The Swiss Cost Of Living Is Too Low

At least that’s the claim of the US government.

Today, the US government accused Switzerland of artificially depressing the value of its currency in the foreign exchange market. This is rather odd, as Switzerland is generally considered to be the country with the strongest currency in the entire world. Since 1971, the value of the Swiss franc has soared from 23 cents to $1.12:

The US government might argue that this is the nominal exchange rate, and what matters is the real exchange rate. I agree. But most measures of the real exchange rate (such as The Economist’s’ Big Mac index”), also show the Swiss franc to be the strongest currency in the world. The “real exchange rate” is just a fancy term for the relative cost of living. So to put this claim in terms that average people can understand, the US government is claiming that the cost of living in Switzerland is being held too low. Have you ever taken a vacation is Switzerland?

If you want to understand the US claim in graphical terms, look at the Economist’s Big Mac index graph. The Swiss franc is the blue dot on the far right, 21% “overvalued” versus the dollar. The US is essentially claiming that the Swiss have manipulated that dot too far to the left.  No, I’m not joking.

The US government might argue that while Switzerland has the strongest currency in the world, it should be even stronger. But what evidence do we have for this claim? The Treasury Department would cite Switzerland’s large current account surplus. But a current account surplus does not mean a currency is overvalued undervalued. Many American states run current account surpluses with other states. Does that mean the Massachusetts dollar is undervalued relative to the Texas dollar? Switzerland’s current account (CA) surplus is merely an indication that the Swiss save more than they invest.

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