The Swiss cost of living is too low
By Scott Sumner
At least that’s the claim of the US government.
Today, the US government accused Switzerland of artificially depressing the value of its currency in the foreign exchange market. This is rather odd, as Switzerland is generally considered to be the country with the strongest currency in the entire world. Since 1971, the value of the Swiss franc has soared from 23 cents to $1.12:
The US government might argue that this is the nominal exchange rate, and what matters is the real exchange rate. I agree. But most measures of the real exchange rate (such as The Economist’s’ Big Mac index”), also show the Swiss franc to be the strongest currency in the world. The “real exchange rate” is just a fancy term for the relative cost of living. So to put this claim in terms that average people can understand, the US government is claiming that the cost of living in Switzerland is being held too low. Have you ever taken a vacation is Switzerland?
If you want to understand the US claim in graphical terms, look at the Economist’s Big Mac index graph. The Swiss franc is the blue dot on the far right, 21% “overvalued” versus the dollar. The US is essentially claiming that the Swiss have manipulated that dot too far to the left. No, I’m not joking.
The US government might argue that while Switzerland has the strongest currency in the world, it should be even stronger. But what evidence do we have for this claim? The Treasury department would cite Switzerland’s large current account surplus. But a current account surplus does not mean a currency is
overvalued undervalued. Many American states run current account surpluses with other states. Does that mean the Massachusetts dollar is undervalued relative to the Texas dollar? Switzerland’s current account (CA) surplus is merely an indication that the Swiss save more than they invest.
The US government might argue that the Swiss CA surplus is unusually and unjustifiably large. But most northern European countries run CA surpluses. Switzerland is significantly richer than other European countries, and the Swiss are also unusually thrifty. It’s exactly the sort of country one would expect to run an especially large current account surplus, even if there were no manipulation.
The US government might argue that the Swiss saving rate is artificially inflated by government intervention in the foreign exchange market. But the Swiss purchase of foreign assets is motivated by a huge rise in the demand for Swiss francs, which has caused the Swiss National Bank’s balance sheet to balloon to well over 100% of GDP. There are not enough Swiss government bonds for the SNB to purchase. A failure to meet that demand for francs would result in deflation and depression.
In fairness, you could argue that the Swiss should set a higher inflation target, and/or engage in price level targeting. But that’s true of the EU and Japan as well. And it’s also true of the US. Or the government might argue that Switzerland should run massive budget deficits. In other words, the Swiss should abandon the economic system that produced arguably the most successful small country in human history, and throw in their lot with the MMTers.
I’m guessing that the Swiss will say, “No thanks, we are doing just fine without your advice.”
PS. Keep in mind that the US government is currently run by a team that launched a trade war because its economists told them that trade barriers would reduce the US trade deficit. The deficit actually increased, just as most sensible economists predicted.
PPS. The report actually named two countries as currency manipulators, Switzerland and Vietnam. When we put tariffs on China it caused some low wage industries to move to Vietnam. The game of trade “whack-a-mole” continues.