Bullied into deflation – Econlib

People on the far left tend to overestimate the extent to which all the world’s problems are caused by nefarious American policies. On the other hand, I suspect that the average American has no idea of ​​the extent to which the US bullies smaller countries. For example, I hear people say that foreign countries “take advantage” of the US in trade deals, when the exact opposite is true. We use our economic power to extract trade concessions from smaller countries. And with respect to GDP at market prices, all countries are ‘smaller countries’.

In recent decades, Switzerland has repeatedly fallen into deflation, partly due to a very strong currency. This is where the Swiss inflation rate comes from Trade economics:

Because Switzerland has a relatively flexible economy, these short periods of mild deflation have not caused major macroeconomic damage. Nevertheless, to prevent a slide into even deeper deflation, the Swiss National Bank has often been forced to cut interest rates to ultra-low levels and make asset purchases (QE) many times larger than anything in the US or United States is done. EU. Here is the Financial times:

Central banks’ serial interventions continued with the sale of freshly minted electronic Swiss francs in an attempt to avoid the deflationary consequences of steadfast currency strength. These interventions inflated the SNB’s balance sheet to a peak of around 140 percent of GDP.

In 2022, the SNB suffered a loss of 17% of GDP as interest rates rose and bond prices fell. Why then doesn’t the SNB pursue monetary policies that would lead to a weaker currency, to avoid being forced to have ultra-low interest rates and an extremely bloated balance sheet? Part of the problem seems to be that the SNB misunderstands the fundamental cause of their dilemma (an issue I discuss in detail in my most recent book.) But one contributing factor is US government bullying, pressuring Switzerland to strengthen the franc even further:

Because interest rate cuts are unlikely to change the rate and capital controls are unthinkable, the choice is between further intervention and true free float. In 2020, the US Treasury Department – ​​rightly – labeled Switzerland a currency manipulator, putting diplomatic pressure on the SNB to desist.

Consider for a moment the bizarre nature of this state of affairs. Over the past fifty years, no currency has been stronger than the Swiss franc. No. And how is the US government responding to this situation? By bullying Switzerland into making its currency even stronger.

If you’ve done something bigger than any other country on earth, and you’re told your problem is that you’re not doing it enough, that’s a telltale sign that you’re getting advice from people with a highly flawed model of the economy .

I often argue that low interest rates and large quantitative easing programs do not make easy money, and that many conventional economists confuse cause and effect. But why should anyone believe my contrarian opinion?

In January 2015, I said that Switzerland made a mistake when it allowed its currency to appreciate sharply after successfully pegging it to the euro for more than three years. I suggested that this could push Switzerland back into deflation. Conventional economists suggested that this action was necessary to prevent a large increase in the SNB’s balance sheet. All my fears turned out to be true. Switzerland immediately fell back into deflation, leading to a policy of negative interest rates. As investors saw that the Swiss franc was likely to appreciate against the euro, demand for Swiss currency soared much higher. The SNB responded by expanding its balance sheet to 140% of GDP.

Switzerland is not the only country that has driven the US into deflation. Our government also pressured the Japanese to strengthen the yen, with similar results.

P.S. It is interesting to look at some current account surpluses (for 2024), as a percentage of GDP (from The Economist magazine):

Singapore: 19.7% of GDP

Taiwan: 14.2% of GDP

Netherlands: 8.6% of GDP

Switzerland: 7.3% of GDP

Germany: 6.6% of GDP

Japan: 3.2% of GDP

Euro area: 3.1% of GDP

China: 1.2% of GDP

Which country has the smallest trade surplus of this group, expressed as a percentage of GDP? Which country’s trade surplus is US media obsessed with? Which country has labeled both its political parties and much of the media as an enemy of the US? Do you notice a pattern? (China’s actual surplus may be slightly larger than 1.2% of GDP due to measurement errors, but is still well below that of many other countries.)