World Update and the Swiss Franc
A few weeks ago the Central Bank in Switzerland had announced that it would scrap its policies which limit the rise of their currency. A consequence of this arcane move is that the Franc had surged up in value against the Euro and US Dollar, which has caused a shock-wave through global finance and the media.
We can examine what the media is trying to tell us about this event.
Firstly, they tell us that a stronger Franc is bad for Swiss exports - this is semi-true as the prices of Swiss goods will increase for the rest of the world making them "less competitive" and while this may be true, it is definitely not certain. Swiss goods are usually viewed as luxury goods, meaning that the 20% increase in price of these commodities will likely not hurt sales too much as the majority of buyers of Swiss goods will not notice the price increase, and those that do will not be hurt too much by them. Although with that being said, Switzerland does have a lot at stake as exports make up a large share of their GDP.
Secondly, Swiss tourism can be hurt by price increases, although this, too, is unlikely for two reasons. One being that, once again, Switzerland serves the affluent tourists, who likely will not even notice the price increases as they swipe their credit card for a last minute skiing trip through the Swiss Alps. The other reason being that the Swiss are very proud of their own country and although they might not be as nationalist as the USA in supporting their local economies, a large share of their tourism does come from domestic travellers. This means that they only risk losing their domestic tourists as they are now able to afford more abroad.
The last thing the media seems to be warning the Swiss about is deflation. Average prices in Switzerland have seen a 0.3% decrease and will likely see a bigger decrease this year. There is a fundamental problem in the media when they start telling people that they should want their currency to be in a state of continuing decline.
The main reason they will tell that you should want your domestic currency to be declining is that the rich will be more inclined to spend money then to hold it in savings and allow it to appreciate. In reality, the rich will not care since they have the access and ability to hold their money in any currency. There are several ways to stop the greedy affluent from stockpiling cash as if it is grain being saved for a rainy day, and a depreciating domestic currency is NOT one of them.
Say, for example, you are rich and deciding what to do with that money, most likely you will want to use your money in a way that will make you more money. You are then given two options, to invest the money in an economy where the currency is depreciating and therefore money is flowing out of the country because just holding that money loses you money OR investing in an economy where just holding money will make you more money. Obviously you would choose the second option, not only is it appreciating what you are holding but also everyone using that currency feels as if they are getting richer, this means they are more likely to spend more, thus creating more opportunity to invest in successful business operations.
An analysis of real profits for countries where currency is depreciating vs appreciating is necessary, at the very least an analysis of real profits for USA alone during times of dollar appreciation vs. depreciation will likely give conclusive results for the truth behind what the media is trying to tell people.
We can examine what the media is trying to tell us about this event.
Firstly, they tell us that a stronger Franc is bad for Swiss exports - this is semi-true as the prices of Swiss goods will increase for the rest of the world making them "less competitive" and while this may be true, it is definitely not certain. Swiss goods are usually viewed as luxury goods, meaning that the 20% increase in price of these commodities will likely not hurt sales too much as the majority of buyers of Swiss goods will not notice the price increase, and those that do will not be hurt too much by them. Although with that being said, Switzerland does have a lot at stake as exports make up a large share of their GDP.
Secondly, Swiss tourism can be hurt by price increases, although this, too, is unlikely for two reasons. One being that, once again, Switzerland serves the affluent tourists, who likely will not even notice the price increases as they swipe their credit card for a last minute skiing trip through the Swiss Alps. The other reason being that the Swiss are very proud of their own country and although they might not be as nationalist as the USA in supporting their local economies, a large share of their tourism does come from domestic travellers. This means that they only risk losing their domestic tourists as they are now able to afford more abroad.
The last thing the media seems to be warning the Swiss about is deflation. Average prices in Switzerland have seen a 0.3% decrease and will likely see a bigger decrease this year. There is a fundamental problem in the media when they start telling people that they should want their currency to be in a state of continuing decline.
The main reason they will tell that you should want your domestic currency to be declining is that the rich will be more inclined to spend money then to hold it in savings and allow it to appreciate. In reality, the rich will not care since they have the access and ability to hold their money in any currency. There are several ways to stop the greedy affluent from stockpiling cash as if it is grain being saved for a rainy day, and a depreciating domestic currency is NOT one of them.
Say, for example, you are rich and deciding what to do with that money, most likely you will want to use your money in a way that will make you more money. You are then given two options, to invest the money in an economy where the currency is depreciating and therefore money is flowing out of the country because just holding that money loses you money OR investing in an economy where just holding money will make you more money. Obviously you would choose the second option, not only is it appreciating what you are holding but also everyone using that currency feels as if they are getting richer, this means they are more likely to spend more, thus creating more opportunity to invest in successful business operations.
An analysis of real profits for countries where currency is depreciating vs appreciating is necessary, at the very least an analysis of real profits for USA alone during times of dollar appreciation vs. depreciation will likely give conclusive results for the truth behind what the media is trying to tell people.
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