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Comment by lisa_henderson | Hacker News Reader

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lisa_henderson

Anyone who thinks the that the peg was unsustainable should remember a basic bit of supply of demand.

Assume the demand of Swiss francs is "x".

Assume the supply of Swiss francs is "y".

If the price of francs is higher than what Switzerland wants, then:

x = y + z

where z is the amount needed to match supply with demand.

In that circumstance, Switzerland can print z amount of francs -- that is entirely sustainable. And that is what it was doing for the last few years. Keeping the price stable is the same as saying that it was printing z amount of francs, so that y+z equalled x.

Anyone who says this was unsustainable is simply not thinking clearly.

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No it's not that simple. Since Switzerland was fixating 1EUR = 1.2CHF there was a new problem arising when the US dollar went up: Arbitrage. People could exchange USD into EUR and then into CHF (source: Official statement of the Swiss central bank). The result: The Swiss Franc was pegged to the USD as well. Now that's some serious pressure, and that's why the Swiss central bank decided to give up on this unsustainable endeavour. And your calculation is nice and dandy, but if z grows too large then you get a massive inflation which is very damaging.

About this:

"if z grows too large then you get a massive inflation which is very damaging"

No! No! No! I am surprised there are so many people on Hacker News who are bad at math. You can not get inflation unless:

x < y + z

but what I wrote was:

x = y + z

you can not get inflation while that is true. Remember, you face deflationary pressure for as long as:

x > y + z

and that is what Switzerland was fighting. Not inflation, but deflation.

You are mixing two concepts. One is the "outside" value of the currency, that is, for how much foreign currency you can exchange it for. The other is the value inside the country. For example, the Swiss frank may appear 20% stronger but croissants in Switzerland still cost exactly the same. If you just print money you will get an inflation inside the country and the prices will go up.

About this:

"You are mixing two concepts."

You have no idea what you are talking about. This creates deflationary pressure:

x > y + z

So long as x is greater than y plus z, then it is cheaper for the Swiss to import their croissants from Italy or Germany or Austria, or anywhere else. And also their microtechnology, hitech, biotechnology and pharmaceutical goods. That is why every article written about this so far says that dropping the peg is bad for Swiss industry, and therefore bad for the Swiss economy. So long as this is true:

x > y + z

then it is easier for the Swiss to import things, because everything outside of Switzerland appears to be cheaper. And that, of course, puts downward pressure on prices from domestic producers as well. Thus, the pressure is deflationary, not inflationary -- the problem is that prices will fall, not that prices will rise.

Inflation is measured with the price of a basket of goods. Inflation is not measured in terms of the CHF-EUR exchange rate. If you keep your equation x = y + z then yes there will not be an inflation in terms of EUR but the basket can (and will!) still be subject to inflation. Because the EUR is not equal to basket of goods. Nobody is going to import croissants because then they'd be days old and taste like shit.

You really have no idea what you are talking about.

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