[frankthetank]

If it gets that bad in the land of the Swiss, then i hate to see what the rest of the world looks like! I'd stay put into this "situation" becomes a little more clearer. I think talk of immediate collaspe is premature, and we still do have some time to prepare physically and mentally.

You also have access to some of the finest chocolate makers (dark being my fav) which i'm still not sure how to deal with in the Post Peak World!

[thuja]

But haven't you heard Frank...we're reaching the true epic crisis of our times. Forget Peak Oil- PEAK CHOCOLATE!!!

Yes, apparently demand is coming close to dangerously outstripping supply as Cocoa farmers from tropicalcountries are being put to the test to supply an ever increasing voracious worldwide demand for chocolate. Can they do it? Or will the world be plunged into a chaos it can never escape...a world with increasingly expensive and rare, chocolate.

Perhaps if the Swiss can corner this incredibly precious market, they can provide a commodity that will keep them happy in their alpine retreats...forever.

[Ben_CH]

$this->bbcode_second_pass_quote('FoxV', '
')And I don't see a Mad Max world in the future, so banking will always have some value. However I would be very concerned with Switzerland's involvement in the Carry Trade (which is only slightly better than out right money printing in my opinion).

[FoxV]

$this->bbcode_second_pass_quote('Ben_CH', 'B')y the way, you seem to suffer at the common "swiss/swedish is the same" illness . This is wide spread in north american countries it looks like. Ok, ok, I don't know every country in the world too...

[FoxV]

$this->bbcode_second_pass_quote('Ben_CH', 'D')o you have a link why this is dangerous to an economy and who is in the game with this carry trade? Seems to be an interesting thing.

[MrBill]

Seriously, I will explain the mechanics behind the carry trade, but not now, watching Hollywood make a mockery out of CEE post cold war. How can one launch policy when only source of infotainment is false impression of world as seen on TV? Hmmm? In any case, Sweden and Switzerland both start with SW, but interest rates in Switzerland are below euro interest rates and interest rates in Sweden are above euro interest rates, so the SWimilarities SWtop there ; - ) But if you will sell me your land in Switzerland for SFR200,000 I will gladly give you SEK200,000 or even SKK200,000 if you insist?

[MOCKBA]

$this->bbcode_second_pass_quote('Ben_CH', '
')Ok, I know I live in a now nice country probably paradise. But with more than 600'000 arms in nearly every swiss male household....I'm not so sure. This is probably more than in the US (per capita).

[Ben_CH]

$this->bbcode_second_pass_quote('FoxV', '
')Here's an article about how the carry trade is bad for the global economy

[Ben_CH]

$this->bbcode_second_pass_quote('MrBill', ' ')But if you will sell me your land in Switzerland for SFR200,000 I will gladly give you SEK200,000 or even SKK200,000 if you insist?

[Ben_CH]

$this->bbcode_second_pass_quote('MOCKBA', '
') Come on, do you see any of your neighboors being a member of bicycle riding gang raining bullets on other neighboors?

[FoxV]

I don't know ben, it appears the more we scratch the surface here, the worse things get.

I'm actually surprised Switzerland is in such a state. I thought you would have much more natural resources to help things.

And now to hear the you have lost your gold backing, it doesn't sound good for a country supported by banking. One of the reason's for abandoning a gold standard is to allow the banks unrestricted money printing. Not a good sign at all

However I am looking forward to MrBill's explanation of the carry trade, because I found nothing that explains the doner side of things, just the problems to the recipient.

[coyote]

$this->bbcode_second_pass_quote('MOCKBA', 'S')witzerland managed to stay out of any European conflict I could remember.

[pedalling_faster]

i would say you're doing really well.

can you tell us some about the water supply ? annual precipitation ?

i remember switzerland as being beautiful and green (in the summer) with beautiful coins (i was a coin collector).

what kind of engineer ? sorry if you said & i missed it. there's a lot of investment capital for renewable energy, in Europe and the US.

do you guys get paid extra if you work overtime ?

[MrBill]

More on the carry trade later.

The point about Peak Oil, which is so disquieting, is that there will be no place for everyone to hide. There will be losers. They may look around and be upset about their lot in life and decide to take it out on others that are better off then them.

For a good glimpse at this type of mentality in action I can only recommend Ayn Rand’s ‘Atlas Shrugged’ written circa 1953 after she escaped from communism and moved to America. She had no illusions about collectivism. Her mantra was objective epistemicism, which boils down to personal responsibility. That did not make her any friends at the time when let us say the main stream was still flirting with socialism if not in name then in practice. If we throw enough money at any problem, we can make it disappear. A policy that has been discredited over the past 40-50 years to be sure due to best intentions and unintended consequences. But I digress.

So even if a sparsely populated country naturally endowed with natural resources and productive farmland could be found, that is no solution for 5/6th of the world’s population that is not lucky enough to live in such an idyllic place. Therefore, you will have to manage conflict. Armies or at least private security are not only expensive, but they also have to be fed, clothed and otherwise bribed not to turn on their hosts. A dilemma in a time of scarce resources and rationing of energy, commodities and other raw materials. Self sufficient, but vulnerable or part of a larger community with all its problems not least of which internal conflict and not self-sufficient. Neo nation states? I have to agree with Mockva. Internal harmony, i.e. homogenous societies, do have an advantage in times of stress.

You may argue that Europe is not the place to be, but if not, where will they all go? And when Europe, then better Switzerland for all the points I have already made. True democracy. Small Kantons. Politicians are closer to their constituents. People are more empowered. Fiscal conservatism. Believe it or not the fact that many men have been given military training they will work better against external threats and together to solve community problems. At least in principle they understand chain of command versus the rugged individual who thinks only of themself (witness the aftermath of Katerina and New Orleans). Homogenous. And as mentioned before IF the Shi’ite hits the fan, then economic migrants and asylum refugees will no longer be welcome. Period.

Clearly post peak oil any aggressor would have many problems over running Switzerland. Not the least collaboration. It is hard to me to imagine a world with shrinking hydrocarbon resources mounting for some reason or another an attack on Switzerland? Why? What would Italy and France or Germany have in common that would make them single out Switzerland? The logic is lost on me? Unless you subscribe to a view that the future will be roving gangs, but I think again that the nation state, community, small Kantonale will be best placed to defend the interests of the community over the aggressors. By that time with 9-10 billion people, the world will be a Hell on earth, so survival will belong to those communities that pull together not the rugged individual.

Likely in the transition period is when one society or another appears to be coping better than another and therefore attracts jealous neighbors and or economic migrants.

RE food self-sufficiency. There is no doubt that many countries import more food than they need to. Even without oil, we will not forget many of the lessons learnt in the past 50-100 years about food production and preservation. Individuals, companies and countries will be trying to cope with the future as well. If they have wine or bread or vegetables to sell they will. A lack of oil will not disrupt commerce, it will make commerce more difficult. What consumes a tiny fraction of a worker’s income today, may consume a large portion of his or her sporadic income in the future (i.e. declining living standards and negative productivity per worker). But that does not mean we as a society will forget how to feed ourselves. We may only eat tomatoes in season or have to learn how to can them or in worse case we may have to hoard from the hungry grasshoppers. I guess it will not be fun any way you look at it? Who said the future would look like our immediate past?

So Canada, Switzerland, Europe or wherever the transition to a world with less oil and fewer natural resources will be challenging on every level. No country will thrive while others struggle. But some will cope better than others. If you start in a strong place, a creditor nation with competitive advantages, you start in an advantageous place for what is to come. It does not guarantee your future from every eventuality not the least of which is mob violence and or resource wars.

[MrBill]

$this->bbcode_second_pass_quote('pedalling_faster', 'i') would say you're doing really well.

can you tell us some about the water supply ? annual precipitation ?

i remember switzerland as being beautiful and green (in the summer) with beautiful coins (i was a coin collector).

what kind of engineer ? sorry if you said & i missed it. there's a lot of investment capital for renewable energy, in Europe and the US.

do you guys get paid extra if you work overtime ?

[MrBill]

$this->bbcode_second_pass_quote('', 'A')nd I don't see a Mad Max world in the future, so banking will always have some value. However I would be very concerned with Switzerland's involvement in the Carry Trade (which is only slightly better than out right money printing in my opinion).

From what I understand of the Carry Trade, it provides a big economic boost to every one involved. However when the carry trade ends, it's also huge problem for everyone involved (except the Traders actually carrying the money), creating huge inflation in the source country and a cash crunch/market sell off in the reciepeint country. For a country highly supported by banking, this can be a real problem

[drew]

Thanks, Mr Bill. Not that I was asking!

Seriously, though, I only had a rudimentary understanding of the carry trade.

Thanks for filling in some details.

My brain feels better now!

Drew

[FoxV]

ok, I certainly understand how the risk to the debtor nation is much greater than the lending nation.

but when a carry trade unwinds, it means a drop in demand for the lending nation, as well as a surge of cash flowing back in. I would have thought this would lead to a "double whammie" on a currency. Not only does value drop from lower demand, but also drops from a rising money supply.

The money could be dumped back into the economy of the lending nation, but this would not change anything (as inflation would rise and currency would still drop).

The other solution is to send the money back out again but for foreigners to want it, interest rates would still have to be low. This would run contradictory to the economics that lead to a rise in interest that caused the carry trade to unwind in the first place. Here again the risk is inflation or currency devaluation.

I still don't see how an unwinding carry trade cannot lead to a currency or inflation problem in the lending nation.

I think one saving grace may be that when the USD falls apart, any problems with the Swiss Franc may seem trivial and so foreigners may still want to grab the Swiss Franc as a "Any port in the storm" type alternative.

[pedalling_faster]

it's kind of like borrowing $20K on your credit card, if you're planning to spend the rest of your life living underground. borrow the money and split.

off topic from the original post. but as far as the US government is concerned, they're borrowing the money knowing that they'll be paying it back in monopoly money.

and seizing control of $10 Trillion worth of oil, in Iraq.

not a bad policy for survival, but a grave departure from the "america is a shining beacon of democracy" stuff they teach us in elementary school.

[MrBill]

Whenever I do not understand something, I always go back and look at the actual cash flows. That is why the income or cash flow statement often sheds more light on a company's performance than the balance sheet.

Let's keep the assumptions simple, and the math, too.

Primary deposit CHF 1.0 mio @ 1% p.a.
CHF 1-year money market rate 1.65% p.a.
USD 1-year LIBOR rate 5.17%

Assume Swiss bank relends @ 2% p.a.
Loan CHF 1.0 mio @ 2% p.a.
Principle CHF 1.0 mio
Interest CHF 20.000
P + I = CHF 1.020.000

FX USD/CHF 1.3000 (no bid offer spread for this example)
One year forward rate is the interest rate difference between USD and CHF = 5.17% - 1.65% = 3.52% I/R Differential
Therefore, spot USDCHF = 1.3000, and 1-year forward outright = 1.3000/1.0352 = 1.2558

Sell 1.000.000 CHF, buy 769.230 USD (net outflow from Switzerland, demand for dollars)
Buy $769.230 (807 pieces)* of 1-yr UST @ $95.28 with a YTM of 4.72% that mature at par = $100 in one year
*$769.230/.9528=$807.336

Sell 807 pieces @ $100
Receive $807.000 less purchase price = $37.770 profit in dollars on tbills (the $336 you have to discount or use current account interest rate).
$807.336 x 1.2558 = CHF 1.013.852
Sell USD, buy CHF 1.020.000 @ 1.2558 = $812.231 (outflow from dollars into Swizterland creating demand for Swiss franc).
CHF 1.020.000 - 1.013.852 = CHF 6148 loss on carry trade*

*This is because the one year money market rate at 5.17% is higher than the 4.72% yield on the UST. So you borrow at 2.0% and lend at 4.72% or 2.72%, but the forward FX swap imputes 5.17% - 1.65% = 3.52%, for a negative 0.80% carry spread.

As I said the only way to do a currency carry trade is to accept FX risk, which in this case means to expect the exchange rate between the dollar and the Swiss franc to be more than 1.2558 in one year's time based on a spot rate today of 1.3000. In otherwords you are betting that the dollar will weaken relative to the franc despite a positive interest rate differential.


So Switzerland is no worse off. The primary deposits at 1% were relent at 2% instead of slopping around in the domestic money market at 1.65%. The borrrower repaid the principle and the interest. The CHF 1 mio that was sold against dollars was repurchased, plus a little extra to cover the interest bill. The borrower had an effective borrowing rate of 2.0% which they invested at 4.72% in US treasury bills or 2.72% carry. But in this case the borrower ran no interest rate gap risk, and no FX risk, as I used a covered forward FX swap deal to close the currency risk, so the trade was unprofitable as the investor bought US treasury bills at 4.72% but paid money market rates of 5.17% (implied in the FX swap).**

**Which tells me that either US treasury bills or one year LIBOR is too expensive right now? Meanwhile banks would be buying the one year forward, while taking deposits in CHF/giving deposits in USD to bring the spread back into line.

Technically, Switzerland is deprived of those funds for its own domestic use. However, if Switzerland was running a deficit and needed those funds then domestic interest rates would rise from 1.65% to something higher further closing the carry trade window. The difference the bank earned on the loan 2% less one percent for the primary deposit is of course taxable income depending on where that bank is domiciled, but theoretically a plus for Switzerland if their banks earn interest or fee income.

The US has found an external source of funds to close its current account gap without resoprting to higher domestic interest rates to attract funding. This would be fine if the US did not consume 70% of the world's current account savings with no end in sight? ; - )