Because your humble blogger enjoys punching above his weight, I want to grab a baton from Josh Henrickson, who in turn grabbed it from Evan Soltas. The latter (whose prodigious brilliance makes me feel pretty inadequate, frankly) revises his expectations of the power of a central bank commitment, regarding Switzerland’s euro peg, and Henrickson, who is the first person to describe the strategy with the ingenious moniker of “The Chuck Norris Strategy,” concludes:

In other words, credibility is not enough. Central banks also need commitment. This is consistent with the view I described in the first paragraph. It is not consistent with the strong version of the Chuck Norris effect.

Well, yes and no. Soltas was hinting at this, but I think it’s worth fleshing out. So let’s look at two scenarios. Both of them begin like this:

The Swiss National Bank announces a peg to the euro and promises to do whatever necessary to maintain it.

So far so good. Now, scenario one:

There are a bunch of traders/investors who liked buying Swiss francs because they seemed like a sure bet to appreciate against the flailing euro, so it was a secure place to park loose cash until it was needed as euros or dollars. These kinds of trades, of course, are exactly the kinds of trades the SNB were trying to quash with their currency peg. These traders/investors, assuming none of them are totally nuts and/or George Soros, will probably guess that there is little they can do to stop the central bank of Switzerland from printing all the francs it wants, walk away from speculating on the franc altogether.

In other words, Chuck Norris has cleared the bar with the evil eye alone.

Scenario two:

Nestlé invents a new, extremely delicious chocolate bar which takes the globe completely by storm. It is so popular, in fact, that it quickly becomes one of Switzerland’s leading exports, and suddenly grocery and convenience stores around the world are desperate to sate their customers’ monumental demand for this new, face-melting chocolate bar (Wonka bars that finally rival their fictional namesake, maybe). And how do they buy these bars from Nestlé? With Swiss francs, bien sûr! Suddenly, the SNB finds itself defending the value of its currency from a rush of new demand that has nothing to do with the trade value of Swiss francs but instead is about access to a good or service that is seeing a new high level of demand. In this case, the SNB can’t simply will away supply and demand – stronger demand for francs will drive up their price unless supply rises commensurately. So the SNB starts buying euros in sufficient amounts to stabilize their peg.

In other words, Chuck Norris actually had to punch that guy out.

The moral of the story? While Chuck Norris can vaporize currency speculation, he can’t stabilize large, exogenous changes in the exchange rate driven by supply and demand. Those require fisticuffs.

Does the evidence support this hypothesis? Well, here’s what Soltas says:

The big news was that, amid Europe’s  “bank jog” (the slow version of a bank run) and correspondingly large capital flows, the SNB’s holdings of foreign currencies expanded to 303 billion CHF in May from 238 billion in April.

I would say, yes, it does. While earlier inflows into Switzerland may have been based on attempts to invest in the exchange value of the currency, these current flows are not. Instead, European depositors seem eager to send their liquid wealth “jogging” out of euro-denominated accounts in search of the nearest non-euro, non-awful place to deposit money and, hey, look, is that Switzerland? The global capitol of secure bank deposits? Right next door? Don’t mind if I do! And just like that the SNB has to spend ~70b CHF to hold their peg.

On another, totally different note, your humble blogger would like to announce a couple of major personal events – firstly, your humble blogger is now married (if you’re reading, I love you, darling!), and secondly, that your humble blogger and the new spouse are up and relocating from the District of Columbia to the Del Ray neighborhood of Alexandria, VA. Hopefully, once settled I can resume blogging at a less erratic tempo; also, expect DC Metro-area commentary to have a new focus on VA in general and Alexandria in particular.

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