Some people seem to think my comments on the SNB are controversial. They say that the SNB can’t go bankrupt and that the SNB’s shareholder’s carry no direct influence over their actions. Of course this is true. I’ve stated all of this on several occasions in various places. But Central Banks do not operate with impunity simply because they have a printing press and some independence.
Central Banks operate within the political and perceptional boundaries of their countries. For instance, if a Central Bank operates within a country that is known for responsible monetary policy and being a safe haven region then you can probably see how it might be concerned about public perception were it to suddenly begin acting in what is perceived to be an irresponsible manner. Here in the USA I’ve argued that the Federal Reserve would never buy municipal bonds because it would give the appearance of funding state budgets indirectly. Of course, they can legally purchase municipal bonds, but from a perceptional and political perspective that is some pretty muddy water to enter.
I constantly battle monetary theorists who argue that the printing press is some omnipotent tool that gives its operators the ability to function without care for political or perceptional boundaries. These arguments are nice in theory, but only in theory. In reality Central Banks and governments operate within strict political and perceptional boundaries. It’s not always rational, but when are human beings ever all that rational about monetary matters? And in the case of the SNB I think their unique ownership structure and status as a safe haven magnifies the political and perceptional boundaries.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.