Crimping the SNB’s “Flexibility” – It is High Time

The Swiss National Bank (which is run by a bunch of Keynesian dunderheads – not too surprising for a central bank, but somewhat surprising for Switzerland) is trying its best to somehow thwart the upcoming referendum on gold. If the referendum is successful, at least 20% of the SNB’s assets would have to be held in gold – and the gold would have to be kept in Switzerland.

Not surprisingly, the central bankers argue that this would “severely crimp their flexibility”, apparently completely unaware of the irony. Crimping the “flexibility” of central bankers is a good thing after all. They are doing enough damage as it is. We actually are not quite sure what they are complaining about, since they will still be able to create money out of thin air in nigh unlimited quantities.

However, if they once again more than double the money supply as they have done since 2008 – inter alia to buy up foreign exchange in order to manipulate the CHF’s exchange rate – they will be forced to buy gold as well to keep the 20% reserve level intact if the referendum succeeds.


Switzerland money supplySwiss monetary aggregates. Monetary inflation in Switzerland has gone hog-wild since 2008 (note especially the more than doubling of M1 which is roughly equivalent to TMS-1). And yet, the people responsible for this printathon are worried about “deflation” (seriously). It is of course no wonder that these inflationist bureaucrats hate gold – click to enlarge.


Another argument the SNB is forwarding is that it would no longer be able to remit as much “profit” to the government. First of all, if the gold price were to rise, it could actually make quite a big profit (since then it could sell gold at a profit to keep the size of the reserve at 20%). Secondly, a central bank isn’t supposed to be a “profit center”. Officially, its objective is to maintain the purchasing power of the currency it issues, as laughable as it is to make this the official task of what is after all the very engine of inflation.

A recent article in the press informs us about the SNB’s attempts to “thwart” the referendum:


“Switzerland’s central bank (SNB) is stepping up efforts to block a populist motion launched last year that would force the financial institution to almost triple the proportion of reserves held in gold.

The Alpine country will vote on Nov. 30 on the so-called “Save our Swiss Gold” initiative organized by the right-wing People’s Party, or SVP. The motion calls for the central bank to hold at least 20% of its assets in gold, which currently make up about 7.5% of its total assets. In addition it should be prohibited from selling any gold in the future, and all of its reserves of the precious metal must be stored in Switzerland.

The Swiss Federal Council, the seven-member cabinet, as well as both houses of parliament have recommended voters reject the motion.

“The Swiss electorate will vote on an initiative which, paradoxically, would severely constrain the SNB’s room for maneuver in a future crisis,” SNB’s vice president Jean-Pierre Danthine said last week in a speech prepared for delivery at a conference in Martigny.

The proposed ban on future gold sales would have even more serious consequences for the SNB as an increase in gold holdings couldn’t be reversed, Danthine said.

“This would severely restrict our room for maneuver, and furthermore because gold pays no interest or dividends, the SNB’s ability to generate profits and distribute them to the government and cantons would be impaired.” he said.

In other words, it would force the bank to buy gold every time its balance sheet expands and to sell euro every time it contracts. Had the terms of the initiative been in force three years ago, it would have obliged the SNB to buy gold as well as euros in large quantities to defend the currency floor of 1.20 Swiss francs per euro, Danthine added.

The floor was imposed in September 2011 to prevent the Swiss economy tipping into recession and head off the danger of deflation. Since then, the SNB’s foreign currency holdings have ballooned – rising from about 204bn Swiss francs at the end of 2010 to 470bn Swiss francs last August. Despite the difficulty of managing such a rapid increase, the SNB says the minimum exchange rate is still “the key instrument to avoid an undesirable tightening of monetary conditions”.


(emphasis added)

We find it incredibly funny that a referendum to increase the SNB’s gold reserve is referred to as populist. Imagine that, the plebs want the currency to become “harder”!

Of course the SNB can “block” absolutely nothing. In Switzerland, referendums are binding, and no-one can keep them from going forward if enough signatures have been collected (as is the case in this instance).

Vice president Danthine is of course not mentioning that any future “crisis” will be the result of the very “maneuvering room” central bankers currently enjoy. If they weren’t printing money like crazy or aiding and abetting credit expansion ex nihilo by commercial banks, there would be no crises.

We already remarked on the central bank as a profit center, but allow us to add here that “deflation” (by which they mean falling prices) is not a danger. It is only dangerous according to the overactive imagination of the Keynesians populating central banks (and unfortunately, much of academe). For nearly everyone else in the economy, falling prices are just fine.

We suspect the main concern is for debtors who have overextended themselves on account of previous central-bank policies. In other words, ultimately the “danger” that the SNB thinks it needs to counter is emanating from itself. What could be better to achieve that than limiting its vaunted “room for maneuver”?

There could be an “undesirable tightening of monetary conditions?” This sentence alone tells us these people have completely lost their mind, not to put too fine a point to it. Switzerland is one of those countries where a great many interest rates have dipped in and out of negative territory in recent years, one even has to pay a penalty for holding cash on deposit with banks. Frankly, much looser monetary conditions than are currently extant in Switzerland can hardly be imagined. The central bank’s balance sheet has blown up like over-ripe carrion due to its unlimited buying of foreign exchange with Swiss francs it created ex nihilo in great gobs (it bought mostly euros, to boot – a currency the survival of which is still in doubt. Gold would be a lot safer, that much is certain), and the money supply has exploded into the blue yonder right along with it.

There are already a sizable real estate and stock market bubbles underway in Switzerland, and if Mr. Danthine really thinks the monetary largesse of recent years will somehow not invite disaster, then he is in for a rude awakening.


DanthineSNB vice president Jean-Pierre Danthine

(Photo via


Claudio Grass interviewed by Jeff Deist

In this context, here is an interview of our friend Claudio Grass, the managing director of Global Gold (which is based in Switzerland), by Jeff Deist, the president of the Ludwig von Mises Institute. The interview provides plenty of additional background information on the topic.


Claudio Grass, CEO of Global Gold, interviewed by Jeff Deist.



Referendums in Switzerland have often failed recently, but not always. Our impression is that notwithstanding their central bankers, most Swiss citizens are actually quite firmly grounded in that continuum we generally refer to as reality. This means that they tend to reject socialist nonsense like “free basic incomes” and absurdly high minimum wages, but often more conservatively oriented referendums will actually manage to garner a majority. As a result, the unwarranted fear-mongering by the SNB and the government may well be falling on deaf ears. For the long term health of the Swiss currency and economy one can only hope so.


Chart by: SNB



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