Turmoil in the currency markets after Switzerland’s decision to distance itself from the EURO

Dialogue with the Alter Ego on deflation angst and other fears in the Euro-zone

Question of Alter Ego of Noah denkt™ (AE): The specter of Japan-style deflation is haunting Europe to such an extent that it creates unheard of turmoil in the currency markets. On Thursday, Jan 15, the Swiss Central Bank announced that it would give up its three year peg to the EURO not the least because it is concerned that the European Central Bank would launch its own FED-style Quantitative Easing program. This move of the Swiss Central bank to distance itself from the EURO led the Swiss Franc to briefly gain more than 25% against the US$. Gyrations of such proportions are very rare in the currency markets. So the question is, do we need to be concerned by that decision of the Swiss Central Bank? And it could be that there is indeed a new storm on the horizon that could threaten the existence of the EURO?

Answer by Noah denkt™ (Nd): Clearly, there is worrying stress in the system. We believe though that this stress is in part due to an exaggerated concern over austerity politics and the supposedly ensuing prospect of a Japan-style deflation in the Euro-area. It is true that prices are falling in the EURO area. But they are not only falling there. Sweden, UK, Brazil, Chile, India, Turkey etc.., which still have their own currency aren’t doing great either. Apparently there is a bigger phenomenon going on here.

AE: What could that be?

Nd: Well, it seems to us, as if this lack of consumer confidence worldwide (apparently even US citizens appear to harbor some discontent with their current economic situation, see the outcome of the midterm elections) has something to do with a widespread sense of uncertainty among citizens about their individual, professional future and the continued manageability of the highly complex social/political order we live in. In other words, this may well go far beyond governmental budget issues and economic policy.

AE: But public budget issues and economic policy in the Euro-area certainly contribute to the malaise that people feel in Euroland?

Nd: To measure that we should ask ourselves whether people in France and Italy who feel bad about their current situation would feel less bad if they had their own local currency back? Would they be more optimistic under such a scenario? Would they feel that their job security increases, that their access to the labor market expands and that their competitive pressure diminishes? Or would they instead feel that the digitization of their work environment continues as it did before, that individual narcissism persists just as much as before, and that cultural aspirations and ambitions continue to be defined on global rather than a local level?

AE: Well, people would probably still be stressed out in a local currency environment. But at least they would feel that it is a sovereign national stress they face and not a dictated foreign one. In other words, they would at least feel marginally better.

Nd: And that marginal increase in their outlook would account for what, 1 or 2% growth or more?

AE: That is obviously hard to say. The initial boost would probably be higher than 2%, given the fact that there would likely be a multiplying effect of relief coming from various markets. The real question however is whether that original sense of malaise caused by technological advances and complex volatility would not sooner or later kick in again?
Nd: You can bet it would. Ask people in Britain or Brazil.

AE: So what would Noah denkt™ then do if it had to manage monetary policy in the Euro-area?

Nd: Noah denkt™ would argue that quantitative easing will only have a soothing effect and that a real change of heart needs to be orchestrated by the people itself. Perhaps the people will need some help in this from public figures who can convincing personify the hope of being able to successfully reinvent yourself come what may. But that seems entirely doable, doesn’t it?

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