Inflation has been the current song that waves in our ears like a constant backdrop. It has struck almost everywhere around the globe after the coronavirus pandemic and the war that showed up between Russia and Ukraine. At the time of this blog, many western countries have been seen to record the highest inflation rate in this century. You’ve probably known that inflation is the smoke right now. But how about we tell you that there is a country that has escaped this crisis of inflation, not just this year but in the past decade? Yes, it’s awesomely surprising. Which country is it, and how do they get there? The answer is all in today’s blog. So, sit back and relax as you enjoy this blog.
The confederation of Switzerland has seen five times lower inflation compared to its neighbouring western countries. It seems like the Swiss confederation is in a world different from the one that we know. Inflation has been on the negative section of the graph for this country for the past decades. And at times when they record inflation, it has to fight a complex process to lower the inflation rate to one per cent. In other words, this country has been facing deflation over the last ten years. This is jaw-dropping news for most people and comes with burning questions that demand answers.
To see that despite the inflation ravaging the world, the price continues to fall in a country could be called a miracle. Is it a miracle? Or the Swiss central bank doesn’t print more money like other banks? Let’s look at the facts. The Swiss central bank has printed more francs by over sixty per cent than the European central banks over the last ten years. This tells us that they printed more money, which could have landed them in inflation. But why is this not happening? What are the Swiss doing differently from other countries to get this advantage?
Switzerland’s Escape From Current Inflation
As you might have known already, the central bank of any country is responsible for printing new money, controlling inflation and moderating interest rates. The central bank is just like private businesses that have debts, savings, properties, and profits.
This was glaring in the record of over 1.6 billion dollars in profit by the European central bank in 2020. That’s to tell you that central banks also make a profit. The same happened with the Swiss central bank. They do not only make a profit, but they are also listed on the stock market for people to invest in and get dividends.
The central bank works just like a bank that makes a profit from loans and investments. They lend newly printed money to the government and commercial banks, and the interest they get from it makes a profit. This was how this money got across to the hands of citizens in the country.
Why are we saying all this? Because it helps us understand better what the Swiss central bank is doing to beat inflation at its game.
For a central bank, the money they create is their liability, and the one they lend out and invest is what makes an asset. Supposing that a country printed 8 trillion dollars throughout a year and lent 4 trillion and 3 trillion to the government and conventional banks, respectively, there would still be 1 trillion left from the printed cash.
So, what happens to this money and where does it go? This takes us to the last means by which the central bank can get the issued money to circulate the economy. This includes buying stocks, gold and other valuable assets and usually ends up as the central bank reserves. This third strategy is critical in managing the rate of inflation and foreign exchange.
This is how it works: at the outcast of inflation or dropping exchange rate, the central bank can go to their reserve and sell out their assets in place of their currency. That way, the amount of money in circulation would be reduced, and inflation and currency devaluation would be controlled. We can say that the central bank reserve is the golden box of power that allows the central bank to keep the value of its currency stable and secure.
Now we have reached the Swiss anti-inflation secret spot. The Swiss have 91.5% of its entire currency in its central bank reserves. This means that more than ninety per cent of Swiss francs are backed by valuable assets like gold, stocks, and even foreign currencies. In comparison, the European central bank only has 17% of its money backed by its reserves. This alone has explained why we see the big differences when it comes to inflation and currency exchange. Switzerland has enough weapons to fight the economic battle better than anyone else, and thanks to the profits from their investment, the reserve will continue to grow yearly.
What’s more? Low taxes is another subordinate that aids them in winning the game against inflation. Investors and workers are now moving in to benefit from Switzerland’s low tax rate and exchange rate advantage. In short, the victory of Switzerland against inflation is driven by the nice proportion and growth of its central bank reserve and the economic benefit of low taxes that attracts companies and highly qualified workers.
If you love this blog, please hit the like button and share it for others to benefit from the Swiss anti-inflation intelligence. We will always be grateful. Remember to signup to our newsletter to not miss out on hints and tips to improve your financial life as we dish them out. In your opinion, is deflation in Switzerland better than stable inflation some other countries are working towards? We’d love to have your answer in the comment section.
Recommended books for further reading:
- Intelligent Investor: The Definitive Book on Value Investing – A Book of Practical Counsel
- The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns (Little Books. Big Profits
- Rich Dad’s Guide to Investing: What the Rich Invest in, That the Poor and the Middle Class Do Not!
- How to Make Money in Stocks: A Winning System In Good Times And Bad
- Investing QuickStart Guide: The Simplified Beginner’s Guide to Successfully Navigating the Stock Market, Growing Your Wealth & Creating a Secure Financial Future
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