SNB makes 21 bn loss in currency speculation...

nakedcapitalism.com/2011/02/ … banks.html

Don’t worry, your money is safe. As long as Mr. Soros doesn’t ask for his bill to be settled in gold…

How does a central bank ‘lose’ when it’s their currency that is rising? Or why would they ‘give up’ for that matter? They have infinite ammo.

Keep printing until it drops - simple.

How much does it drop then?

They lose because they buy forex. The SNB appreciates, so the forex is worth less in SNB terms. They only have infinite ammo if you believe that they have infinite ammo to act without debasing the currency…

Depends on how much you want, easily managed by reversing a fraction of the initial position. They’re likely suffering from a combination of safe-haven cash flows, and their relative lack of printing anyway. It’s up to them to decide if they want to defend their real economy while those factors cause dramatic FX swings, but they can certainly do it if they want.

So keep doing it, until this becomes not true.

Surely debasing the currency means it has already dropped?

Would it not just be a case of caution regarding what happens when the currency haven herd mentality changes course? I would have thought the SNB would feel limited in the volume of CHF they can pump into the market without running the risk of it causing rampant inflation at some point in the future when it gets dropped as a result of confidence in other currencies improving in relative terms.

True, but they would be able to mop up that surplus any time they wanted to, by simply reversing (some of) their position, and ‘unprinting’ the money. Since any emergence of local inflation would be immediately apparent in fx rates, overdoing it would be obvious.

Unless they wanted to go chinese, they wouldn’t be planning on keeping their currency low in the face of a sustained export surplus - just giving the fx speculators a bloody nose while protecting their real economy from a temporary flood of cash.

Well, the lessons of the ERM crisis seem to be that the bank loses. Mind you, I’m sure it’s harder to prop up a currency than to get one to fall.

The problem is, I believe, a philosophical one. They only have unlimited ammo if they accept that they can make money appear themselves, rather than waiting for someone to deposit it with them (i.e. instead of assets backing it, it has nothing backing it).

If they take this step, they can never make a loss. Interestingly, the Fed appears to have already taken this step. It’s always in balance now, except when it makes a profit… and cannot go bust.

The SNB, though, is still doing accounting as if it is a regular bank. I agree with you that it’s silly, but until someone decides that Central Banks get to have rules that are x while other banks operate with y and until there are enough of them that decide that and until the population believe that it is okay to have make believe money (remember, some of them are struggling with asset (debt) backed money, going to total promise money may be a step too far), then they will be shitting in our shoes and we will be pissing in their bovril.

It appears as if Mr. Gideon Gono was correct. Print and print and print…

Absolutely - you don’t have (potentially) infinite ammo in other currencies, only your own :slight_smile:

Which suggests fending off the fed generated slosh in the FX markets perhaps requires the same approach.