As many bloggers (Marcus Nunes, David Beckworth, Scott Sumner, and Scott Sumner, among others) have pointed out, the Swiss National Bank, in pledging not to tolerate a Swiss franc-euro exchange rate below SF1.20, showed this week how much a central bank can accomplish in a very short time by acting decisively and with determination, qualities sadly lacking in the decision-making of the Federal Reserve Board, and, in particular the Federal Open Market Committee (FOMC). Even The Wall Street Journal (to the evident consternation of the lunatic mainstream of the commenters populating its website) applauded the move by the Swiss central bank.
The Swiss National Bank’s announcement Tuesday that it would buy “unlimited quantities” of euros to keep the franc-euro exchange rate above 1.20 is a dramatic and helpful move amid the continuing euro crisis.
Acknowledging that the action taken by the Swiss central bank would benefit Swiss exporters, the Journal properly cautioned:
But throwing a bone to exporters is not the most important reason for the central bank to intervene. Central banks are the monopoly suppliers of the commodity known as money. When a currency like the Swiss franc appreciates rapidly, the market is sending a signal that not enough francs are being printed to meet demand.
In contrast to what central banks usually do when they conduct exchange-rate intervention, the Swiss central bank is saying that its monetary policy is subordinated to the peg. The quantity of francs issued by the central bank will be whatever amount the public wants to hold at the peg (the peg, in this case, being one-sided, the franc-euro exchange rate not permitted to fall felow SF1.20).
The Journal concludes with the following observation:
Since the collapse of the Bretton Woods exchange-rate system in the 1970s, policy makers have grown fond of saying that markets should set exchange rates. But markets can’t set the value of a commodity whose sole supplier is the central bank, and this pseudo-laissez-faire is an abdication of central banks’ duty to control the supply of their currency, both internally and externally.
Markets can’t set the value of a commodity whose sole supplier the central bank?! What does the Journal editorialist think happens every day in the foreign exchange markets? Who else but the market is setting the value of these monopolistically supplied commodities? Didn’t the Journal editorialist just observe “when a currency like the Swiss franc appreciates rapidly, the market is sending a signal that not enough francs are being printed to meet demand”?
The point that the Journal editorialist was trying to make, albeit clumsily if not incoherently, is that it makes sense for a monopolist — even a monopolistic central bank — to take into account the signals about the demand for its product reflected in rapid changes in the market price of the product that it supplies. A sudden sharp increase in the exchange rate of a currency signals that the demand for the currency is increasing. Not responding to such an increase and just letting the increase in demand force up the price doesn’t make sense for the monopolist, and it surely makes no sense for a central bank. Not increasing the supply of a rapidly appreciating currency can have all sorts of unpleasant consequences (e.g., deflation and a recession) for the country with a rising currency. That’s why the Journal wasn’t wrong to label a policy of ignoring fluctuations in the exchange rate in the name of non-intervention as “pseduo-laissez-faire.”
But while the Journal endorses the decision of the Swiss central bank to halt the demand-driven appreciation of the franc, the Journal has shown less concern over the past three years with appreciations of a similar magnitude in the dollar relative to the euro. The nearby graph shows how both the dollar and the Swiss franc have fluctuated against the euro since January 2007.
A recession beginning in December 2007, triggered by the bursting of the housing bubble, led to a gradual depreciation of the dollar relative to the euro from about $1.45 to just over $1.60 in April 2008, with the dollar fluctuating in a narrow range between $1.55 and $1.60 till the end of July. From August 1 to August 31, the dollar rose from $1.5567 to $1.4669 against the euro. On the Friday before Lehman collapsed (three years ago on September 5, 2008), the dollar stood at $1.4273, falling to $1.3939 on September 11, then falling to $1.4737 on September 23 and was still at $1.46 as late as Friday September 26. On Monday September 29, the dollar rose sharply to $1.4381 and by the end of October the dollar had risen to $1,26, nearly 30% higher than its value at the beginning of August. From November to March, the dollar remained in the $1.25 to $1.30 range against the euro, except for a blip from mid-December to mid-January when the dollar fell to about $1.40 before quickly recovering. Did the Journal ever once call for a reversal of this devastating appreciation of the dollar against the euro in the fall?
From March through December 2009, during QE1, the dollar fell gradually from about $1.25 to about $1.50 as a recovery of sorts began, the economy growing 3.8% in the fourth quarter. The dollar then rose from $1.50 in early December to about $1.20 in June, remaining in the $1.20 to $1.30 range till the end of August, when, fearing the onset of deflation, Chairman Bernanke announced that QE2 would be tried. The dollar quickly fell from $1.27 at the end of August to $1.40 in November and, with only occasional movements outside the range, has remained between $1.40 and $1.48 against the euro throughout 2011. Yet the Journal and its regular columnists constantly complain about the dollar debasement caused by the Fed, even though dollar-euro exchange rate is roughly the same as it was in December 2007 when the downturn started.
The Journal properly defends the decision of the Swiss central bank to reduce the value of the franc after having risen by about 20-25% against euro since April. Yet the Journal never misses an opportunity to castigate the Fed for reversing two episodes of dollar appreciation of at least as large as that of the franc against the euro, accusing the Fed of deliberate dollar debasement even though inflation over the last three years has been at the lowest level in half a century. Anyone care to guess why the Journal is more understanding of the Swiss central bank than it is of the US central bank?