Alright, wall of text:
This is not an accurate depiction of our economic and monetary system but it is my attempt at vulgarisation, given my own understanding of it, as an outsider to the relevant fields. It is very surface level, we can dive deeper in every aspects of it, but this is how I manage to keep a higher view of how things work and what global blind spots to expect in my investing theses. I welcome any correction or complement:
The answer is “it’s complicated” and it is possible even experts on the system do not truly know, or that the ones who know won’t share (because they have ways to benefit from it). I have yet to see a comprehensive explanation of why inflation was low from 2008 onward, as central banks were increasing their balance sheets and low to negative interest rates poured credit into the system, but inflation manifested all of a sudden now, instead. I have inklings and ideas but many experts, including the FED, seem to have been surprised by the current inflation even though it could be explained in retrospect. The system is complex.
I would say there are two markets: an international currencies market, which defines for how much of another currency a specific currency can trade and a domestic currency market, where the currency actually gets traded for goods. The US dollar, being traded globally on a large scale is somewhat of an exception in this framing.
The global market defines the strength of the currency. The swiss franc is a strong currency because people, including foreigners and institutions, want to hold it, and its supply is limited. Currencies often don’t trade or are stored in the shape of hard currency, though. Government issued bonds, for example, are a way to get exposure to a certain currency without buying actual coins/storing them on a bank account.
That means that as long as the rest of the world perceives our government as being responsible with its debt, the swiss franc should hold a resilient status of a reserve currency and that has a stabilizing effect on its value in regards to other currencies.
To note, too, is that the whole system is relative and not absolute: if other currencies perform worse than the swiss franc, the value of the swiss franc against those currencies will strengthen without the need for the swiss economy to perform better or for its supply to change.
The domestic market is where the supply and demand of goods and local currency will mostly show as inflation. Two parameters must be considered: the supply of money and the speed at which it circulates. If I trade mostly with the local shops in my village, and that we have CHF 10K circulating among us all but that it gets spent again as soon as someone uses part of them, those 10K can actually allow us to conduct all of our trades and it would support much more activity than if 9K out of those 10K were instead stored in my cellar and only 1K was circulating.
Money creation doesn’t necessarily impact the circulating money supply: if the money stays on balance sheets and doesn’t get spent, it won’t be circulating and won’t have a big impact on the economy.
Which leads to the complications: money, and value, can be stored. Central banks have the power to create and destroy money. Banks have a limited, but quite big, ability to create and destroy credit. Bonds are a type of credit: it is an obligation by a certain party to provide a certain amount of money/credit to the bearer of the bond. If I hold a debt obligation by the ZKB for CHF 1K and everybody acknowledges that the ZKB is going to make good on that obligation, then I can use that debt obligation much in the same way I could use actual money: people/businesses would accept that obligation at its value of 1K, or for a small discount accounting for the lesser liquidity it has, and that would actually increase the amount of “currency” (as of “means of exchange”) circulating. For all practical purposes, and as far as I understand, for you and me, credit has the same effect than money on the economy.
Where it becomes more complex is that the whole system is interconnected, and it involves trust. If the full faith and credit of the swiss government is still intact, but that people expect the ZKB to maybe not be able to make good on its issued debt, money, actual CHFs, would normally not be affected but credit issued by the ZKB would. The global supply of “means of exchange” would be affected even though the actual amount of CHF circulating would not.
Money and credit can be stored, not all of it circulates. Central banks buy, sell and store foreign currencies in order to affect the exchange rate of their own currency, in an effort to support their own economy, institutions buy and store money and credit for various purposes and very wealthy individuals might not have all of the value of their wealth circulating at once. If you give CHF 1M to a billionaire, chances are the effects on “means of exchange” supply and inflation would be very minor, if any. If you give that same CHF 1M to a thousand people living below the poverty theshold, chances are that 1M would quickly find its way into circulating means of exchanges. It’s more complex than that because money can be recaptured (money has a way to find its way from the pockets of the people who spend it to those of those who have wealth already and are more likely to store it).
On top of that, the domestic and foreign market are connected. If the price of a table in the US, in USD, is significantly cheaper than the price at which I could get that same table paying in USD but in Switzerland, I might be willing to try and get that US table to me instead of the one available in Switzerland. My operation would have an effect on the US domestic market (the table would be bought on their market) but would result from a relative weakness of the USD on the international markets. The value of a dollar on the domestic market (inflation) is also connected to the strength of the dollar on the international markets. Those operations bear costs, so prices are never 100% aligned but, globally, on a very high perspective purpose, the actual price of a table, for me, shouldn’t depend on which currency I buy it in. If it is, that is a market inefficiency (they exist, but not on a scale easy to exploit by you and me) and if it is significant enough, there are institutions/people who have enough of an incentive to profit from it. That’s arbitrage: they would make it so that the price of the table in CHF, and the price of the same table bought in USD first exchanged from CHF would align and they pocket the difference.
What all that means is that money creation/destruction is but one small part of the inflation/strength of the currency on the international markets puzzle. At the core of the system is trust and it has a lot of inertia: if people are used for 1 CHF to be worth a certain amount of things (including a foreign currency), the simple fact that they are used to it would help anchor that price/value.
One of the main effects of a bank run, or of a high wave of inflation, is to put that trust into question. Prices aren’t anchored anymore and bigger changes can happen, the value of currencies can realign, up to then dominant economies can be toppled by rising and more dynamic ones. That’s why central banks react that strongly when trust seems to be at stake: if they can cut the deanchoring process short, their work is done. That will work for as long as people trust the specific central bank, currency and government faith and credit. Switzerland enjoys a very high amount of trust in each of these, hence the inertia sustaining the system is very high. There’s a reason for it: our government is maintaining reasonable spending levels, our debt levels are low, our political system is stable, we have a high value added economy and a social framework favourable to wealth creation. It will continue to be so as long as we keep striving to have good work ethics, sustain a culture of discussion and political consensus and provide the world with efficient ideas and products.
Edit: the short answer to the remark of @Mokona I have quoted is then: the USD is currently loosing strength in regards to the CHF in part because people expect it to be worth less in the future.
Trust in the FED’s ability to contain inflation is at its core, which is partly why the USD often strengthens when the FED raises rates and would weaken if it’s perceived they’re not doing enough.
The risk-free interest rate one can get on the USD vs the CHF is another, more mechanical, reason for those expectations (I will get more USD in the future than CHF if I store them in a perceived risk free vehicle, hence that bigger amount of USD I will get in the future should be worth the same as the lesser amount of CHF I will get bearing the same perceived level of risk, hence the USD should loose a related amount of value in regards to the CHF).
It’s a lot more usefull than an answer with just " you don’t understand, go read something" without telling you what is that “something”…
