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January 15, 2015

Swiss Central Bank Finally Folds

Thomas Jordan, the head of the SNB has repeated said that the Franc peg would last forever, and that he would be willing to intervene in “Unlimited Amounts” in support of the peg. Jordan has folded on his promise like a cheap suit in the rain. When push came to shove, Jordan failed to deliver.  
The Swiss economy will rapidly fall into recession as a result of the SNB move. The Swiss stock market has been blasted, the currency is now nearly 20% higher than it was a day before. Someone will have to fall on the sword, the arrows are pointing at Jordan.
The dust has not settled on this development as of this morning. I will stick my neck out and say that the failure to hold the minimum rate will result in a one time loss for the SNB of close to $100B. That’s a huge amount of money. It comes to 20% of the Swiss GDP! If this type of loss were incurred by the US Fed it would result in a loss in excess of $2 Trillion!
In the coming days and weeks there will be more fallout from the SNB disaster. There will be reports of big losses and gains from today’s events. But that is a side show to the real story. We have just witnesses the collapse of a promise by a major central bank.
The Fed, Bank of Japan, ECB, SNB and other Central Banks have repeatedly made the same promises over the past half decade:   
Don’t worry! We are here. We will do anything it takes to achieve the stability we desire. We are stronger than the markets. We can overwhelm all forces. We will never let go – just trust us!

I never believed in these promises, but the vast majority of those who are active in financial markets did. The entire world has signed onto the notion that Central Banks are all powerful. We now have evidence that they are not.
Anyone who continues to believes in the All Powerful CB after today is a fool. Those who believed in Jordan’s promises now have red ink on their hands – lots of it! 
The next central bank that will come into the market’s cross hairs is the ECB. Mario Draghi has made promises that he would “Do anything – in any amount”.  Like I said, you would be a fool to continue to believe in that promise as of this morning.
We’ve just taken a huge leap into chaos. The linchpin of the capital markets has been the trust in the CBs. The market’s anchors have now been tossed overboard.
 About The Author - Bruce Krasting had worked on Wall Street for 25 years--"For 25 years I woke up thinking, "What am I going to do today to make some money in the market". I don't do that any longer. But I miss it." Nowadays, Bruce blogs about his take on financial events at Bruce Krasting(EconMatters author archive here.)   

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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