Socialist Worker

Deflation is driving the currency chaos

by Alex Callinicos
Issue No. 2437

Swiss National Bank in Zurich

The Swiss National Bank in Zurich (Pic: Roland zh on Wikimedia Commons)

The global financial system suffered an unexpected jolt last week that showed how far it is from reaching safe harbour more than six years after the global crash.

On Thursday of last week the Swiss National Bank (SNB) announced that it was abandoning the peg that prevented the Swiss franc from rising too far against the euro. Switzerland is one of those economies that act as safe havens. The United States, Germany, and even Britain are others.

In the face of economic turbulence, investors like to park their money in these places to keep it safe.

The problem for Swiss capitalism is that, if exchange rates were left to find their own level, the inflow of this funk money would push the franc up against the euro. This would make Swiss exports expensive compared to those of rival European firms.

So in September 2011 the SNB imposed a ceiling of 1.20 francs to the euro. To stop the franc rising higher it had to buy up assets denominated in foreign currencies and thereby pump more francs into the financial system.

By last November it was holding over half a trillion euros’ worth of assets—80 percent of Swiss output.

This probably wasn’t the decisive factor in prompting the SNB to give the franc peg up.

The governing council of the European Central Bank (ECB) meets this week. It is widely expected—finally—to adopt a programme of quantitative easing (QE).

This would involve buying bonds as a way of creating new money and pumping it into the banks. The idea is that the banks would lend this money to firms and households, stimulating investment and consumption.

In the aftermath of the crash, both the US Federal Reserve Board and the Bank of England adopted big QE programmes, though there is controversy about how effective they were. The Bank of Japan is currently running an even bigger one, relative to its economy.


Japan’s problem is deflation. Prices are falling, increasing the burden of debt and making consumers reluctant to spend. Now deflation is spreading. Prices fell by 0.2 percent in the eurozone in December, and Britain is on the verge of something similar. 

So ECB president Mario Draghi wants to introduce QE in the hope the extra money will stop prices falling. He has had to overcome enormous resistance from the German establishment. It is terrified that anything that smacks of European Union support for indebted member states will undermine Germany’s high-export economic model. 

The green light only came last week when a European Court of Justice official overruled the German Constitutional Court and decided that a predecessor of QE was legal.

Because of German resistance, Draghi will probably have to water down his version of QE by comparison with those in the US and Japan. But the flood of new money will be enough to push the euro down on the foreign exchange markets.

It was probably this prospect that prompted the SNB to abandon the peg. In the hours that followed, the franc jumped an astonishing 39 percent against the euro.

The shock waves shoved some foreign exchange dealers towards bankruptcy. It emerged in the wash how many dodgy practices have survived the crash. 

London-based foreign exchange dealers have been allowing punters to bet up to 1,000 times the cash they put up front on currency movements.

Meanwhile, naive borrowers in central and eastern Europe have, as they did before the crash, been taking out mortgages denominated in Swiss francs. The franc’s rise means that many may now lose their homes.

But the reminder of how dangerous and destructive financial markets can be wasn’t the only lesson of last week. 

Deflation is a symptom of economic stagnation, which it in turn helps to perpetuate. 

Last week the World Bank cut its forecast for world economic growth this year from 3.4 to 3 percent.

“The global economy is running on a single engine”—the US, a spokesperson complained.

But the problem lies deeper. The real engine that has driven the world economy these past decades—the financial system centred on New York and London—remains badly damaged.


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