The Most Powerful Force in the Universe is the Central Bank Press Release
Albert Einstein is rumoured to have said that compound interest is “the most powerful force in the universe”. I have a better candidate: the central bank press release is the most powerful [nominal] force in the universe.
When the Swiss National Bank decided to ease Swiss monetary policy on September 6th 2011, the so-called “zero bound” on monetary policy was no obstacle.
It required only a short press release – just 122 words – to do the job:
The current massive overvaluation of the Swiss franc poses an acute threat to the Swiss economy and carries the risk of a deflationary development.
The Swiss National Bank (SNB) is therefore aiming for a substantial and sustained weakening of the Swiss franc. With immediate effect, it will no longer tolerate a EUR/CHF exchange rate below the minimum rate of CHF 1.20. The SNB will enforce this minimum rate with the utmost determination and is prepared to buy foreign currency in unlimited quantities.
Even at a rate of CHF 1.20 per euro, the Swiss franc is still high and should continue to weaken over time. If the economic outlook and deflationary risks so require, the SNB will take further measures.
Because the power of Chuck Norris is brutal and instant, the Swiss franc immediately devalued.
The SNB had been making large ad-hoc balance sheet expansions prior to September 6th in an attempt to ease policy by effectively “throwing money at the wall“, without setting an explicit target. After setting an explicit target in devaluing the currency, the balance sheet has contracted slightly. Expectations were set, and the markets did all the heavy lifting:
The actions seem to have been sufficient to stabilise the level of the Swiss CPI:
Meanwhile back in the UK, the excellent Left Outside documents how the Bank of England is again allowing a passive tightening of monetary policy. Are we doomed to suffer from the same people making the same mistakes over and over again? In 2008 a passive tightening occurred whilst policy makers were distracted by
decimating raising the levels of capital in the banking system. Today, those UK economists who do see a demand deficiency choose to concentrate their attacks on Downing Street, and mostly ignore monetary policy.
The MPC is left needing only to defend itself against the loony liquidationists complaining about high inflation. A disgusting state of affairs.
Update: Of course I should not post on return from holiday without catching up with other blogs first. Scott Sumner on Ben Bernanke says:
Liquidity trap? Don’t make me laugh.
That would have been a snappier title for this post.