That is a good point – I had actually only looked at the export side, not the net export position, so this is new information for me.

In that context, there push to get the currency down seems less appropriate – I can understand loosening monetary policy but not mentioning a level of the exchange rate …

We have the same issue with Japan …

“That’s a bit of a reach. Long term problems caused by several issues: trade liberalisation, excessive hot money flows, speculation and asset bubbles on the back of pegged currencies.”

In terms of the developed world, I would say that “hot money” and trade liberalisation are inconsequential at worst, and beneficial at best.  The relative price issues that have come about in many developed economies do stem from the management of savings and exchange rates in Asia though – understanding these issues is key to understanding what has gone on.

“The pain of the AFC then caused Asian countries to build large surpluses so they wouldn’t get shafted by the IMF/World Bank again”

That is a good point – and I’d note that I don’t see the “imbalances” as necessarily all bad – just a description of something that happened and needs to be explained.

“Hot money flows, carry trades plus speculation in general overwhelms any trade related currency flows and so currencies are often way out of line. “

Hot money requires a demand side – why were people in NZ borrowing?

It is true that real interest rates were lower overseas, but was this the sole driver of the increase in borrowing here – or did our demand for credit also rise.  Once we have ideas about both drivers we can discuss what is going on … and in both cases having a floating exchange rate is still appropriate.

“The current financial system is so out of control that serious measures are needed to stabilise it”

There are definitely issues in the financial system – namely, transparency and government involvement (which brings us back to intervention in Asia) … interestingly, the US appears to have one of the healthier financial systems out of the big countries at present, a far cry from 3 years ago.

“I don’t think the SNB move is permanent by any means (though we can’t rule out the Swiss joining the Euro!) and I agree fixing rates is not a long term solution. But it’s good that they have taken some action to bring the market back to more justifiable levels and remove some of the volatility. “

It is definitely not permanent – nor is it a “peg”.  I am sure their justification for intervention was sensible, and the risks of deflation were rising.  I am just hoping people don’t see it as a peg – as that is something a bit different.

“I think we should have floating rates for the trade account…that’s how trade works BUT it’s the capital account that is the problem. Hot money flows, carry trades plus speculation in general overwhelms any trade related currency flows and so currencies are often way out of line.”

Nonsense – with a floating exchange rate, net trade flows = net capital flows. GROSS capital inflows can overwhelm trade flows, but then you have an opposing gross capital outflow… why would you think that one leg affects the exchange rate but not the other?

I find it hard to muster sympathy for a country that already has a massive, and growing, trade surplus – the goods balance alone is now up to 4% of GDP, when it was balanced a decade ago.  And how does this square with the G7/G20/etc commitments to reduce global imbalances?  For some countries to reduce their current account deficits, the others have to be willing to reduce their current account surpluses.  The rising Swiss franc was part of the market’s effort to reduce those imbalances; policymakers are exacerbating them.

That’s a bit of a reach. Long term problems caused by several issues: trade liberalisation, excessive hot money flows, speculation and asset bubbles on the back of pegged currencies. The pain of the AFC then caused Asian countries to build large surpluses so they wouldn’t get shafted by the IMF/World Bank again.

(The real long-term imbalances go back to 1944 and the unipolar financial system created at Bretton Woods but that’s another story).

I think we should have floating rates for the trade account…that’s how trade works BUT it’s the capital account that is the problem. Hot money flows, carry trades plus speculation in general overwhelms any trade related currency flows and so currencies are often way out of line. 

The current financial system is so out of control that serious measures are needed to stabilise it. This may involve short term currency action, changes to margin requirements, transaction taxes etc….

I don’t think the SNB move is permanent by any means (though we can’t rule out the Swiss joining the Euro!) and I agree fixing rates is not a long term solution. But it’s good that they have taken some action to bring the market back to more justifiable levels and remove some of the volatility. 

The long-term currency manipulation by Asian countries which caused the long-term imbalances is the prime example of the problem with exchange rate management – not a signal that everyone should be doing it.  Currencies can be pegged – short term variability due to speculation is a non-issue … the issue has come FROM exchange rate management.

In net terms I think the Swiss move was a good one – especially since they framed it in terms of active monetary policy.  However, I am concerned with naming exchange rates – generally “setting” prices is not a good idea.

What’s so bad about exchange rate management? Exchange rates should reflect, as much as possible, economic fundamentals so that trade relationships can be kept in balance.

The imbalance we have seen in trade has created a nasty feedback loop in the capital account as surplus currencies are fed back into the asset system causing misallocation of funds. The inability of currencies to do the traditional work has led to the major macro-economic imbalances we have now.

It’s a big call by the SNB but the Chf has risen so much in the last year that it’s got to ludicrous levels. I think it’s a very good move and will calm markets down. It will remove speculative flows, program and algorithmic trades and still allow real capital flows to take place.