The Next Crisis We Have Will Be a Currency Crisis

Switzerland…the land of cheese with holes, mountain top yodelling, pricey watches and a *cough* ‘discrete’ banking system.

The home of course to the famous — and very private — Swiss bank account.

Disclosing client information has been considered a serious social and criminal offence since the early 1900s in Switzerland.

In many ways, it’s as sacred to the Swiss as the sanctity of the confessional is to a catholic priest.

Funnily enough, many ‘people of means’ quite like this thing about Swiss banks.

And as a consequence, the original offshore banking hub certainly punches above its weight when it comes to the world of finance.

It was estimated that in 2018, Swiss banks held US$6.5 trillion in assets. That’s a whopping 25% of all global cross border assets.

It’s a big reason why this country with a population of just under 8.5 million is one of the richest in the world. The average income per person works out to around US$83,583, putting the Swiss at second place in the world just after Luxembourg.

They’re also pretty handy at making chocolate…

So why this run down on the Swiss economy?

Let me explain…

The Swiss have a negative interest rate

As you can see, the Swiss are doing pretty well for themselves.

I won’t bore you with more stats, but suffice to say economic growth is good, unemployment is low and all the usual economic numbers reflect a time of glowing prosperity.

But in that context, one figure looks very out of place.

The interest rate…

You see, the Swiss National Bank (SNB) — the central bank of Switzerland — has their interest rate set at MINUS 0.75%.

Yep, you read that right. They have a negative interest rate. Which in effect means you have to pay the banks for the pleasure of holding your cash. Well, it’s a bit more involved than that. It’s actually the banks that have to pay the central bank to deposit money.

But that of course flows out into the rest of the banking system.

The bottom line is: We’re entering a world where it costs money to save money.

This is new territory we’re in…

The strange thing to me is that this is the kind of thing you’d expect to see perhaps only in a moment of crisis. I’m talking a GFC or banking collapse type world.

But as I noted at the start, the Swiss are actually travelling along pretty nicely right now.

So why are they doing it?

As the SNB chairman explains, it’s all to do with the value of the Swiss Franc.

As reported in Market Watch:

Swiss National Bank Chairman Thomas Jordan on Friday defended negative interest rates, saying the policy is “absolutely crucial” to ensuring price stability and keeping the Swiss franc from being too strong.

“Unfortunately, you can’t have your cake and eat it, as the saying goes,” he said at the SNB’s annual general meeting, explaining that “you can’t have higher interest rates and a weaker Swiss franc at the same time.”

Why are they worried about the value of their currency rising?

Well, in a twist of fate, the Swiss reputation for ‘solid’ banking means the Swiss Franc is often seen by global investors as a ‘safe haven’ currency. Especially compared to its more volatile European neighbours.

But what you need to remember is that the Swiss are big exporters.

They have what’s called a current account surplus which basically means they export more than they import. Unlike Australia or the US, which run current account deficits.

In such a situation, the Swiss Franc should naturally rise.

But the simple reality is the SNB are artificially holding down the value of their currency using the blunt tool of interest rates.

This helps them export more as it keeps their exports cheaper. Which in turn helps the country keep making money by selling stuff to the rest of the world.

But in doing this, they’ve created an economic situation where they now have no leeway — no firepower up their sleeve — should an external crisis hit them.

These ultra-low interest rates have also created a house building boom that seems to be starting to cause headaches.

According to recent statistics, there are around 72,000 empty properties as a result of a construction frenzy fuelled by cheap debt and a search for rental yield to make up for lack of interest paid on bank deposits.

Things could unravel quickly from here… [openx slug=inpost]

Just one piece of madness in the world of fiat

It’s funny…for most people, money is just money.

Unless you’ve had the misfortune of living in Zimbabwe or Argentina during a currency crisis, your bread and milk costs are usually pretty stable.

But I believe we’re standing on a precipice for this current system of money.

The Swiss situation is just one manifestation of a central bank-induced madness.

Everywhere you look, we seem to be positioned for trouble. And propped up by central bankers who now consider themselves the new ‘Masters of the Universe’ it would seem.

They’ve made money cheap. Which in turn makes debt cheap. Which then causes unintended consequences which need new actions and reactions.

Unfortunately, like a drug pusher ready to provide one more hit, each ‘high’ lasts less than the last one.

In the meantime, you’ve got the US debt bomb ticking away, the hidden world of Chinese shadow banking growing and the potential collapse of the Euro brought about by Italy’s shaky banking sector.

It feels a bit like watching poor old Wile E Coyote running off a cliff in the Road Runner cartoons. His feet are still running a million miles an hour, oblivious to the fact he’s off the cliff already, suspended in mid-air.

Like Wile E, we’ve just not looked down yet!

With the world’s debt markets running amuck and the wacky world of negative interest rates starting to creep in, we’ve literally nowhere to go if something ‘bad’ happens.

The next crisis we have will be a currency crisis

Which is why, in my opinion, the next crisis we have will be a currency crisis.

People will lose faith in the value of fiat currencies simply by virtue of continuous money printing and an excess of global debt.

Fiat money will become meaningless as central bankers copy the Swiss and break the rules. The thing is fiat only works if most countries obey the rules.

But money won’t go away. It’ll just change, like it has before.

In the past, that meant turning to gold.

But this time round, it could mean turning to cryptocurrencies like bitcoin. I mean, think about it…if your bank wants to charge you to hold your cash, why not move it into bitcoin instead?

If banks are printing money out relentlessly, why wouldn’t you turn to an asset with a fixed supply like bitcoin? An asset free of central bank manipulation.

That’s a situation I can see happening in the next crisis as people seek to put their money out of the grasp of both the greedy bankers and the desperate government.

A new Swiss bank account for the 21st Century even perhaps!?

In my opinion, bitcoin offers a hedge for your portfolio. An economic insurance policy in a way. It’s risky, but there’s no escaping risk in today’s world.

And at least bitcoin’s risk is decentralised, so no one party holds all the power.

However it plays out, it’s clear for anyone that cares to look that something is not right out there.

When the proverbial you-know-what will hit the fan is anyone’s guess.

All you can do is have a plan for all outcomes. And that means preparing in advance.

Good investing,

Ryan Dinse


Ryan Dinse is a contributing editor at Money Morning New Zealand. He has worked in finance and investing for the past two decades as a financial planner, senior credit analyst, equity trader and fintech entrepreneur. With an academic background in economics, he believes that the key to making good investments is investing appropriately at each stage of the economic cycle. Different market conditions provide different opportunities. Ryan combines fundamental, technical and economic analysis with the goal of making sure you are in the right investments at the right time.


Wealth Morning Stock Market News, Finance and Investments