Why the Swiss are idiots and what the US should do

The Swiss Franc (CHF) used to be the world's trusted currency.  It was seen as a safe haven and as good as gold.  When there were problems with the euro, people would buy the franc.  The problem was that as the franc appreciated in value, it made their exporters less competitive.

Here is what they did:  They declared war on their own currency, instantaneously reducing its value 10% on Sept. 6, 2011, and set the peg of 1.20 euros/franc floor (or 0.833 francs/euro ceiling).  In order to keep the value of the franc from increasing again, they issue more francs and buy up euros.  The euros, in turn, get recycled into safe German government bonds.  The problem is that the euro has dramatically decreased in value against the dollar since the Swiss bought them.  So the way to think about the franc is that it is a share in a giant hedge fund invested in German bonds.  But the value of the shares has decreased over the last year.  The CHF was worth as much as $1.37 on Aug. 10, 2011, and $1.27 on Sept 5, 2011, before dropping to $1.16 on Sept 6.  Now it is worth only $1.02, only slightly more than the Australian dollar.  And it will probably drop more.

What they should have done:  Not announced any peg, but instead set targets.  As long as the franc was still above the target level, intervene in the FX market and buy euros, the same as before. But instead selling the euros to buy gold.  This would have keep the value of the franc down in nominal terms, to help their exporters, but kept the real value of it up, since it is backed by gold, not the German government.

So the result is that the Swiss franc is no longer a special currency, for better or worse.  The replacement? Believe it or not, the US dollar.  What does the dollar have going for it?  First, it is at least partially indirectly backed by gold.  On the Fed balance sheet is an entry for "Gold stock", showing a balance of 11,041 million dollars. The gold is valued at $42/ounce, when it is actually worth about $1600/ounces.  So multiply it by 40 to get the actual value, which is about $440 billion.  Second, the Fed isn't trying to weaken the value of the dollar.  So the dollar is actually increasing in value.  Which is good if you are an investor but bad if you are an exporter.

What the Fed should do:  Issue more dollars.  The world, for whatever reason, likes the dollar.  Something the US does well is print money.  But the question is, what do we do with the "wealth" that has been created?  Extend unemployment again?  (Joke.)  Easy, buy more gold.  Set a gold target that increases 5% (or whatever) per year.  The Fed should set up a unit that intervenes in the foreign currency markets in an inobtrusive manner as possible, by buying Euros and Yen.  And then selling those currencies and buying gold.  It would be a way of putting the US dollar back on the gold exchange, partially, at least.  If the price increases a lot more than the target, sell some gold.  It would be like an Open Market Operation, but instead of buying and selling government bonds, buy and sell gold.