Innovation will save Switzerland!

Europe and Switzerland are in full deflation, aggregate demand is at best anemic and only the emergence of a single or multiple asset bubbles is likely to revive their economies. Retail prices decline as consumers, who no longer have the means to maintain their current living standard, refuse to listen to the “credit sirens” and instead, reduce household expenses and defer purchases. In this environment, tormented by uncertainty, the Swiss National Bank (SNB) has decided to behave in the same fashion as the citizens of the country whose monetary policy it supervises. It has, unilaterally and going against the philosophy of its fellow central banks, shut down the Swiss Franc printing press. Until it did so, its massive sales of Swiss Francs for Euros had allowed it to artificially manipulate the market exchange rate and indirectly boost its lending.

It is certainly valid to accuse China of having contributed to this deflationary monster by maintaining the value its currency artificially low for so many years. Deflation is easily transmitted through foreign exchange markets, as nations traditionally weaken their currency to boost exports. These currency wars, if conducted by large countries, are the surest way to induce global deflation. Germany can also be blamed for substantially increasing her exports by exploiting her workforce and at the expense of the entire European Union.

In this war of titans, little Switzerland had to abandon its policy of currency manipulation due to a lack of central bank financial resources. As a result, the SNB failed to defend the country’s domestic industry and Swiss exports. However, those who cry treason should understand that this attempt on the part of the SNB to depress the value of the Swiss Franc was doomed from the start. The global forces of deflation faced by the SNB were too great. The dice were loaded from the start and the Swiss economy was doomed to face a recession. It was just a matter of time.

Under these conditions, the only salvation consists in the desire and ability to innovate. The example of the village of Grächen in the Valais region shows that the Swiss still have this ability in them. This village, completely dependent on tourism revenues, decreed that it would apply an exchange rate vis-à-vis the Euro of 1.35! It went into effect in 2011 and is enforced in hotels, shops, and restaurants and on the sky lifts as long as clients pay in cash. This decision has allowed Grächen to overcome the crisis triggered by soaring Swiss Franc and the village has been able to avoid losing tourist bookings. In the face of adversity the citizens of Grächen literally decided to be their own central bank!

Confronted by the evil of deflation and caught hostage in a war it did not want, Switzerland must urgently appeal to the legendary inventiveness and dynamism of its citizens.