1  Mainstream finance and macroeconomics has, then, followed firmly in the footsteps of giants, part Popperian, part Newtonian. It has been heavily indebted, intellectually, to Classical physics. That has led some to dub the dominant economic paradigm “econo-physics” (Mirowski (1989)). Less kindly, some have described economics as suffering from physics-envy. Assessing the Pros and Cons  Despite recent criticism, which has come thick and fast, it is important not to overlook the benefits from having followed this path. One benefit, shared with theoretical physics, is that economic theory has well-defined foundations. There are fewer “free”, or undefined, parameters floating around the model. Nobel 2  Laureate Robert Lucas said “beware of economists bearing free parameters”. He was right. A theory of everything is a theory of nothing. The advantages do not stop there. On the assumption agents’ behaviour is representative – it broadly mirrors the average person’s – these models of micro-level behaviour can be simply-summed to replicate macro-economic behaviour. The individual is, in effect, a shrunken replica of the economy as a whole. These macro-economic models are, in the jargon, micro-founded – that is, constructed bottom-up from optimising, micro-economic foundations. These advantages carry across into the policy sphere. If the assumptions underlying these models are valid, then the behavioural rules from which they are derived will be unaffected by changes in the prevailing policy regime. These models are then a robust test-bed for policy analysis. They are, in economists’ jargon, immune to the Lucas critique (Lucas (1976)).

Unsecured loans, in particular, are rising substantially. During phases of favourable economic development, there is greater willingness to grant unsecured loans. This was the case in 1999, when the economy found itself in a similarly robust state. There is a long-term correlation between loan volume and the M3 aggregate. Loan development typically lags behind the development of money supply. Monetary aggregates have grown only moderately for the past three years. The M3 monetary aggregate is currently growing at a modest 2%, while M1 and M2 are even registering a decline. The measured development of the monetary aggregates suggests a slowdown in lending. The development of the Swiss franc attracted considerable attention as it has weakened vis-à-vis the euro since the beginning of the year, although it has firmed against the US dollar. To gauge the effects of exchange rates on the economy, we need to make use of the inflation-adjusted exchange rate that is also weighted to take account of the importance of individual trading partners. Measured by this real, effective exchange rate, the Swiss franc today is at the same level as it was in 2000. In what way do exchange rate developments enter into our decision-making process? The exchange rate is important to the extent that it influences inflation, either directly via the prices of imported goods or indirectly via the business cycle. Volatility of the Swiss franc against the euro has been negligible as of late. This relative calm should not, however, deceive us. It is not necessarily going to last.