Switzerland Surrenders in the Currency War

Markets are still reeling from yesterday’s news that the Swiss National Bank has removed the currency cap on the Swiss franc. Still wondering exactly what this means for European and American investors? Peter Schiff explains to RT what this means in the larger context of the international currency war. It’s good news for the Swiss people, but Americans still have a long way to go before losing confidence in the Federal Reserve.

Follow along with this transcript of Peter’s interview:

“First of all, it’s not just the euro that collapsed. The US dollar collapsed almost as much. I think it was the right thing to do. I think it was a mistake for the Swiss to have adopted that peg in the first place. In fact, by abandoning the peg, they’re admitting it was a mistake, because now the Swiss franc has appreciated anyway, which was something the peg was designed to prevent. Now the Swiss National Bank has tens of billions of francs worth of losses on a 500 billion plus cash of euros and dollars that they’ve accumulated to defend that ridiculous peg. Of course, had they not ended it, the losses would have mounted. If Europe launches QE, they could have lost hundreds of billions of francs…

“Central bankers rarely admit their mistakes. What’s changed? It’s not necessary because it didn’t work. It was never necessary. They probably have a much greater supply now of euros and dollars on their balance sheet than they bargained for. The prospect of having to back up the toboggans and fill them full of euros was very daunting. So they abandoned this peg, thankfully for the Swiss… Swiss people are going to benefit. Look at the drop of oil prices in terms of Swiss francs. Prices are going to come down and the Swiss are going to be that much more prosperous because of a stronger franc…

“I think that is a mistake. I don’t think they need negative interest rates. I think that is taking some of the luster off of the franc. It would be even stronger had they not done that. But a strong currency is not a bad thing. A weak currency is a bad thing. Switzerland should take pride in the strength of its currency. Now they have to deal with the losses by trying to prevent it from rising. Of course, there have been some economic mistakes made in Switzerland and elsewhere, because of this monetary policy, that now have to be corrected. Unfortunately, these were needless mistakes that didn’t have to be made. I think a lot of people are now jumping to the conclusion that Europe is going to do a big QE program, and that’s why the Swiss are backing away. Without the Swiss, I think it makes it that much more difficult for Europe to do QE. So maybe they’re not going to be able to do it, because they no longer have the Swiss to support their currency. Maybe they’ll do some more substantive economic reforms instead. That would be a positive for Europe. I think that it could mean the US is the last central bank standing with QE, because I think we’re going to be doing QE4…

“No, [a large account surplus is not a concern], because it just means the Swiss are going to be able to get a better deal on all the products that they import from Europe and from other countries, so they won’t have to export as much to pay for their imports. So that’s positive for the Swiss. I would be worried about the Europeans who are now going to have to spend more money to buy Swiss products. They’re the ones that hurt, as are Americans. Swiss products are now going to be more expensive for Americans, but American products… are going to be cheaper for the Swiss. So the Swiss win because they have a stronger currency, and Europeans and Americans lose because we have a weaker currency…

“I think that you’re going to see a complete breakdown in the confidence that people have for central banking over the next several years. The Swiss were saying, ‘Over my dead body. We will defend this peg to eternity.’ Then they went around and they didn’t do it. Of course, that’s generally what central banks do. They have to deny, deny, right up until the point where they do what they were denying they were going to do. I think you have a lot of confidence and trust and faith in central bankers. I think that bubble in central bank confidence is going to burst, is going to be shattered. Particularly when it comes to the confidence people have in the Federal Reserve and in Janet Yellen, because they’ve been talking about how great the US economy is. To anyone who has been paying attention to the statistics, this mirage of a recovery, this illusion is fading fast. I think instead of the promised recovery that Janet Yellen has been talking about, we’re going to have a relapse to recession. Instead of rate hikes, we’re going to have QE4. That’s going to be the end of their credibility…

“They should have raised rates a long time ago. The reason they didn’t is because it would have pricked the bubble. It would have exposed all the problems that the Fed helped create. That’s why they’re not going to raise rates. They’re going to come up with an excuse. Maybe it will be the foreign exchange markets, maybe it will be energy, maybe it will just be the weather, or maybe it will just be because the sky is blue. It doesn’t matter. They’re going to have an excuse as to why they can’t raise interest rates. The one thing they can’t do is tell the truth about why they’re not raising interest rates, because it’s impossible to do that without precipitating a worse financial crisis than the one we had in 2008. So instead they’re going to pursue this policy until we have a dollar crisis…

“The Swiss just surrendered in the currency war. That means the Swiss people win. I think more countries are going to surrender. The Swiss economy is going to improve because of this. Maybe the myth will die about the fact that you need a weak currency and somehow you’re punished. The Swiss are going to benefit from a reduction in their cost of living. They’re going to see an increase in their standard of living. Real Swiss GDP is going to be stronger with a stronger franc, not weaker. Maybe more countries will throw in the towel and surrender in the currency war. Unfortunately, I think America is going to win the currency war. That’s a race to the bottom. When you win the currency war, that means your citizens lose…

“I’ve never thought that [the ECB was] going to do a full-blown QE program the way the markets are anticipating. I still think that’s the case. I think if they do something, it will be much less than people are hoping for. Of course, what people are hoping for is destructive policy. Europe will not benefit from QE. People think QE helps you. It didn’t help Japan. The Japanese economy is in worse shape now because they did all this QE. There are people who think QE helped America, but it didn’t. All QE did is exacerbate all the problems it was supposed to solve. Now those problems are bigger than ever. You don’t feel how bad they are until you stop doing the QE, and then the hangover sets in…”

Reprinted  from Schiff Gold.