Our Dependence to Central Banks Has Become Pathological

The sudden burst of panic provoked last week by the Swiss National Bank (SNB) reveals that we have all become so addicted to the central banks’ doings that it is turning pathological. To be sure, the SNB’s decision to let go of the Swiss franc peg to the euro was unexpected, since it had, less than three days ago, stated it would hold to that policy. But, still, it was predictable, since the euro has lost 15% to the dollar in a few months; the SNB had to let go sooner or later. Furthermore, in order to maintain parity (1,20 CHF=1 euro), the SNB had to purchase euros against Swiss francs and, thus, inflate its balance sheet, now at 80% of Switzerland’s GDP; this could not go on.

Nevertheless, reactions have been very strong: In Zurich, the stock market is plunging with investors worrying about higher prices for exported goods, albeit most large Swiss companies operate at an international level and will not be affected that much. The watch sector may suffer a little, but not that much, since it is in a virtual global monopoly (if one wants to buy a luxury watch other than Swiss, what does one do?). In brief, on the contrary, it was the SNB’s decision to follow ECB’s policies at all costs that was irrational from the start and bound to fail.

The fear provoked by this sudden decision underscores the markets’ total dependence toward central banks. Oil, which is essential to our economies, may go from $100 a barrel to $40 a barrel in just a few months, and the markets quietly absorb the news, just as they do with the euro’s slide or the rouble’s collapse. The markets do not seem to be worried about the real slowdown in China’s growth or about the downgrading of Italian debt by S&P to BBB-, just one notch above junk bond status.

On the other hand, each and every word from Mario Draghi’s and Janet Yellen’s statements is analysed in depth and any perceived news, good or bad, is immediately reflected on the markets. And we thought markets were interested in the economy! Not anymore: Investors understand that asset prices are inflated with helium by central banks, and this is where they look for guidance.

That being said... Since we mentioned pathology, there exists something in psychology called “return to reality” and, generally, it hurts. This return to reality could take the form of Greece giving the finger to Europe, the real estate bubble bursting in China, the shale oil sector collapsing in the United States, or any other event affecting the real economy. Also, this jolt by the SNB gives us a sign that even central banks operate within certain constraints which can push them toward a dead-end street from which they can only exit by making a U-turn. Can you imagine the mess we’d be in if the BCE or the Fed were to do an ”SNB” on us?...