ECON430-Topic #1: Swiss Francs and Safe Havens

On January 15th the Swiss National Bank (SNB) dropped a soft peg of 1.20 Swiss francs per euro that it had been maintaining since September 2011. The SNB had been maintaining this peg because their currency had been seen as a safe haven from volatility in the Eurozone. The euro had been volatile due to the debt crises that had been occurring in Spain, Italy, Greece, Portugal, Ireland, and elsewhere (i.e., PIIGS). Prior to adopting this peg, the Swiss currency had been trending downward (strengthening) against the euro for years as foreigners sought the relative safety of Swiss currency. This strengthening is good on one hand, but bad on another. For one, it is good for the Swiss consumer, whose franc now buys more than it did before. For example, a change from 1.60 Swiss franc per euro to 1.20, implies that a franc now buys about 28.6% more euro produced goods than before (Using the midpoint of 160 & 120). However, it also means that Swiss manufacturers and retailers prices are now 28.6% higher than they were before. This jump in prices would lead to rising unemployment and reduced competitiveness by the Swiss, and a reasonable expectation of avoiding deflation.

It is important to note that the Swiss artificially weakened their currency from where it would have been otherwise by maintaining a 1.20 Swiss franc to euro exchange rate, when it would otherwise have been closer to 1.00 to 1.00 (as it is now). It is easy to maintain a peg that artificially weakens your currency, since all you have to do as a central bank is print the additional money that foreigners want to hold. The SNB statement notes that “[t]he euro has depreciated considerably against the US dollar and this, in turn, has caused the Swiss franc to weaken against the U.S. dollar. In these circumstances, the SNB concluded that enforcing and maintaining the minimum exchange rate for the Swiss franc against the euro is no longer justified.”

The move by the SNB is expected to lead to rising volatility in forex markets in the coming weeks as money sloshes around in its search for a new safe haven. Investors now might wonder if the SNB can commit to other policies, and might undermine their effectiveness in the future. This loss of credibility could lead to future difficulties for the SNB if they need to turn to similar policies. While it does not necessarily make it more difficult to maintain a future peg that is artificially weak, investors who think they cannot commit to a policy would be willing to push the SNB limits by attempting to accumulate currency in the hopes that they would abandon their peg and each franc is suddenly more valuable (about an 18% swing in the midpoint of a 1.20 to 1.00 change recently experienced). Much of the problem experienced by the SNB is that the size of the Swiss economy is not large enough to accommodate all the inflow of money that would be necessary to act as a safe haven. The US now takes on additional ‘safe haven’ burden. Some believe that the US should always benefit when the dollar is stronger, while others doubt that it is beneficial to all.

Questions you might want to answer

Remember, don’t try to answer all of these questions, just focus on one, provide some evidence, and support your opinion. NOTE: There is a delay between you posting your comment and it appearing, since I have to approve all comments by hand. Make sure you save your comment in a word processor file before posting it here. I cannot help you if  “the ether” ate your homework.

  • What do you think about the US “strong dollar” policy? Should the US continue to advocate a strong dollar or is this not in our long term best interest? Provide some facts to back up your opinion.
  • Compare the Chinese policy of keeping its exchange rate ‘artificially weak’ as the Swiss have done. How does this result in economic benefits (or costs) to the Chinese, and how has it impacted their price levels? What is a primary difference between the Chinese yuan and the Swiss franc?
  • What do you make of the Swiss policy of having a short-term policy rate of -0.75% (yes that is a negative sign). What does this mean? Why are they doing this, and is this something that the US could implement?
  • Recent events in Greece have led to an anti-austerity party taking nearly full control of their legislative and executive bodies. What does this mean for exchange rates, and how has it already appeared to affect markets?
  • For any comment, please make sure you have facts to back up your opinion, and make sure you are not saying something that someone else said previously.

ECBExchangeRateEURvsCHF_01-01-2008_27-01-2015ECBExchangeRateEURvsUSD_01-01-2008_27-01-2015

16 thoughts on “ECON430-Topic #1: Swiss Francs and Safe Havens”

  1. The US Treasury Secretary, Jack Lew, has consistently stood by the fact that a strong dollar is good for America. However, there are many arguments as to why the US does not need a strong dollar policy. While the strong dollar policy can certainly contribute to the creation of a strong economy, there are many justifiable reasons to advocate against the strong dollar. Most notable, the effect on international trade plays a significant role in the downfall of the policy.

    With a strong dollar policy, American exports look relatively more expensive abroad, which means less exports demanded by the foreign exchange market from US firms. This is a major problem for US companies. More than 40% of revenue for the companies in the Standard and Poor’s 500-stock index comes from abroad, resulting in significant earning concerns. To see how this translates to a specific company, the NY times article (The Strong Dollar Is Always Good, Except When It Isn’t) compares two companies that were divided into two parts. Altria Group, the domestic company, has “skyrocketed” since the dollar has become stronger this past year (see the FRED graph–>http://research.stlouisfed.org/fred2/series/TWEXBMTH).

    The international company, Philip Morris, has “flatlined.” Now with the Swiss franc removing their peg to the euro, it is no longer considered a safe haven, putting more pressure on the dollar to act as the traditional safe haven. Therefore, this new burden will cause trade problems (reduced exports) that will continue to hit US firms hard.

    http://www.reuters.com/article/2015/01/26/us-usa-economy-jacklew-idUSKBN0KZ1BL20150126
    http://www.npr.org/2013/03/18/174639926/does-america-need-a-strong-dollar-policy
    http://www.investorwords.com/4783/strong_dollar.html
    http://www.nytimes.com/2015/01/25/business/the-strong-dollar-is-always-good-except-when-it-isnt.html?_r=0
    http://www.cbsnews.com/news/how-will-a-strengthening-dollar-affect-the-us-economy/

  2. China is one of the largest economies in the world for one major reason, their ability to trade. Their tendencies to export, have created a problem with the exchange rate of the Yuan. If China keeps their currency undervalued, then their exports look more attractive to the international marketplace. The Swiss have done the same thing when it comes to artificially weakening their currency, however the motives are different behind each strategy. The Swiss franc has been seen as a very secure asset in Europe and has been attractive for that purpose, but exchange rate has become to high. The SNB prints money into circulation that lowers the exchange rate, making purchasing the Swiss franc more attractive.

    “Pressure had been building on the cap for weeks.” Daniel Sugarman market strategist stated when describing the sudden change. There is also a suggestion that the Swiss franc wasn’t at an efficient price level and was “overvalued”. It seems as though the SNB didn’t want a bank run to occur (people believe that the value is going to crash well below the new artificial ceiling). Regardless of the reason a bank run occurs, they are self-fulfilling prophecies and are very dangerous. Compared to the Chinese, the Swiss have a very small amount of exports and that is not where the Swiss gain their advantage. China increases the attractiveness of their exports by devaluing their currency, in turn decreasing everyone else’s exports . This especially hurts the US because it lowers our exports and increases the price of exports we buy most of, which ultimately increases the US trade deficit.

    http://www.cnbc.com/id/102340182#.

    http://www.telegraph.co.uk/finance/currency/11347218/Swiss-franc-surges-after-scrapping-euro-peg.html

    http://economistsview.typepad.com/economistsview/2015/01/useuro-foreign-exchange-rate.html

    http://blogs.wsj.com/economics/2014/11/04/u-s-trade-gap-with-china-80-of-trade-deficit-hits-historic-high/

  3. Austerity in terms of economics are “…policies to reduce government spending and or higher taxes in order to try and reduce government budget deficits”(1). Given this definition, the Anti-Austerity party in Greece does not want to use austerity policies to solve the Greek economic crises. The people of Greece have suffered from decreases in government spending, wages, and pensions accompanied by increased taxes (2). The strategy of decrease in government spending and increase in taxes is by definition what to do in order to reduce government budget deficits.

    The Anti-Austerity party leader, Alexis Tsipras has some plans to fix the current crisis in Greece. One of his plans is to attempt to get the debt written off. The party also wants to negotiate the austerity imposed by the IMF.

    The euro market (in terms of dollar per euro) plummeted after the election, but is now noticing a slight rebound since the drop (3). The exchange rate for the future depends on so many factors. It seems that Greece’s looming deficit will play a major role, as well as their future taxes and government spending. Since there is a relationship between a country’s current account and exchange rates, taxes and government spending will play a role in determining the current account. Even though the current account is made up of many factors, these two would variables have a direct impact, especially since there is austerity in place. It’ll be interesting to see what happens.

    (1) http://www.economicshelp.org/blog/6254/economics/what-is-austerity/
    (2) http://www.huffingtonpost.com/2015/01/25/greek-election-winner_n_6541878.html
    (3) http://www.reuters.com/article/2015/01/26/us-markets-global-idUSKBN0KY13020150126

  4. By introducing a negative policy rate, the Swiss are allowing Swiss franc investments to become increasingly unattractive. This would result in the desire to cash in or sell any existing Swiss investments that one might be holding. The Swiss National Bank decided to put fourth the negative policy after “ months of pressure on the (Swiss) franc” (1). This has allowed the Swiss franc to gain purchasing power by 28.6%, as mentioned in the original post (1.60 to near 1.20 a euro).

    Due to an increase in purchasing power of the Swiss franc, the stronger currency will highly benefit the citizens of Switzerland. On the other end of the spectrum, exporters within the country will suffer greatly. For example, Switzerland’s strongest economy is finance. This is because “people put their money there (Switzerland) because they trust in the soundness of the currency” (2). But this will not always be the case if other currencies begin suffering due to the appreciating Swiss franc.

    This has had an effect on the US markets as well. With the removal of the peg, the Swiss franc has “gained 25 percent against the U.S. dollar” (3). Other results include a drop in the portions of the stock market and signs of diminishing earnings and strength of US companies in the worldwide economy. Despite the clear advantages of the majority of Swiss citizens, this move has had negative effects on several major Swiss companies, and left negative effects on a majority of the major countries involved in the Swiss economy.

    (1) http://www.wsj.com/articles/swiss-central-bank-introduces-negative-interest-rates-1418888001
    (2) http://www.businessinsider.com/jim-rogers-i-predicted-the-swiss-franc-shocker-2015-1
    (3) http://www.cnbc.com/id/102340182

  5. The U.S. having “strong dollar” policy helps and hurts the economy at the same time. It helps our financial markets because we’re known for having a very low personal savings rate, down to 4.4% in November of 2014 (1) vs China’s which was estimated to be 54.3% in 2012 (2). Having this low savings rate means we are partially dependent on foreigners investing in the U.S. and the strong U.S. dollar is what helps attract foreign investment. One of the Fed’s main concerns with this is “boosting inflationary pressures and creating a speculative bubble (3).” That’s when the Fed will want to raise interest rates to slow growth and avoid a crash later on. Overall it seems to help our financial markets as long as we can avoid large amounts of speculation.

    It hurts domestic manufacturing companies because they rely on foreigners to purchase their products. Having a strong U.S. dollar makes their goods more expensive to foreigners who will look for substitutes elsewhere. Also, domestic consumers may start to buy foreign goods because they seem cheaper relative to domestic goods (4). Domestic goods looking more expensive to foreigners and domestic consumers will widen our trade deficit.

    It appears to be a zero sum game between U.S. manufacturing companies and our financial markets when it comes to the strong dollar. Ultimately it comes down to which one you think is more important to our economy.

    Sources
    (1) http://www.tradingeconomics.com/united-states/personal-savings
    (2) http://www.thechinamoneyreport.com/2013/01/16/china-claims-highest-savings-rate-in-the-world/
    (3) http://www.gocurrency.com/articles/stronger-dollar
    (4) http://blogs.cfr.org/renewing-america/2015/01/28/the-strong-dollar-policy-back-to-the-future/

  6. Austerity measures in Greece have resulted in a contractionary effect on the economy and have caused social unrest. In this context, the anti-austerity party Syriza was elected as the ruling party in Greek parliament.

    The Syriza party has indicated they want to end tough austerity measures, halt privatization efforts, rehire public workers, and get Greece lenders to write off one-third of Greece’s debt (1). These signals of intent have spooked investors. On Wednesday, three days after the election, the Athens stock exchange fell 12.7% and Greek bank stocks have fallen more than 25%, while yields on Greek government bonds have risen (1). Additionally, the day after elections the euro dropped to $1.1098, its lowest level since 2003 (2). The risk of Greece being cut-off from liquidity from the ECB has increased worries of future default and resulted in losses in the financial markets.

    However, many investors believe that the Greek government will reach an agreement with international credits. Financial assets rebounded slightly throughout the week and the euro also edged higher (3). Nonetheless, there remains investor uncertainty which is causing losses in the financial markets and additional pressure on the euro due to reduced foreign demand for the currency.

    1) http://www.cnbc.com/id/102379248#.
    2) http://www.zacks.com/stock/news/161914/3-stocks-to-sell-as-greece-concerns-intensify-euro-slide
    3) http://www.bnn.ca/News/2015/1/30/Morning-Markets-US-dollar-set-for-record-run-European-shares-rise.aspx

  7. Why did Switzerland, unlike China who faces similar wishes to boost exports, stop devaluating currency? In order to compare the dissimilar decisions between these countries we must compare their situations. Given that the World Bank estimates export goods and services are 72% of Switzerland’s GDP and 26% of China’s GDP this question becomes even more puzzling (1).

    First, while Switzerland devalues its currency based on a peg, China operates on a managed float, which offers more freedom in choosing new exchange rates (2).

    Second, as the blog prompt explained, although strong currency is bad for the producers, it improves the foreign buying power for consumers. A more authoritative government like China would be much more willing to sacrifice individual benefits for corporate success.

    Third Switzerland imports 41% of its goods and services from Germany, Italy and France, all countries with which it has devalued its currency (3). China on the other hand only gets 8% of its imports from the country it pegs its currency with (4).

    Fourth, according to the World Bank, annual inflation rate for Switzerland was 0.2%, -0.7%, and -0.2%, in 2011, 2012, and 2013 respectively. Chinese inflation rates for these years were 5.4%, 2.7%, and 2.6%, numbers that near mimicked the global average (5). Not to say that the inflation would not be lower without the peg, but if it was supposed to stop deflation it was not working well.

    (1) http://data.worldbank.org/indicator/NE.EXP.GNFS.ZS/countries/CH-CN?display=graph
    (2) http://www.ecrresearch.com/chinas-exchange-rate-policy
    (3) http://atlas.media.mit.edu/profile/country/che/
    (4) http://atlas.media.mit.edu/profile/country/chn/
    (5) http://data.worldbank.org/indicator/FP.CPI.TOTL.ZG/countries/CH-CN-1W?display=graph

  8. Deflation has already been a concern for Switzerland for some time; annual inflation rates were negative in 2012 and 2013 (1). With that in mind, it will be an even greater concern after a 15% appreciation of the franc against the euro in the past two weeks (2). The SNB was pegging the franc to keep it artificially weak, but now needs another way to fight deflation. One option? Charge banks to hold on to deposits.

    When the peg was abandoned, the SNB also moved the deposit rate from -.25% to -.75% (3). Meanwhile, the Fed has been moving in the opposite direction, paying banks interest on excess reserves (4). For the Swiss, the negative deposit rate is intended to help on multiple fronts. First, it encourages banks to lend out their deposits, spurring inflation. Second, it puts downward pressure on Swiss investment yields that pay a spread off the benchmark interest rate, thus dissuading foreign investment. However, a negative deposit rate creates risks for the Swiss banking system. It threatens net interest margins for domestic banks, meaning they might be forced to charge depositors to hold money, causing a massive exodus of funds (3). After all, at that point, why not just keep your money under the mattress?

    One proposed solution is a rule that allows discrimination against foreign investors, possibly charging them a premium to invest in Switzerland. While logistically difficult to implement, this idea could be warranted; the premium would essentially be a fee investors pay for safety.

    1) http://data.worldbank.org/indicator/FP.CPI.TOTL.ZG
    2) http://finance.yahoo.com/echarts?s=CHFEUR%3DX+Interactive#%7B%22range%22%3A%221mo%22%2C%22scale%22%3A%22linear%22%7D
    3) http://blogs.wsj.com/moneybeat/2015/01/19/as-switzerland-moves-to-negative-rates-finance-enters-uncharted-territory
    4) http://www.federalreserve.gov/monetarypolicy/reqresbalances.htm

  9. (1) Before the anti-austerity party came to favor in Greece, GDP was predicted to rise a modest 2%. Now investors are spooked, and this prediction may no longer hold as (2) Greece experiences growing tensions with troika, and closes the stock market with a 1.68% downturn following talks between the two parties.
    (1) Greece might go back to the drachma, altogether leaving the Euro in pursuit of a central bank that is free to set interest rates and enact policy that best suits Greece’s economic climate.
    (3) However, if Greece were to return to the drachma, there are legitimate concerns about the drachma becoming fiat money. If this were not attained, exchange rates would plummet as the devaluation of Grecian currency became rampant.
    Despite this, legitimate discussions have returned about Greece returning to the drachma, which were last seen and seriously considered in 2011. Although this is a possibility, it is my belief that Greece and troika will be forced into an agreement. This is partially due to fears around a country leaving the Eurozone, which was designed without any clear exit plan (1), and the looming possibility of large-scale financial crisis Eurozone countries (2).

    (1) http://www.washingtonpost.com/opinions/robert-samuelson-austerity-on-trial/2015/01/28/909e618a-a707-11e4-a06b-9df2002b86a0_story.html
    (2) http://www.theguardian.com/business/blog/live/2015/jan/30/greece-awaits-meeting-with-eurozone-finance-chief-live-updates#block-54cbac99e4b008c912b45dab
    (3) http://www.telegraph.co.uk/finance/economics/11378396/The-game-is-up.-Its-time-for-Greece-to-leave-the-eurozone-and-move-on.html

  10. The leader of the anti-austerity party that has recently taken control in Greece, Mr. Alexis Tsipras is looking to drastically change the Greeks economic position contrary to the wishes and requirements of the country’s creditors: Germany and Troika. Mr. Tsipras has promised to the Greek public to increase the minimum monthly wage by €165, create jobs, and restore collective bargaining arrangements [1]. The success of these policies are questionable given the gross debts and deep recession Greece has continued to experience since 2009. However, Mr. Tsipras plans on renegotiating the strict austerity measures placed blindly on 8 of the 17 EU countries in recession, in order to provide Greece with more money for stimulus spending in addition to the other economic overhauls listed above [2].

    Given the information above, it is clear that these demands and anti-austerity policies will have an effect on the foreign exchange market. According to FRED, the U.S. dollar is appreciating against the Euro since anti-austerity was put in place in Greece and is currently $1.17/ € 1.00 [3]. Keeping in mind that Greece’s policies do not comply with the strict financial discipline of the Eurozone, the falling value of the Euro has created a lesser demand for U.S. exports; something necessary for our own full recovery and GDP growth. In addition to this concern, Greece’s already overbearing debt to Troika and other European governments (approximately €320 billion or 174% of GDP) is expected to increase even more if Mr. Tsipras requests for additional stimulus funds is approved and delivered [4]. The against-the-status-quo goals of the Syriza party will most likely continue to decrease the value of the Euro and in turn produce a lack of confidence in the value of European investments, possibly throwing the Eurozone into deeper financial trouble [5]. Although anti-austerity policies may be in the best interest of Greece, the economic prosperity and stability of the EU as a whole is in jeopardy.

    [1] http://www.nytimes.com/2015/01/26/world/europe/greek-election-syriza.html
    [2] http://www.npr.org/2012/05/13/152627865/eus-financial-crisis-doesnt-end-at-nations-borders
    [3] http://research.stlouisfed.org/fred2/series/EXUSEU
    [4] http://www.wsj.com/articles/greeces-creditors-mull-debt-relief-for-reforms-plan-1405522958
    [5] http://www.express.co.uk/news/politics/554289/Syriza-election-financial-markets-George-Osborne-warns-Greek-leaders-act-responsibly

  11. While the U.S. has maintained a strong dollar policy, it is not the single contributor to a strong economy, and may not be in our best interest in the long run. Eswar S. Prasad of Cornell stated that “the United States has been able to sustain the illusion of the importance of a strong currency” to be a strong economic power. However, we’re not a country that relies fully on exports. Therefore, a strong currency that has made our exports look more expensive to foreign investors has not resulted in detrimental effects on our economy.

    Although not enough to overwhelm the positive contributors to GDP, a weaker dollar is probably in our best interest in the long run. The weaker currency would boost exports and decrease trade deficits while creating jobs in the wake of higher demand for US goods.

    With the Swiss dropping their peg it is only going to result in more foreign investment into the US since now the Swiss “safe haven” is no longer trusted the dollar is the next best bet. This will make citizens have more purchasing power and make domestic interest rates lower on assets. However, it will cause financial stress in the corporate sector and many export-based companies may have to lay off workers to compensate for a loss of demand due to the price going up. Therefore, it would most likely be in our best interest to have a weaker currency policy.

    http://www.nytimes.com/2015/01/25/business/the-strong-dollar-is-always-good-except-when-it-isnt.html?_r=0

    http://www.wsj.com/articles/swiss-central-bank-credibility-takes-hit-with-franc-move-1421760856?autologin=y

    http://www.businessinsider.com/r-central-bankers-lurch-from-whatever-it-takes-to-whatever-next-2015-1

  12. There are several reasons why a national bank would want to keep its country’s currency “artificially weak”. One reason would be to maintain a high level of exports, as a weak currency means more foreigners can afford to purchase your country’s goods. Maintaining a pegged currency also eliminates exchange rate risk associated with a floating currency. Both China and Switzerland have engaged in this strategy for different reasons.

    By keeping the yuan artificially low relative to other currencies, The People’s Republic Bank of China (PBoC) have maintained a price level in China above that which would be the case if the Yuan were allowed to float freely. If the PBoC were to unpeg the yuan, current levels of demand for Chinese goods would drive up the yuan’s value relative to other currencies, making Chinese exports more expensive and imports less expensive. Exports would fall and imports would rise as the exchange rate and net exports approached equilibrium, flooding international markets with Yuan. This would lead to less of the currency being held by domestic Chinese, putting downward pressure on price levels in China. (1)

    The policy has helped stimulate the Chinese economy by keeping exports high, but has had costs as well. The PBoC keeps the Yuan artificially low by selling it for dollars to buy US treasuries, counteracting the demand for Chinese exports by investing in US assets. While this has helped China build up significant reserves, the treasuries themselves earn a very low interest rate. This could be considered a “poor investment” on the part of the Chinese for several reasons. There is the opportunity cost of not spending the government surplus, as well as not earning a higher rate of interest on the invested funds. It has also exposed the Chinese to a lot of exchange rate risk, since so many of their assets (over 1.3 trillion) are denominated in dollars. (2) (4)

    The primary difference between the yuan and the franc is the nature of the demand for the two currencies. The yuan is in high demand because Chinese goods are high demand, and Chinese officials want to keep the currency weak to stimulate exports. The Swiss franc was kept artificially low for a time to maintain a high level of exports, but the pressure for the currency to appreciate was due to high demand for secure Swiss financial assets. (3)

    1) https://globalconnections.hsbc.com/us/en/articles/floating-yuan-could-be-game-changer-world-trade
    2) http://www.ecrresearch.com/chinas-exchange-rate-policy
    3) http://www.economist.com/blogs/economist-explains/2015/01/economist-explains-13
    4) http://www.cnbc.com/id/101103246

  13. Switzerland has long been deemed as a safe haven for assets. So naturally, it made sense for the SNB to peg the franc to what was formerly a stable currency in the euro to protect the nation from high unemployment and deflation. What’s interesting is the move to also slash interest rates even further into negative territory along with the switch from the peg, in dealing with the extreme capital inflows into Switzerland (1). Could the US ever adopt negative interest rates?

    Negative interest rates aren’t necessarily a new policy, but are certainly unusual. Negative rates were used by the ECB this summer to flight deflation fears, as well as by Sweden and Denmark historically to fight currency issues (2). Growth is beginning to stabilize more in the US as we crawl further away from the financial crisis, despite a global economic slowdown. There could be short term advantages, as the US is at serious risk for deflation (3), but the long term risks are too great (4). As renowned bond investor Bill Gross points out, negative, and even near zero rates are a danger to capitalism, by causing a failure to invest. Gross in drawing a parallel to the game Monopoly writes “Investors and game players do not logically give money away; a mattress ultimately becomes a more attractive haven. And most importantly… growth is challenged and stunted.” (5) Although a negative rate could be a short term patch for a currency issue, it could lead to a stifling of our economy in the long term.
    (1) http://www.bloomberg.com/news/articles/2014-12-18/snb-starts-negative-interest-rate-of-0-25-to-stave-off-inflows
    (2) http://www.bloombergview.com/quicktake/negative-interest-rates
    (3) http://www.businessinsider.com/deflation-risk-in-the-us-is-escalating-2015-1
    (4)https://www.stlouisfed.org/publications/regional-economist/january-2013/how-low-can-you-go-negative-interest-rates-and-investors-flight-to-safety
    (5) https://www.janus.com/bill-gross-investment-outlook?utm_campaign=Bill_Gross_IO_Monthly_Subscription_February_2015&utm_medium=Email&utm_source=Salesforce&utm_content=Read_Now

  14. Unlike the Swiss, the Chinese have a massive population where many of the people are unemployed or are one of the “150 million surplus rural laborers needing to be transferred to sectors apart from agriculture (1).” An improving value of the Yuan would mean that the real wages of laborers increases and that would incentivize companies to look elsewhere for the location of their manufacturing plants. The Chinese government must purposely devalue the Yuan as a precautionary measure to ensure growth by decreasing the unemployment rate.
    Devaluation of the Yuan also leads to having cheaper exports allowing for them to remain at a much more competitive price than if the Yuan were to appreciate. A chief economist, Lu Zhengwei, for the Industrial Bank in Fuzhou, is on record stating that the Yuan should depreciate at least 3-5% more because appreciation of the Yuan’s exchange rate is one of the primary reasons for the reduction of Chinese exports (2). The Yuan has reached a seven month low in comparison to the US dollar at an exchange rate of 6.2537 to one dollar (3). Chinese exported goods are necessary for Chinese growth and the simplest way to stimulate sales is by decreasing the price. The Yuan decreased 2.4% against the dollar in 2014 and is already down 0.9% this year (3). Decreasing the Yuan’s rate of exchange is evidence of China’s need for export prices to remain competitive abroad.

    (1) http://www.china.org.cn/english/features/Q&A/161834.htm
    (2) http://www.nytimes.com/2012/06/01/business/global/china-lets-its-currency-slip-raising-trade-tension.html?pagewanted=all&_r=0
    (3) http://www.wsj.com/articles/chinas-yuan-falls-to-seven-month-low-1422260080

  15. While consumers prefer a strong US dollar for import consumption, a weak US dollar is best to grow the economy as a whole. A strong dollar makes foreign goods cheaper to consumers, allowing them to buy more “stuff,” both imports and domestic. A weak US dollar, although would make imports (i.e. oil, vehicles, pharmaceuticals) more expensive to consumers, has multiple benefits to help stimulate the economy.

    Nations all over the world are trending towards devaluing their currency to help stimulate the economy. The US Government should follow suit. If the US dollar is weak, foreigners will be more inclined to buy our products, increasing net exports. With more goods being sold in the US, firms will have to increase investment and create more jobs to keep up with demand.

    Yes, forcing the US dollar to be weak will make the US economy seem suboptimal, but it will help the economy grow faster than it has in recent history. Imports and unemployment will decrease, while exports and investment increase.

    (1) http://www.epi.org/publication/briefingpapers_may03bp_lowerdollar/
    (2) http://www.forbes.com/sites/bobmcteer/2015/01/24/is-a-strong-dollar-a-good-thing-or-a-bad-thing/
    (3) http://www.newsweek.com/strong-dollar-good-americans-303323
    (4) http://www.investopedia.com/articles/economics/09/how-us-benefits-when-dollar-falls.asp

  16. The SNB first implemented a negative interest rate of -0.25% to make Swiss franc investments less attractive to support the minimum exchange rate that was in place with the Euro (1). More specifically: “The interest rates paid to savers in Switzerland are already extremely low, so there is little room for lenders to cut further. In putting in place the negative rate, in essence a tax on excess deposits, the Swiss monetary authority joins the European Central Bank, which introduced its own negative 0.1 percent deposit rate in June…” (2).
    They lowered the interest rate again to -0.75% after discontinuing the minimum exchange rate with the Euro to “ to ensure that the discontinuation of the minimum exchange rate does not lead to an inappropriate tightening of monetary conditions” (3).
    There have been some arguments for the U.S. to implement negative interest rates as well for a little while now. In 2013, Former Fed official, Alan Blinder stated that the Fed should stop paying banks interest to “park” their money, and charge them instead. This way they would need to find other ways to make money, mainly by lending more money to their customers. (4)

    (1) http://www.bbc.com/news/business-30528404
    (2) http://www.nytimes.com/2014/12/19/business/switzerland-central-bank-interest-rate.html
    (3) http://www.fx-mm.com/39092/news/banking-news/swiss-national-bank-discontinues-minimum-exchange-rate-lowers-interest-rate-0-75/#.VNBFhFXF8mU
    (4) http://fortune.com/2013/01/25/making-the-case-for-negative-interest-rates/

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