At the present, a variety of QE-type activity is already underway in a number of countries. Their goal is to decrease the value of their currencies out of concern for the rising price of exports. A prime example is Switzerland, which has pumped 80 billion Swiss francs (over 100 billion dollars) of liquidity into the market to purchase Swiss bonds and swaps. That’s a lot of money. It totals about 13 percent of the total U.S. QE from September 2010 until June 2011. Moreover, it was done in a short period. The Swiss did manage to get their francs to fall a little but they paid a high price. According to the following excerpt from Citibank economist Michael Saunders last week, the Swiss Central Bank has indicated more moves may be on the way. He cites a Swiss National Bank report that says:
“The measures taken thus far by the Swiss National Bank (SNB) against the strength of the Swiss franc are having an impact. Nevertheless, the Swiss franc remains massively overvalued. The SNB has therefore decided to expand again significantly the supply of liquidity to the Swiss franc money market. In so doing, it is increasing the downward pressure on money market interest rates with a view to further weakening the Swiss franc exchange rate. With immediate effect, it aims to expand banks’ sight deposits at the SNB further, from CHF 120 billion to CHF 200 billion. In order to achieve this new target level as quickly as possible, it will continue to repurchase outstanding SNB Bills and to employ foreign exchange swaps. Furthermore, the SNB reiterates that it will, if necessary, take further measures against the strength of the Swiss franc."
One way to diminish the attraction of a strong currency is to print more money and buy bonds with the money. Fiscal manipulations of this sort have been commonly applied in the past and sooner or later will also be pursued by Australia, Canada, Brazil, and other countries as their currencies rise in value against the falling U.S. dollar and Euro. These activities will increase world liquidity and cause asset prices to rise.
Another type of liquidity being engineered by the European Central Bank involves buying bonds of the profligate and irresponsible Greek, Portuguese and Irish. Later, it will also buy bonds of Italy, Belgium, Spain and even France. To no one’s surprise, German taxpayers will pay the bill.
So, get ready for a big stock market and industrial commodities rally later in the year after QE maneuvers in Europe and the U.S.
