This past week was a rocky week that ended in a sharp selloff over Thursday and Friday.  The sharp decline in global stocks was mostly precipitated by the ongoing nightmare that is Europe. One very notable event this past week was the fall of the last safe haven – the Swiss Franc.  The Swiss National bank (SNB) has done its very best to avoid devaluing their currency while all other currencies are in a race to devalue.  Recall that devaluing a currency is very helpful for exports of the country devaluing.  Needless-to-say, Swiss companies have been struggling mightily as the Swiss Franc has been rising.  Switzerland has decided to set a minimum exchange rate of 1.20 to the Euro.  In essence, the Swiss will be buying up foreign currencies and selling their own to push down the strength in its own currency.  So, let’s now welcome the Swiss to the global race to the bottom to devalue currencies.  

Virtuous circle or vicious cycle?

Below is one of the many quotes from Fed Chairman Bernanke where he references his virtuous economic circle:

“Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.”

In contrast we have a quote from Casey Research:

“Ultimately, there is only one solution, and until people start seriously talking about that solution – the overt default on un-payable debts, in order to begin restructuring those debts – this pain party is going to continue. Actually, it’s going to get much worse as each country looks to its own, as the Swiss are trying to do, creating ever more complexity, which, in turn, will require adjustments elsewhere, giving rise to even more ill-informed policies. It is the very definition of a vicious cycle.”

 In my opinion, we are closer to a vicious cycle than a virtuous circle.