Printing Up a Sovereign Wealth Fund

Whenever you think the Financial Times cannot get any more confused about the effects and the meaning of money printing, it promptly one-ups itself. The latest idea propagated by this handmaiden of statism is that the Swiss National Bank's massive interventions in its currency somehow 'show' that there's really no need to ever unwind 'QE' (not that that will happen anyway – not in a million years). On the contrary, so the FT, the Swiss have been very cunning: they have printed themselves a 'sovereign wealth fund'.

Seriously. A few excerpts from the article:


“It would appear that capitalism is no longer capable of saving itself. Central bank policies, which rightly supplied liquidity when confidence was lacking, continue to shape capital flows when it is not.

When and how this will end is the source of market-moving speculation. But in sifting through the scenarios, market participants might like to think a bit out of the box. Take for example the case of the Swiss central bank’s foreign exchange intervention.


The policy had an initial calming effect. But in 2012 the troubles in Europe resurfaced; demand for Swiss francs returned. In that year alone, the SNB “spent” some SFr188bn to enforce the cap. This was equivalent to nearly one-third of Swiss GDP. Central bank reserves swelled to $500bn. After a short respite in early 2013, purchases resumed and reserves rose further – exceeding $550bn by the end of the first quarter.

When will the SNB halt its policy? When will it reverse its purchases? In April Thomas Jordan, SNB president, said the exit from the franc cap was still far away. But perhaps a full reversal need never take place. Perhaps, albeit unconsciously, the Swiss authorities have laid the foundation for a “Swiss sovereign wealth fund”.

Sovereign wealth funds come in many shapes and sizes. The International Monetary Fund defines SWFs as “government-owned investment funds set up for a variety of macroeconomic purposes. They are commonly funded by the transfer of foreign exchange assets that are invested long term overseas.”

SWF’s can provide commodity-producing countries with a stable level of income in the face of volatile commodity prices (for example, Chile and copper). Alternatively, a fund can diversify trade-generated foreign exchange reserves (for example, the China Investment Corporation). The largest SWF today is that of Norway, founded in 1990 to convert the income from a non-renewable resource (oil) into a permanent national endowment that will offer benefits to future generations.


Now back to Switzerland. It too possesses a scarce resource – its haven status. This has been built over generations of fiscal prudence, domestic stability, and political neutrality. Though a leading wealth manager, the Swiss wish to preserve balance in their economy through a viable industrial and services sector. An excessive rise in the Swiss franc is a threat to economic equilibrium in the short term and the people’s well-being in the long term.


The cap is not only expedient, it is clever. The policy exchanges printed Swiss paper for a diversified portfolio of global purchasing power. Equities may join the traditional central bank holdings of sovereign debt and gold. So is it a given that this state of affairs need be reversed by the Swiss state – in full or in part? Global investors take note.

Viewed as FX reserves, the SNB ranks fifth in the world. Viewed as a sovereign wealth fund, the holdings approximate those of China Investment Corporation. The Financial Times’ front page recently reported Beijing’s search for a new head of that wealth fund. Will a future edition announce the search for a chief investment officer of a newly created Swiss SWF?

Markets are mesmerised by how and when central bank policies will be unwound. But they should also consider the possibility that such policies may not be unwound at all.



(emphasis added)

Good freaking grief. We will try to remain calm (ommm) while jotting down our objections.

First of all, 'capitalism' didn't need saving from itself. Crony capitalism did. Today's system is so far removed from free market capitalism that we should really begin to use a different term to describe it. The main connection it has with capitalism is that it has given it a bad name.

So the Swiss have printed money like crazy – no big surprise there, as the board of the SNB consists of Keynesian inflationists who think declining prices are 'evil'. A portion of this printing is theoretically 'sterilized', as a lot of bank reserves have piled up on the SNB's balance sheet, but a bubble has undeniably begun to develop in Swiss real estate and lately also in Swiss stocks. Swiss government bonds have for a long time traded at prices where their nominal yields were de facto negative and Swiss banks have introduced penalties for holding cash balances with them.

In such an environment financial asset bubbles tend to flourish, and unless the SNB actually does reverse some of its interventions, it is very likely that the long term effect of it printing will be a rather noticeable rise in all sorts of prices. It should perhaps be pointed out that the Swiss mentality does not lend itself to bubble psychology, but when such a huge amount of money is sloshing about in the system, it will definitely have an effect on prices somewhere in the economy.


Massive Monetary Inflation

So how big has monetary inflation in Switzerland effectively been? It turns out that narrow money M1 (roughly equivalent to US TMS-1) has increased by a full 120% since the fourth quarter of 2008. That's right, in a little over five years, the Swiss money supply has more than doubled. This beats even the 'heroic efforts' of the Bernank. The SNB clearly is in possession of the bigger and bolder helicopter. At one point in 2009, the growth rate of the Swiss money supply reached 50% year-on-year.

It is absolutely stunning to hear the head of the SNB, Thomas Jordan, frequently complaining about the 'danger of deflation', which he feels he must ward off by printing even more!



Swiss money supplyThe Swiss money supply: growing like weeds. The solid line is M1, which corresponds roughly to TMS-1 in the US (currency, sight deposits and transaction deposits) – click to enlarge.



Swiss money, rate of changeAt one point in 2009, M1 spiked to an almost 50% annualized growth rate. Since 2011 it has never grown at less than 10% year-on-year – click to enlarge.



So, has Switzerland really become more 'wealthy' because of all this money printing?  The FT editorial cites the sovereign wealth fund of Norway by way of comparison. However, Norway actually produced and sold something of value to accumulate its sovereign wealth fund's assets, namely crude oil.

Allegedly, Switzerland has a valuable asset too, even a 'scarce resource', as the author avers, namely, “its haven status. This has been built over generations of fiscal prudence, domestic stability, and political neutrality.”

Good thing 'monetary prudence' wasn't mentioned.

Even if we grant that some unquantifiable value should be attached to Switzerland's reputation, in what way does that support the notion that it can simply print up its own SWF without ill effect? If it were that simple, shouldn't everybody be doing it? Then the global risk asset bubble could really go into overdrive and we would all live happily ever after, knowing that those 'clever' suits have made us all rich with a few strokes on a keyboard.

Where does the FT find the people hatching out such ideas? There has to be a nest somewhere.




Charts by: SNB



Emigrate While You Can... Learn More




Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.


Bitcoin address: 12vB2LeWQNjWh59tyfWw23ySqJ9kTfJifA


6 Responses to “A Novel Idea: Money Printing Creates ‘Wealth’”

  • Bogwood:

    Central banks follow rather than lead? Somewhere out there is a sea of Ponzi(borrowing to pay interest) financing there is some real borrowing for real projects hoping to pay real interest. Due to spotty but real inflation, (five times energy costs),most of these projects no longer pay off. Ironically this includes fracking for natural gas. There is lending to large companies since government allows them to define themselves as profitable. But by evading taxes,pensions, salary increases and healthcare, using environmental arbitrage they do not pay the all-in costs of their products. They pay interest only by accounting conventions.
    Lenders become aware that the average project will not even return the original capital. Emphasis goes to return of capital rather than return on capital( the usual long term historical situation). Rates go to near zero not due to central banks but due to the absence of financially viable competing projects. It relates to the lower energy return on energy invested, beginning to affect even the oil exporting countries(less surplus).
    Rates will not go back up unless costs get cheaper or default is immanent. So the Swiss pay negative rates because that is the new normal. What would Calvin do?

  • Sunonmyface:

    Perhaps you can create wealth from printing money!!!

    As long as someone is willing to accept your newly printed money in exchange for a productive asset, then you have accumulated wealth. However, at some point, the trust is lost with the excessive money printing and no one will exchange with you.

  • geoorgge:

    Dear Pater,
    I am George Dorgan, the author of the blog, who tracks and comments the SNB balance sheet. Some remarks:
    The SNB is fully aware of the risks they are going. A recent publication by the SNB’s hawk JP Danthine shows that Swiss credit to GDP is rising too quickly and there will be a bust of the Swiss credit/property price bubble.
    Here the most important graph

    They know that money supply and in particular credit growth will lead to price inflation, it is just a matter when. Certainly later when wages in the US and in Europe do not rise due to high unemployment.

    A central bank usually tries to intervene at a relatively low level. According to Thomas Jordan choosing a higher level than 1.20 would have had serious risks in potential 2nd crisis.
    None the less according to purchasing power parity, the current 1.24 level has become nearly a fair value

    And with continuing immigration, in particular of rich immigrants and highly qualified personnel (even a brain drain) from Europe into Switzerland, the Swiss franc will appreciate, it is just a question when.
    Only higher interest rates in Europe and in the US can stop this, but this is still a remote scenario. Can you imagine the Fed hike rates for home owners in the next ten years?

    In order to protect against future FX losses, the SNB must create income and gains like a hedge fund or an SWF. This is very difficult in the current world of low yields. As only solution, they increase the equity share to 15%. They have finally realized that the Swiss franc is not a real safe-haven (as the FT claims), but similar as Australia a proxy for global growth (via Swiss multi-nationals foreign incomes). Therefore hedging alone with bonds is insufficient.

    That Keynesians like the FT implicitly claim that “money printing creates wealth” and that the floor can remain in place forever, is certainly not very rational. We showed that price inflation in Switzerland is stable or rising, but it is quickly falling in the EU.

  • No6:

    “such policies may not be unwound at all”

    Unwound! They will be accelerated. This is a very slippery slope.

  • ab initio:

    Unfortunately this insanity can continue a lot longer than we can remain solvent betting against it.

  • SavvyGuy:

    Central bankers gone wild the world over! Such grotesque monetary profligacy can occur only at the tail-end of a generation-long complacent bull market in bonds. Not to worry, central bank balance sheets will be involuntarily unwound when bonds tank.

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • No results available

Support Acting Man

Austrian Theory and Investment


The Review Insider


Dog Blow

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

Realtime Charts


Gold in USD:

[Most Recent Quotes from]



Gold in EUR:

[Most Recent Quotes from]



Silver in USD:

[Most Recent Quotes from]



Platinum in USD:

[Most Recent Quotes from]



USD - Index:

[Most Recent USD from]


Mish Talk

    Buy Silver Now!
    Buy Gold Now!