[vegabook]

Seigniorage, the ability of an institution to print a worthless piece of paper that other people believe is worth something, is a very valuable power, one which is earned over decades, even centuries, of prudent policy. You don't want to mess with this by printing billions, at the risk of destroying your reputation (resulting in inflation, and/or speculation against your currency, as others have pointed out).

More prosaically, also, every time the SNB prints a swiss franc, that piece of paper is marked as a liability on its balance sheet (and the corresponding euro amount purchased is the asset). So they optically "lose money" if their assets decline in value versus their liabilities, as happened last week. Of course, they could then print more CHF to cover the loss, but then we're back to my first point.

Finally, and as an aside, the biggest loser in this whole thing was of course the SNB itself, at least on paper. It has CHF liabilities and foreign currency (and gold) assets to the tune of 500bn dollars. On paper then that was a 75bn USD loss. Conversely, and this is worth keeping in mind amidst the frenzy of headlines about broker losses, remember that markets must net off, so all those swiss francs that the SNB sold to defend against appreciation, were held by the market (individuals, brokers, funds, corporates, other governments). Thus it is likely that there are some huge winners out there, whose net wins are greater than the net losses to the tune of about 200bn * 15% (the amount that they intervened in the past 2 years * the percentage move).

[anonymousDan]

Just trying to understand why when the SNB prints CHF it becomes a liability. Is it because whoever they sell it to (in return for some asset such as Euros) can at least in theory redeem the CHF as gold?

[vegabook]

Like any liability of any entity, when you possess a swiss franc, you have a claim against the assets of the SNB. The assets of the SNB include a lot of gold and many foreign currencies. These assets have been accumulated in various ways, but are generally the foreign assets of the country in question (held on behalf of the people of the country by their central bank), plus the accumulated profits of the central bank over the years on this capital. Crucially however, just like "goodwill" in a company balance sheet (often a much larger ledger entry than any tangible assets), there is a large proportion of the value of the issuer's paper (be it equity or in this case, money) that is made up of intangible assets. Those intangibles essentially amount to the credibility of the entity, that is, the fact that other people believe that the piece of paper that it issues has value. Thus you have a claim against some of their assets, yes, but you're also hoping, just like with equity, that the value of the goodwill stays high (similarly for GOOG, AAPL or FB or any other company). The value of the goodwill is determined by the strategy and actions of the entity being seen as sound, and ultimately profitable, by the market.

Long story short, I don't personally know of any central banks who explicitly promise gold back against their liabilities anymore (this disappeared at Bretton Woods). Thus your claim is (mostly) on the credibility (goodwill) of the bank which is highly dependent on it not issuing too much paper.

As far as your claim on the tangible assets is concerned (the foreign currencies and gold), you will not be able to walk into the SNB with a 100CHF note and ask for the tangible share of what that represents. In practise, if the CHF loses value, the SNB will (amongst other measures such as raising interest rates and trying to put pressure on its government to spend less), protect your 100 CHF by selling its foreign currencies and gold into the market, "defending" your asset. That's how your claim on the tangibles works out in practise: the assets are paid back out to the market if there is pressure on the currency. Of course, again, only a small portion of the value of the CHF will be backed by gold and FX. The rest of the value comes from the fact that it is accepted by merchants and people in exchange for real goods and services. That's goodwill, otherwise known as "credibility" in monetary economics.