(NaturalNews) Worried about its national currency, the franc, losing too much of its value as both it and the euro fall against the U.S. dollar, the Swiss government has recently removed a 2011 cap placed on the franc against the euro to protect it from further losses amid rising global financial pressures.
“Recently, divergences between the monetary policies of the major currency areas have increased significantly — a trend that is likely to become even more pronounced,” the Swiss National Bank announced Jan. 15 in a press release.[PDF]
“The euro has depreciated considerably against the US dollar and this, in turn, has caused the Swiss franc to weaken against the US dollar,” the bank said. “In these circumstances, the SNB concluded that enforcing and maintaining the minimum exchange rate for the Swiss franc against the euro is no longer justified.”
That announcement and the bank’s actions led to a round of volatile trading in world markets. Following that announcement, the franc spiked some 30 percent, reports said, and the Swiss may have lost as much as $60 billion in a single day — perhaps the world’s largest daily loss ever, according to ZeroHedge.com.
Switzerland could no longer subsidize Europe
“The SNB is lowering interest rates significantly to ensure that the discontinuation of the minimum exchange rate does not lead to an inappropriate tightening of monetary conditions,” the Swiss central bank continued. “The SNB will continue to take account of the exchange rate situation in formulating its monetary policy in future. If necessary, it will therefore remain active in the foreign exchange market to influence monetary conditions.”
As dire as the financial news out of Switzerland and Europe has become, financial expert Peter Schiff is warning that the worst may yet be coming. In a recent Schiff Report, he said the move by the Swiss was a financial “bombshell” that “surprised everybody.”
Schiff said one reason why the move was so momentous was because, just recently, Swiss central bank officials and the Swiss government had vowed to “defend” the franc’s position against the euro. However, he said it wasn’t a move he didn’t anticipate.
“I’ve been expecting this from the very beginning,” he said in his report, adding that he knew it would come but he just did not know when it would happen.
“If you go back to the first day when the Swiss announced” that they were pegging the franc to the euro, Schiff said, “I said at the time that it was a big mistake, that Switzerland would regret it, and they would ultimately abandon the peg when they had thrown too much good money after bad — when they had lost enough Swiss francs, blown enough wealth buying up euros, they would eventually throw in the towel, and that is exactly what they did.”
The financial guru said the Swiss central bank decided to “throw in the towel” now rather than wait so that more billions of dollars were not lost.
“The longer they waited, the more they were going to lose,” he said, adding that after the decision to un-peg from the euro, the franc is now actually worth more.
It’s a hard lesson that the world is getting ready to learn, Schiff noted — “that central banking doesn’t work.”
“Switzerland is small microcosm of the bigger pegged relationship that is going to end, and when it does, it will be much more spectacular,” he said.
Is China set to act next?
The Swiss case “was a tremor,” he continued. “When the Chinese decide to abandon their peg, both for the Hong Kong dollar and the [Chinese currency] yuan — that is going to be a 10.0 on the Richter scale of economic activity.”
When that happens, he says, it will be the U.S. dollar that takes the hit.
He explained that the Swiss were essentially subsidizing 300 million Europeans by pegging the franc to the euro, and it simply became economically untenable to continue with those policies. Schiff said the Chinese have essentially been doing the same thing with the United States — subsidizing the dollar with massive bond and treasury purchases.
“China has $4.5 trillion in foreign reserves,” he said, but what is happening is that unlike the Swiss case, where wealthy Swiss citizens were subsidizing not-as-wealthy Europeans, China’s poor are subsidizing the American middle class.
“How much longer can this go on?” he asked rhetorically.
Not long. Listen to the full report here.