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CHF, We Declare Thee Garbage

It is by now well known that after several weeks of intense government propaganda, the Gold Initiative in Switzerland failed rather spectacularly (78% voted against keeping the Keynesian dunderheads running the SNB in check). The propaganda machinery got into full swing a few weeks ago when the “yes” vote unexpectedly started developing a lead in the polls. Obviously, the intense bombardment of Switzerland’s voters with stories about the alleged calamity of slightly reducing the power of the country’s monetary bureaucrats has worked rather well. The panic of the bureaucrats is understandable: Swiss bank assets relative to GDP are the highest of any industrialized country, and have in fact long ago attained Cyprus-like proportions. The central bank probably believes it needs to be in a position to bail the country’s banking behemoths out in the event of another crisis, and anything that threatens to reduce its room to maneuver even in the slightest must be fought tooth and claw.

However, we hereby officially declare the CHF a garbage currency. While it still has one major factor going for it – namely the relatively high degree of economic freedom in Switzerland – it is garbage in every other respect one can possibly think of (irrespective of the fact that fiat confetti printed elsewhere isn’t any better). As Eric Schreiber recently pointed out, the CHF has become little more than a derivative appendage of the euro. Although Swiss voters have rejected accession to the EU twice already, the government has engaged in a kind of “stealth accession”, with the CHF-euro peg only the latest step in an ongoing effort to integrate the country with the EU.

The pegging of the CHF has had the effect of increasing the Swiss money supply more than that of any other major currency area since 2008. Moreover, the main asset held as the theoretical “backing” of this huge money supply is the euro, which is a currency the very survival of which remains in question. That is however not all that is worth pointing out in this context. Not only has the CHF money supply exploded into the blue yonder, but in purchasing power parity terms it is undoubtedly one of the most overvalued currencies on the planet.

Here is a list of prices paid in Zurich on a wide range of items and here is a comparison of these prices with those paid in Vienna, the capital of neighboring Austria (which itself is by no means a cheap place to live; as an aside, Austria has the highest CPI rate of change in the euro area). As can be seen, the cost of living in Zurich is about twice that of Vienna. As mentioned above, Switzerland’s high degree of economic freedom does deserve a premium – but these prices are just crazy. It is even more crazy in this context that the mandarins running the SNB are worried about “deflation”.

No doubt the CHF will once again catch a bid in the next global financial/economic crisis (which is probably going to happen fairly soon), but it won’t be deserved. We would strongly recommend not to overweight the currency, resp. to avoid it altogether. Since the CHF doesn’t pay any interest anyway, one is far better off with gold, which is not “backed” by euros and the hollow promises of a government.