Yesterday the markets were stunned when the Swiss National Bank reversed its official policy of pegging the value of the Swiss Franc against the Euro.  The value of the Franc vs. the Euro spiked 30% higher virtually immediately; much-maligned gold was up over $20/oz.  Today reports are coming out of several large bankruptcies associated with foreign exchange.  One report from CNBC relates:

Foreign exchange broker Alpari UK announced Friday that it had entered insolvency following the Swiss National Bank’s (SNB) shock decision to drop its three-year-old peg of 1.20 Swiss francs per euro.

“The recent move on the Swiss franc caused by the Swiss National Bank’s unexpected policy reversal of capping the Swiss franc against the euro has resulted in exceptional volatility and extreme lack of liquidity,” Alpari UK said in a statement.

“This has resulted in the majority of clients sustaining losses which has exceeded their account equity. Where a client cannot cover this loss, it is passed on to us.”

Long-term readers of this blog know that I am very critical of the Fed’s monetary policy; but not just the Fed–the entire central bank monetary system of false monetary signals endangers the world’s economy.  We often hear discussion of the worries of inflation, and we hear counters that there is no inflation (yet) so there are no worries with central bank machinations.  But this public concern (which is valid) is small compared to the attendant capital misallocation that goes with monetary manipulation.  Today’s market turmoil is reflective of this.  Effectively, the central banks have telegraphed to leveraged speculators that “you are free to make one-way bets–we have the other side of the trade.”  They have encouraged this speculation–perhaps not intentionally, but any serious financial player sees the opportunity.  The problem is the central bank cannot continue the policies forever, and what happens when the one-way bets need to be unwound?  Well, we’re seeing the result today.

This isn’t the only place this is happening; the Swiss experiment is likely small compared to the leveraged speculators’ shorting of the Yen and buying dollars right now.  For now, its guaranteed money.  It’s guaranteed–until its not.  When the inevitable financial crisis occurs, capitalism will once again be blamed, when the heart of the problem is monetary disorder caused by central planning central banks–of which the Fed is the big gorilla.

EDIT 19 Jan:

The WSJ seems to agree with me in an editorial today:

All this is the inevitable consequence of the extraordinary volatility in world currency markets, especially in what economist Robert Mundell once called the most important price in the world—the dollar-euro exchange rate. The devaluation agenda among central banks hoping to grow via exports is shaking the global monetary system, with sometimes nasty surprises.