Thursday the Swiss National Bank gave the world a quick lesson about why a strong currency is almost always better for an economy.
It is not uncommon for economic populists to attempt to demonstrate that a falling currency benefits an economy by helping exports and by claiming that devaluation is the “normal way countries emerge from financial crisis.” Neglected by that line of thinking is that an economy’s imports necessarily increase in price as a result of that same currency devaluation. But even if we analyze both sides of the equation, it would seem that the two should balance out.
However, lower import costs as a result of a stronger currency are almost always better for both consumer and producer. Here is why this is the case: while in a global market, only a few people’s livelihoods are dependent on exports, everyone depends on imports. Even the exporters depend on imported raw materials. This sets up a situation where the individual costs of a bad economic policy–currency devaluation–are relatively small and diffused across the entire population, while the benefactors are fewer in number but have large visible gains.
But just how “small” are those costs? On Wednesday a hundred Swiss francs bought about 83 Euros. By the end of the next trading day it bought a hundred euros. As a result, everything priced in Euros fell in real terms for the Swiss consumer: Italian vegetables, German cars, French wine. And as the franc increased by a similar amount against the dollar once Switzerland removed its artificial peg to the euro, the cost of oil, metals, and most commodities likewise plummeted. It takes a lot of export losses to make up for the fact that the cost of almost everything Swiss consumers buy fell nearly 20% in a single day.
Under normal circumstances currency interventions are incremental and thus difficult to tie to precise costs. That’s what makes them fun targets for government interventionists. When gains are concentrated and losses are dispersed, it is the perfect scenario for central bankers and politicians to embark on policies that are decidedly not in the interest of the general welfare, but are in the specific interests of organized benefactors. But the SNB’s surprise move demonstrated just how big the costs of currency manipulation really are when governments and central bankers conspire to devalue money.
Unfortunately, consumers don’t have well organized and vocal advocates, so you’re not likely to hear from most quarters that what happened Thursday is good news in the long run. (“In the long run” being defined as the amount of time it takes for the Swiss economy to readjust to an unsubsidized natural state). Instead you’ll hear plenty from groups like Swiss watchmakers, who by the way, are an anachronism tethered to a technology made obsolescent 50 years ago by quartz crystals.
And that’s the point. The Swiss watch industry has much to lose only because the SNB’s artificial intervention in the currency market subsidized a larger existence these last four years than their business model deserved.
Just how large the subsidy had been is evident in today’s currency climb. Effectively, Swiss citizens were paying a 20% sales tax on almost everything they bought so that Swatch could still churn out cheap watches for overseas markets.