Japan and the ECB) are engaged in unorthodox monetary policies, namely Quantitative Easing, QE for short, or also known as money printing.

By his own admission, the SNB is now in a situation where its main monetary policy tool is the expansion (and eventual contraction – good luck with that) of its Balance sheet. This is the essence of QE, the creation of central bank reserve balances by fiat, also known as money printing or its alternative, digital cash balances at banks.

To wit, from the same passage above, “The connection between a minimum share and a ban on selling which it embraces would very greatly restrict our monetary policy room for manoeuvre, since the SNB only retains its full capacity to act when it is in a position to adjust its balance sheet to monetary policy requirements – in other words, if the SNB can
expand or shrink it – without any restrictions.”

Indeed, the SNB went “all-in” on QE on 6 September 2011, on announcing the EURCHF 1.20 Peg, namely that “is prepared to buy foreign currency in unlimited quantities”. It must be unequivocally stated that with this brief statement, the SNB reached a point of no return.

In the 2010-2011 period, the SNB stopped using its traditional monetary policy tools, the target Libor rate and Claims on Repo as liquidity draining operations, and instead began seriously expanding its asset line item Foreign Currency Investments from 2010 onwards, as can be seen in the table at the end of the essay.

Gold Reserves initiative vs Euro 1.20 Peg QE: Which is the more “dangerous”

A look at the SNB Accounts will put into context the magnitude of the actions that the Euro Peg implies. The next two tables show a summary of the Income statement and the Asset-side of the Balance sheet breakdown of Currency Reserves (being Foreign Currency Investments plus Gold holdings), for the period since just before the crisis to date (2006-Q32014 YTD).

I will first focus on the Income statement starting in 2010, which is the year when the Eurozone sovereign crisis seriously began. It can be seen that the SNB began taking large amounts of bonds and equity price risk exposure but also foreign exchange translation risks. For that year, the amount of foreign exchange losses reached CHF 32.7bn, which were partially offset by interest income and gold revaluation to a loss of CHF 20.6bn.

On the other hand, it is fair to say that Gold holdings also delivered a large valuation loss in 2013 of CHF 15.2bn, and also that Foreign Currency Investments as at Q32014 year-to-date has delivered a CHF 25.2bn profit.

However, it is important to understand that all these large profits and losses are beside the point. The real area of focus should be on the very large future risks that the SNB is
taking by expanding its Balance sheet. This can be seen mainly in the exponential growth of the line items Foreign Currency Investments.

At the end of Q32014, the total Foreign Currency Investments amounted to CHF 471.4bn, a growth of 10.3 times from CHF 45.5bn in 2006, the year before the crisis started.

Taken altogether, as of Q32014, at CHF 522bn the size of the SNB Balance sheet has now grown to be the equivalent of 83% of the Swiss GDP. The following chart puts this expansion in contrast compared with the other QE Central Banks, namely the Fed, the Bank of England, ECB and the Bank of Japan.

[We encourage readers to continue reading the rest of the document as of page 4]


[The author concludes its piece as follows]


Central Banks’ coordinated QE: A veritable race to the bottom

The thing with QE is that once a central bank embraces it there is no painless way of turning back.

As things stand, it is reasonable to say that QE will be the leading feature of monetary policy for years to come. Take the Bank of Japan’s Kuroda freshly unleashed dose of QE on 31 October 2014 to take the baton from the Fed, or the ECB’s Draghi intent on forcing Germany’s Bundesbank to cave in for QE of one sort of another.

It is important to understand that currently all the major QE Central Banks, that is G7 plus Switzerland, are at the lower bound Zero Interest Rate Policy (ZIRP), or negative in some cases. In addition, these banks are engaging in QE via Balance sheet expansion with the aim to devalue their currency under the guise of making their exports more competitive and whilst at the same time fighting deflation. What we are witnessing instead is a coordinated debt debasement trough subsequent and coordinated global currency devaluations. The Currency War is being fought between the QE Central Banks bloc against all the others.

No way out

For this reason, the first one of the QE Central Banks that attempts to exit QE will be flooded with capital inflows with the accompanying strong currency appreciation. Indeed, such currency appreciation will crush the economy via the export sector, whilst it will import price disinflation. This falling inflation will in turn give the central bank the cover to renew again any QE policies. This is the so-called boom and boost inflation-deflation cycle that central bankers create with their bias towards expansionary policies.

In the same way, any central bank once engaged in QE is faced with two equally painful choices. The first one, should it choose to reduce its balance sheet, is strong currency appreciation and rising bond yields. This will lead to a collapse in the bond and equity market and thus heavy price losses upon exiting its bond or equity positions. The second choice is to continue with QE, in this case the Balance sheet continues swelling uncontrollably with the consequent accumulation of price, interest rate and foreign exchange risks with lots of volatility that eventually also leads to heavy Equity capital losses. Under this scenario, both the bond and equity markets continue expanding until they are in bubble territory leading to an eventual bust.

Under the first scenario, although the right choice, the markets’ collapse blame would land squarely at the feet of the central banker. Under the second scenario, the central banker, or his/her successor, can simply claim that it was the markets’ vicissitudes and that he/she was simply conducting monetary policy for the greater good of the country.

Does any of this sound familiar?


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