Why Switzerland is wreaking havoc in the global currency markets

This is how a currency peg ends. This is how a currency peg ends. Yes, with a bang, actually.

The Swiss National Bank (SNB) shocked markets on Thursday by announcing that it would no longer hold the value of the Swiss franc down at 1.2 per euro, although it would lower interest rates from -0.25 to -0.75 percent. Mayhem ensued. The Swiss franc immediately shot up as much as 39 percent against the euro, before settling at "only" up 17 percent on the day. This is basically the biggest single-day move for a rich country's currency, as economist David Zervos points out, in the last 40 years. And it's sent Switzerland's stock market down 10 percent, as its suddenly more expensive currency will cripple its exporters by making their goods more expensive abroad.

Now let's back up a minute. Why was Switzerland pushing its currency down, and why has it stopped now? Well, in four words, it's the euro crisis. Back in 2011, you see, what looked like the imminent end of the euro made people want to move their money to the safety of Swiss banks. It wasn't about the secrecy, though. It was the fact that Swiss banks use Swiss francs, and those wouldn't get devalued like, say, Italian euros would if the common currency broke apart. The problem, though, was that this flood of incoming money pushed Switzerland's currency up too much, over 40 percent in just a year. The Swiss franc got so expensive that Swiss exporters, who sell 56 percent of their goods to the EU, were becoming uncompetitive, and Swiss prices were starting to fall.

And then the SNB remembered that a central bank can always push its currency down just by printing more of it. So that's what it did. Even better, it told everybody that this was what it was doing. It said it would buy as many euros with newly-printed Swiss francs as it took to keep the Swiss franc from being worth more than 1.2 per euro. That meant that, for awhile, the SNB didn't actually have to do anything, since nobody wants to bet against somebody with infinite money.

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Further evidence of severe global deflationary pressure.