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Central Banker’s Recent Decisions

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Central Banker's Recent Decisions

The currency war continues with ever-increasing speed. During recent periods until January 2016, the world's central banks have taken major decisions to further nourish this (monetary and financial) cold war.

Suisse National Bank (SNB)

In the first half of January 2015, the Court of Justice of European Union (CJEU) decided that the authority for Quantitative Easing (QE) program is within scope of the European Central Bank (ECB) mandate. A few days later, the Suisse National Bank (SNB) decided unexpectedly on January 15, 2015, to unpeg the Suisse Franc (CHF) from Euro. The SNB had pegged the CHF to Euro with a rate of 1 Euro to a minimum of 1.20 CHF since September 6, 2011.

To understand the situation, a brief history of CHF (Suisse Francs - Schweitzer Franken) is presented.

Switzerland joined the Bretton Wood System in 1945 and pegged the CHF to the US dollar at a rate of $1 to 4.30521 CHF, or 1 CHF to buy 0.206418 grams of gold. Since the 1920s, there was a legal requirement for the SNB to back the Suisse Franc by a minimum of 40% of gold. However and following a referendum in 1999, this requirement was abandoned on May 1, 2000. Since then, the SNB sold part of its gold reserve until 2005.

It is interesting to know that following a citizen initiative, a referendum to back the CHF by gold again, with a gold reserve of 20%, took place on November 30, 2014. However, a majority of Suisse citizen voted against this referendum.

It is worthwhile reminding here that the Suisse Franc (CHF) is a fiat money since May 1, 2000. The SNB is manipulating the value of CHF against other currencies, in particular the Euro, to manage the Suisse trade balance. Meanwhile and since the so-called financial crisis of 2008, the SNB has increased its balance sheet from some CHF 100 Billion to some CHF 500 Billion. It is following the same wrong monetary policy of the Fed, ECB, BoE, BoJ, and PBoC, to propel the country's economy.

Due to relentless pressure from Politicians and Central Bankers to manipulate their fiat currency, the Paper money will eventually always end up where its intrinsic value is, worth the production costs of the painted paper of the bank notes, or worthless. This is ultimately going to be the fate of the Suisse Franc as well unless they decide one day to back it up by gold again.

European Central Bank (ECB)

After decision of the CJEU, the ECB decided a massive Quantitative Easing (QE) program on January 22, 2015, to purchase €60 Billion per month of bonds until at least September 2016. This decision led to a drastic devaluation of Euro against other currencies, in particular, the USD. The main purpose was a large-scale asset purchase to boost the economy of the Eurozone member states, their trade balance, and export of goods and services. On December 3, 2015, the ECB announced an extension of its bond-buying program for an additional six months until March 2017.

The EU QE decision was one of the last of the developed countries after Japan, the United States, and the United Kingdom.

People’s Bank of China (PBoC)

On August 11, 2015, the PBoC devalued its currency, Yuan (Renminbi) by 2%.

Bank of Japan (BoJ)

The concept of Quantitative Easing (QE) was originally born in Japan, a country plagued in recent history by deflation and rolling recessions. The purpose of  original QE in 2001, and for the duration of five years, was to get the country out of deflation and into inflation.

The most recent BoJ QE program began in April 2013 for a massive purchase of $1.4 trillion. The plan was aiming to purchase $70 billion of government bonds each month by using the electronically created money. The amount of purchasing was colossal. As a comparison, the Fed monthly purchases amounted to $85 billion, however with an economy size of three times larger than Japan.

Like many of developed countries, the Japan economy is sluggish. The GDP growth rate for 2015 is anticipated at 1.6%, the debt to GDP rate at 230%, and the unemployment rate, very low, at 3.1%.

Bank of England (BoE)

The Bank of England decided a QE program first in its meeting on March 4 and 5, 2009. During the period from March to November 2009, BoE ran a QE program to purchase £200 billion of assets. Thereafter, BoE decided to continue the QE programs with further purchases of £75 billion in October 2011, £50 billion in February 2012, and a final purchase of £50 billion in July 2012. The BoE QE program purchased assets with a total amount of £375 billion. No further asset purchases have been undertaken since then. However, all refunds associated with the maturing bonds, have been reinvested, and therefore, the total stock of QE remains at £375 billion.

The UK economy is sluggish like the US, Japan and, France. The GDP growth rate is estimated at 2.1% for 2015. The debt to GDP ratio was 89.4% for 2014. However, the UK unemployment rate is relatively low, at 5.2%.

Federal Reserve (The Fed)

QE1 program started in November 2008 and ended on March 31, 2010. During the period, the Fed injected some $1.7 trillion in the economy. At the beginning of QE1, the markets continued trending down until March 6, 2009. After the Fed announcement of expanding the mortgage-buying program of subprime assets, DJ-30 started to rebound. QE1 program resulted in a gain of some 4,500 points for DJ-30, which went from the low of some 6,500 in March 2009 up to some 11,000 in March 2010. This represents a gain of some 70% from the bottom price of March 2009.

At the end of QE1, the markets started to decline again. This observation led the Fed to kick-start the QE2.

QE2 started on November 3, 2010, through June 30, 2011. During QE2, DJ-30 went from the low of some 9,700 up to some 13,000. This gain represents some 3,300 points or 34% from the low.

The economy being still sluggish, the Fed decided again to execute another QE program, QE3, which started on September 13, 2012, to end on December 18, 2013. After that, the QE3 was tapered until October 29, 2014. The effects of QE3 program and the tapering led the DJ-30 to rise from some 15,000 up to some 18,000, with a gain of approximately 3,000 points or 20%.

For further details regarding the state of the US economy and finances, you may refer to Chapter 13.
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