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Vollgeld Initiative questionsMonnaie Pleine/Vollgeld Swiss Initiative

Alan Leishman
dalhnz@gmail.com
Posted Dec 31, 2015

The Swiss Sovereign Money Initiative, known as the “Vollgeld-Initiative” in German (VGI): Five questions with answers. [Read the Vollgeld Initiative here.]

"1) What is sovereign money? Sovereign money is the money that a central bank brings into circulation. At the moment, this consists only of the coins and bank notes in circulation. This legal tender makes up only 10% of the money in circulation in Switzerland. 90% is electronic money or book-money, which is created by the banks at the click of a button to finance their business (bank loans, mortgages, financial products). Most people believe that the money they have in their bank accounts is real money i.e. real Swiss Francs (or pounds Stirling etc). This is wrong! Money in a bank account is only a liability of the bank to the account holder, i.e. a promise the bank makes to provide money, but it is not itself legal tender.

"2) What would change with the Swiss Sovereign Money Initiative? The way the money system works today doesn’t comply with the intention of the Swiss Constitution (Article 99: “The Money and Currency System is a matter of the State”). The sovereign money initiative will correct this. The Swiss National Bank alone will be able to create electronic money. Banks won’t be able to create money for themselves any more, they’ll only be able to lend money that they have from savers or other banks, or even, if necessary, money that the Swiss National Bank has provided them.

"3) What are the fundamental advantages of sovereign money? Sovereign money in a bank account is completely safe because it is central bank money. It does not disappear when a bank goes bankrupt. Finance bubbles will be avoided because the banks won’t be able to create money any more. The state will be freed from being a hostage, because the banks won’t need to be rescued with taxpayers’ money to keep the whole money-transaction system afloat i.e. the “too big to fail” problem disappears. The financial industry will go back to serving the real economy and society. The money and banking systems will no longer be shrouded in complexity, but will be transparent and understandable.

"4) What will happen to banks after a sovereign money reform? After a changeover to sovereign money, the banks will continue to offer all the normal financial services (giving credit, enabling transactions, wealth management etc.). However, there will only be central bank money in our current accounts at the bank. This electronic money has value exactly like today’s coins and bank notes have value. The banks can only work with money they have from savers, other banks or (if necessary) funds the central bank has lent them, or else money that they own themselves. Banks won’t have an unfair advantage over all other market participants any more, as they won’t be able to create money any more.

"5) What will be the effect of sovereign money for bank customers? From the moment that sovereign money is introduced, there’ll only be money guaranteed by the central bank in all transaction bank accounts… "

In my opinion, at first sight this initiative appears too radical, and hence with almost zero chance of success.

However, at second glance, when one studies the detail, the sole simplistic demand of the initiative is to return to, and respect, a paragraph of law that is already anchored in the Swiss Constitution. The observer is now confronted with a new scenario, that the current application of the Swiss Law is not respecting Article 99? Otherwise why bother to launch an initiative? QED

Opposition from the big Swiss Banks has already commenced:

In her newsletter about the Swiss Sovereign Money Initiative on 18th of December 2015 - Emma Dawnay said:

The Swiss Bankers Association wants to keep their money-creating privileges

On 1st December the Swiss Bankers Association published this statement.

We've written a detailed (9-page) reply answering the misinformation and scare tactics of theirs! The full German version is here. This hasn't been translated into English, but is summarised as follows:

  • The Swiss Bankers Association (SBA) firmly rejects the Swiss Sovereign Money Initiative", claiming, amongst other things, it would put the "prosperity of Switzerland" at risk.
  • The criticism of the Swiss Bankers Association is baseless: The credit supply will remain secure with the Swiss Sovereign Money Initiative. There is also no direct impact on interest rates. Only the creation of money is transferred to the Swiss National Bank; lending to companies, private individuals and the state remains as it was: exclusively with the banks.
  • With a closer look at the statement of the Swiss Bankers Association, the criticisms dissolve away. It's a mix between ignorance of the Swiss Sovereign Money Initiative, misinformation and scare tactics. This reaction is understandable taking account of the fact that the Swiss Sovereign Money Initiative wants to abolish the distortive privilege of money creation by banks. Of course, the profiteers of this hidden state subsidy defend themselves against it.
  • The statement by Philipp Hildebrand, Vice-Chief of the US financial giant BlackRock and former president of the Swiss National Bank in the Spiegel on 23 November 2015 is relevant: "I have learned in recent years that one should not always listen to the whining of the banking lobby."
  • The Swiss Bankers Association mainly represents the interests of the big banks. The smaller and medium-sized banks do not feel represented by the Swiss Bankers Association, as a survey showed: to the question "Do you, the regional banks, feel represented by the Swiss Bankers Association?" more than 90% of the Directors voted "No." …" (end of quote)

So now taking a closer look at some of the most important elements and the effect on various Swiss Institutions, here are my comments:

SNB Swiss National Bank:

  • In theory it gains in power by regaining the sole issuer of money status.
  • In practice its job may become more difficult to carry out, e.g. the PEG – see below.
  • More serious issues such as the SNB Management structure and selection, Monetary Policy (HedgeFundesque recently), and legal conformity thereof, appear at first site not to be addressed by the Initiative. However indirectly the SNB could easily be forced into policy changes, if the Initiative passed.

Commercial Swiss Banks:

  • The Global players, ie the Majors will be the most affected by the Initiative.
  • Existing contracts, e.g. Hypothek fixed x years would either have to be Grandfathered, or passed to the SNB to run to maturity.
  • Passing from say 10% reserves to 100% would entail a reduction of 90% of certain types of business, e.g. Credit of all kinds. (or would it perhaps simply replaced by other means of funding rather than fractional reserve monetary creation).
  • Loss of Banks Market Capitalisation by downgraded share price, or the contrary?
  • Credit Rating of Bonds issued by Swiss Banks would achieve a new highest ever grade AAAA+ rating.
  • Cost of coupons on issuing Bonds would fall, and currently would be ZIRP zero.

The Infamous PEG of the CHF to the Euro

  • The fixed PEG at 1.20 collapsed in Jan. 2015 as I predicted in my PP on the Swiss Gold Initiative in 2014.
  • The fixed PEG has now, (de facto but not de juris), been clandestinely replaced by a floating PEG, managed in an undisclosed range by the SNB. The current range is 1.07 to 1.10 but if the Initiative passed this might have to be reduced to Parity or below.
  • The Establishment are protesting loudly, that an “overvalued” CHF would be bad for the Swiss economy but the CHF has been a very strong currency for 50 years or more, and the Economy has always adapted and flourished, so this is déjà vu, and the actual evidence is to the contrary.

Summary Conclusions

The VGI if it passed would affect the financial sector of the Swiss Economy, and in turn the Global Financial markets:

  • The large Swiss Commercial Banks might lose some business temporarily, but would more than regain this in the medium term through new inflow of funds and new customers in a classic SAFE HAVEN effect.
  • The SNB would have to adapt its Monetary Policy to the new environment.
  • The CHF PEG could be controlled by the SNB in a range around Parity to the Euro.
  • Exchange Control might be a better instrument for this end rather than Negative Interest Rates, with the latter becoming less effective as they are adopted globally.
  • Switzerland would experience a temporary deflationary wave, which would put further downward pressure on interest rates to ZIRP and NIRP.
  • The Swiss Financial markets would regain a Safe Haven aspect through the VGI, replacing the Banking Secrecy advantages it offered historically, now somewhat dismantled.
  • Other Financial Centres, London, New York, etc. would initially have difficulty in following the Swiss VGI, because they lack the Direct Democracy Initiative instruments necessary to obtain its speedy introduction.
  • The global excesses of debt and derivatives ($1 Quadrillion) Ponzi scheme driven by QE and Fractional Reserve Banking would gradually (or suddenly) unwind as Capital flowed into Switzerland.
  • Bubble valuations of certain favourite assets, e.g. Google, Apple, FaceBook, and high end Real Estate and Collectables would start to deflate.
  • The share prices of Swiss major Banks, e.g. UBS and Credit Suisse, could rise 10 to 100 fold, after an initial drop, as the realisation of the beneficial effects replaced the initial fear mongering and downgrades that the Establishment Banking sector would likely wheel out in an effort to kill the VGI before the vote.
  • The Swiss major Banks recapitalised at these new multiple levels could then even selectively acquire some of their domestic and foreign competitors through non-dilutive equity take overs. The acquired Banks could then be restructured on the same VGI base, upgrading their status and credit worthiness.
  • Gold would regain its role as a safe haven as low interest rates globally were seen to become a permanent feature of the new 100% reserve Banking System.
  • The Global financial markets would gradually over a period of a few years be forced to adopt a VGI system in order to retain Capital which otherwise would flow to Switzerland.
  • A Bretton Woods 2 type Conference would be set up to reset the Global System.
  • There would be no more Bail-Ins, Bail-Outs, Banking Runs, Financial crisis, excessive Bank Bonuses, and all the other negative aspects of the current system for the Banks and the Countries that adopted the VGI methodology.

The VGI is both radical and innovative and needs a lot of research, reflection, debate, and input from not only the Swiss voting public but also internationally, given the global knock-on effect it will have, if adopted.

There is now a period of 18 months or more for this discussion process before the vote is cast by the Swiss electorate.

All comments are welcome.

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Dec 27, 2015
Alan Leishman
email: dalhnz@gmail.com

Copyright ©2015 Alan Leishman. All Rights Reserved.
This essay may only be reprinted in its complete form, without omissions or amendments including all links and author references, and with the permission of the author.

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