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The Keynesian PhD Brigade Strikes Again: Sweden’s Riksbank Joins The ZIRP Mania
Submitted by David Stockman via Contra Corner blog,
Folks, it’s a tyranny of the PhDs. Recently the central bank of Sweden was subject to a withering tirade by that oracle of Keynesian rubbish, professor Paul Krugman, who accused it of “sado-monetarism” for leaving the Swedish economy exposed to the mythical economic disease of “deflation”.
So the Riksbank threw caution to the wind, and a few months ago joined the global central bank plunge into ZIRP and promised to ladle out free money until at least 2016. To leave no doubt about its intentions, it is currently cranking up plans for “direct lending”, “asset purchases”, negative interest rates (N-ZIRP) and the rest of the recently invented central bankers’ voodoo kit. Anything to achieve its sacred 2% inflation target!
So still another central bank has been infected by the 2% inflation shibboleth—-a folly the greatest central banker of our era dispatched recently with a single sentence:
Mr. Volcker,who believes the Fed’s main goal is to defend the dollar’s stability, said he doesn’t even understand why the Fed adopted a 2% target for inflation. He asked, “Do we want prices to double every generation?”
Yes, today’s Keynesian central bankers don’t particularly care what happens in the next 30 years or even 30 months. It’s all about the noise-ridden “in-coming” data and whether the gap between actual production and employment, one the one hand, and a theoretical figment called full employment or “potential” GDP, on the other, has been closed.
It is downright amazing that the $75 trillion global economy is in thrall to the stupid math models of a couple of hundred PhDs. And these so-called DSGE models (dynamic stochastic general equilibrium) are, indeed, just plain stupid.
Not a single major economy in the world is a closed system. Nor is the capacity to produce iron ore, petroleum liquids, sheet steel, autos, machine tools, solar panels, networking gear, server farms, e-commerce order fulfillment, warehousing services, quick-serve restaurant meals, shopping boutiques, violin lessons or yoga classes fixed and measureable. Instead, it is a giant, swirling global flux driven by billions of prices and competitive dynamics that continuously bring new capacity into being, put old and obsolete capacity out to pasture and stretch, bend and extend existing “capacity” in ways that are too deep in the economic weeds to observe, measure or manage.
Likewise, the other component of the DSGE—so-called “aggregate demand”—-is also a fairy tale. That is, “spending”, as it is computed in the Keynesian GDP accounts, and then spit back by the DSGE models which pretend to “forecast” it, is a function of either income or fiat credit.
In a stable, productive and honest economic system, spending always and everywhere comes from income. Workers earn incomes through the act of production, and then “spend” the major part of it on their current cost of living and save or pay taxes with the rest.
Likewise, businesses distribute some of their net income or profits to shareholders/owners and then reinvest the rest—along with newly raised capital obtained from household savers. Government’s also “spend” a fair amount on goods, services and transfer payments, but obtain the financing via levies on the pre-tax incomes of households and businesses.
And that’s all there is; there ain’t no more in an honest free market economic system. Investment spending is obtained from current savers; debt is one form by which savings are channeled to investors along with equities and various hybrids. Household consumption spending—the famous 70% of GDP—comes from the disbursement of labor and capital incomes to these units; and, yes, when governments run a deficit to finance their spending in an honest system, they tap the savings pool in competition with other investors.
It goes without saying, of course, that in an honest economic system there could theoretically be a lot of debt—–that is, if households were inclined or motivated by high interest rates to save a larger portion of their incomes. The latter increment to the pre-existing savings pool, in turn, could be borrowed by businesses or governments to augment their own spending at higher levels than could otherwise be financed by post-dividend profits or tax inflows, respectively.
An honest “high debt” economy, of course, would reflect the market-clearing price of savings and debt. And, most likely, given human propensity to prefer a bird in the hand to one in the bush, it would mean a high interest rate system—-an arrangement that in and of itself would tend to curtail the level of debt.
Indeed, as in almost everything else in economics, high prices (of interest) are the best cure for high debt. But then we come to “fiat credit”—-the kind of debt that is manufactured out of thin air by central banks when they purchase existing financial securities—mainly government notes.
Despite all of the gussied-up theories about the function and theory of central banks, the only thing they really do is introduce a deadly economic virus into the system. Namely, debt that is not funded by savings.
Needless to say, the more central banks hit the “print” button, the more the fiat credit disease flourishes, and the greater the distortions in the financial system. Central bank created fiat credit is inherently fraudulent because it amounts to “something for nothing”. And, as a practical matter, it causes debt to be underpriced because increasing demands for its issuance do not need to be greenlighted by savers asking for high interest rates in order to defer current spending.
Instead, it is greenlighted by monetary central planners who are inherently prone to an occupational disease. Namely, the unfounded belief that they can generate higher societal growth and wealth by keeping interest rates persistently and systematically below free market clearing levels.
Yes, there is an argument that private fractional reserve banks can create fiat credit, too. But what they really do is more in the nature of “maturity transformation”, which means they turn short-term liquid deposits into long-term, relatively illiquid loans. Get rid of deposit insurance, the Fed discount window and the legal shield against fraud suits—–and fiat credit out of the private banking system would not get too far. The high rollers who went all-in making loans and thereby generating “new” deposits would either crash land in insolvency eventually from bad loans; or they would be cut-off at the pass by real savers, who would take there deposits to safer and sounder institutions.
In any event, the artificial boost to credit availability and “growth” in the Keynesian GDP accounts that results from ever increasing amounts of central bank manufactured fiat credit is a one time parlor trick. At length and inevitably, it is stopped cold by the limits of “peak debt”.
Suffice it to say, that almost everywhere on the planet that condition has now been reached. The mountainous rise of total credit outstanding—household, business,government and finance— in the US economy since 1971 is not remarkable merely owing to its magnitude, as shown below.
The more relevant point is that the bottom left of the graph represented 150% of GDP—-an aggregate leverage ratio that had prevailed for a century since 1870; and which reflected either the absence of a central bank (before 1914) or the operation of the early Fed which, other than during wartime, was run by people who knew better than to sit around printing money and pretending that they were the masters of the national economy.
At the present time, that ratio is at 350% of national income, and that’s “peak debt” for all practical purposes. Try as it might—–and expanding the Fed’s balance sheet by 5X since September 2008 amounts to a whole lot of trying—the Fed has been able to only inch total credit outstanding upwards by hardly 2% per year compared to double digit rates which prevailed prior to 2008. That is, when central bankers were indulging in their one-time take-out of the economy’s natural debt service capacity against income.
In short, what the recent flattening trend in the chart below really means is that the days of turbo-charging the GDP computations via fiat credit financed “spending” are over. We are back to income based spending. And that condition surely describes most of the rest of the world–but especially Japan and Europe. 
In short, peak debt means that the one-time Keynesian parlor trick of fiat credit fueled GDP growth is over and done. Accordingly, actual “aggregate demand” today is nothing more or less than the spending that can be extracted from current production; and its particular mix reflects the manner in which the income from current production is whacked-up by households. business and government.
So what you see is what you get when it comes to “aggregate demand”. State differently, production comes first, income follows, and spending results. There is no meaningful boost to GDP from fiat credit. It has been a modest sideshow during QE, and now, at least for the moment, there is no boost to income-based spending at all.
That’s why the central bankers’ DSGE models are a complete crock. There is no measureable or achievable thing called “potential GDP”. There is no magic elixir called “aggregate demand” which is different from current production, and which can be goosed and “simulated” by central bankers. And there is no “gap” to fill owing to the ministrations of central bankers running a monopoly printing press.
In other words, DSGE amounts to a foolish kind of bathtub economics. That is, our benighted central bankers believe there is a full-employment line at the top of the tub; and there is a faucet that can be opened to fill that tub to the brim. Their job, they presumptuously aver, is to regulate the water flow through the crude tools of interest rate pegging, yield curve manipulation, wealth effects “puts” and open-mouth word cloud emissions.
Its all bunk, of course, yet bathtub economics is the source of the 2% inflation target. There is not a shred of actual empirical evidence for it. Its just an made-up axiom that purports to explain why there is a “gap” between the imaginary line of potential GDP and actual production, and why more inflation is necessary in order to goose a mythical ether called “aggregate demand”.
Indeed, the whole thing completely defies common sense and everyday observation. In a recent post, Mish Shedlock said it well. From Mish
- If price of food drops will people stop eating?
- If the price of gasoline drops will people stop driving?
- If price of airline tickets drop will people stop flying?
- If the handle on your frying pan falls off or your blow-dryer breaks, will you delay making another purchase because you can get it cheaper next month?
- If computers, printers, TVs, and other electronic devices will be cheaper next year, then cheaper again the following year, will people delay purchasing electronic devices as long as prices decline?
- If your coat is worn out, are you inclined to wait another year if there are discounts now, but you expect even bigger discounts a year from now?
- Will people delay medical procedures in expectation of falling prices?
- If deflation theory is accurate, why are there huge lines at stores when prices drop the most?
- (Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com
And that gets us back to Sweden. Like the rest of Europe, it is suffering from the burden on growth and wealth that accompanies a giant welfare state and its onerous burdens of taxation, regulation and incentives for non-production.
Nevertheless, despite these headwinds, Sweden has experienced a moderate level of real growth (@ 2.5%/year) and a steady 1.5% rate of inflation since the turn of the century. It is not plunging into some economic black hole, and does not face an emergency so severe that it needs to run its printing presses as if there is no tomorrow.
Yet its central bank has not been penurious about expanding its balance sheet, either. The whole “crisis” which caused it to join the ZIRP money printers club is that after a burst of Riksbank credit expansion in response to the financial crisis, its central bankers made a feeble effort to slow things down.
For that act of prudence, they were fired. And now the PhD who led the charge, Dr. Henry Ohlsson, is being put in charge.
Ohlsson, also a member of the board of the Swedish Public Employment Service, joins a bank that has lowered its benchmark rate to zero and this week pledged to do what’s needed to jolt the largest Nordic economy out of a deflation spiral……..The Riksbank has come under fierce criticism in recent years for cutting rates too slowly to address persistently low inflation, including in June from the Economic Council of Swedish Industry of which Ohlsson was chairman.
So it is a tyranny of the PhDs. It is a group-think mania that has gone global. It’s also only a matter of time before the central bankers’ money printing spree takes down the very bubble-ridden financial system it has so recklessly spawned.
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David Stockman must be an AI robotic bear. With the quantity and quality of output, no human would have time to eat or sleep.
I never understood why people who have no *experience* are highly esteemed for basing ideas on theory....
Sweden did NIRP in the early 1990's with success. Of course that shut out outside investment and gave them time to clean up their first investment/real estate crash then of course they repeated the same mistakes of the 1980's in the last 15 years.
Sweden will go full blown Bernank by the end of Q1 making NIRP look like nothing.
Hey, if you can't hit 2% inflation, maybe you can get it done by imposing -2% interest rates on savings.
I need another drink. BRB. (Be Right Back, my 10 year old taught me that one.)
Zimbabwe didn't have any problems with deflation. Maybe the western central bankers should consult with Robert Mugabe.
I think there should be a Riksbank Prize in Dismal ZIRP Sciences in memory of Ben Shalom Bernanke.
The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2008
The debt to GDP level is so high in Western economies that it must be inflated away - hence the focus on increasing inflation.
Even with ZIRP and NIRP, debt to GDP is not improving anywhere. Hence, the fires of inflation must be stoked to create a new reality where debt does not matter since interest rates will be held near zero or even negative, and inflation is creating false, nominal growth. But all such wishful scenarios end badly.
That might work if debt was being paid down but it's not.
DavidC
Negative disdeflation coming.
The unknown knowns and the known unknowns
What else can you do but stack phyzz? There's no way to be in this system and not be at tremendous risk.
Zirp or Bail ins, either one de facto default on debt. Get the fuck out of the system. What are you waiting for?
Oh for fuck's sake! I saw this coming. Over the last 10 years I have slowly watched the Swedish media begin to praise the United States for it's financial system, for it bank freedoms and financial engineering abilites. Along with that, Swedish media began to praise and promote the Neocoservative Zionest Agenda, with much praise for American foreign policy, and a campaign of Russia hate also began to grow.
I knew this was the elites preparing the ground for an American coup at Swden's highest levels. Now we have this evidence as proof that the coup is final and the new polices are in effect. The great Russian submarine non-event also reeks of neoconservative false flag, and happening at a time of Riksdag debate over military spending, well that made clear what it was.
My worst fears are now real. Sweden has bowed to American pressure at the very top 1% level. And from here on in, we can expect a Neoliberal Economic policy, with ZIRP, QE, and Banker Dictatorship. WHile Sweden begin to rebuild the cold war military force it once had, and join the American open war on Russia.
Swedish people have been propagandized by media since the late 1980's when I first began reading the Swedish newspapers, I could see very slowly the number of articles calling for an American style economy and foreign policy were growing.
The long preparation is over. Sweden is an official American puppet state. Like the UK.
Just remember....the Amerikan government is run by puppets, too.
Never had much interest in the Swedes so I've only just recently found myself saying, "WTF is wrong with Sweden?", most notably after 2012 during the Julian Assange "rape case" that never was a rape. In my ignorance of the American take over, I couldn't understand his reluctance to just pop over there and face the music.
Your post explains a lot and fills the gaps in my ignorance of Swedish politics. Funny thing about the UK - I agree with you - the bastards who crow about our nation's sovereignty and independence are almost always the same shits who have sold our national assets unbid to the American multinationals. We don't have politics, we have repeaters who parrot Washington's narratives in a different accent.
The reason why the Swedish central bank chose ZIRP and also may try negative interest rates despite the fact that the head of the central bank, Stefan Ingves, thinks that zero interest rates is a bad idea is that Sweden needs a depreciating currency in order to be able to absorb more excessive labour. And over the past few months the Swedish krona has actually depreciated compared to the Euro and the USD. I guess that the result will be more inflation due to more expensive imports and that ordinary people thereby will get negative real interest rates even if they choose small niche banks that offer a 1.5-1.65 % interest rate. The capital gains tax in Sweden is 30 % so you only need an inflation rate slightly above 1 % in order to create negative real interest rates for ordinary people. Thereby, thrifty small savers will pay for the excessive supply of labour. Furthermore, the thrifty part of the electorate won´t blame the politicians for negative real interest rates to the same extent as if they raised taxes in order to create artificial jobs for excessive labour.
Moreover, people should keep in mind that the low savings rate is a problem in Sweden. People on Sweden are not used to save money. In the past, when to government took care of everybody when they got old, people got used to not having to save anything. Now, when pensions have been lowered substantially and public pension funds have been looted some senior citizens think they should have saved more. But now it´s too late. And many people still don´t understand that they should to save more. Zero interest rates or negative interest rates is probably going to make matters worse.
oops
"Do we want prices to double every generation?”
I think thats already been, as they say, priced in Mr.Volker. And I won't quibble with the word "prices", its what is observable to the average Joe on the street but it is, centrally planned fiat currency destruction.
It is the observation of the devaluation of both our labor & our common currency, also called capital. Well done you socialist-Keynesian pricks, I chose long ago not to participate in your not-so-clever scheme.
But good luck with all that and if you intend to confiscate mine "for the greater good" let it be known I will shoot you right between the eyes.
Bank on it.
By the time this is done anyone who has anything of personal tangible value will be so persecuted and demonized your own children will turn you in for the reward.
We have faith in our offspring, their resourcefulness, their ingenuity, their honor & integrity. If we didn't all the possessions & money in the world mean nothing.
We told them all, we are the exact opposite of what you will be taught and what you will be presented with as "normal" by the state and its handlers. It doesn't matter what you've been accused of or what you in fact did, none of that matters, we need to know the truth so we can protect you...ingrained since youth and they've seen it in action enough times to appreciate it.
That is unconditional familial love and devotion. Blood is thicker than water here, nations or neighbors.
None of this is for us anyways, it has always been for them ;-)
David: As usual, good stuff. I liked this paragraph and would encourage you to explore further:
"Yes, there is an argument that private fractional reserve banks can create fiat credit, too. But what they really do is more in the nature of “maturity transformation”, which means they turn short-term liquid deposits into long-term, relatively illiquid loans. Get rid of deposit insurance, the Fed discount window and the legal shield against fraud suits—–and fiat credit out of the private banking system would not get too far. The high rollers who went all-in making loans and thereby generating “new” deposits would either crash land in insolvency eventually from bad loans; or they would be cut-off at the pass by real savers, who would take there deposits to safer and sounder institutions."
Don't have time tonight, but I think this WILDLY understates the role of private FRB in creating this mess as it ignores the dynamics of the flow of "money" through the economy -- think Cantillion effect. No matter how one looks at it, loaning out multiples of the actual savings in the short term is creating a purely financial claim on the future flow of value that DEPENDS upon nominal growth and is this creating the ponzi dynamics. The Fed inherited the mess a long time ago and has systematically failed to do the right thing and let banks fail (actually, the truly right thing is to let gold soar to revalue financial assets in real asset terms and reliquify the system, after which there will be no TBTF and need for Fed backstop).
I really appreciate and enjoy all that you write. Hopefully, this comment builds on the thought process.
ZIRP becomes NIRP, becomes ZIP!
THE RIKSBANK, the one who awards the Prize for economic science under Nobel's name? The oldest Central bank in the world. They must be smarter than all of us!
/sarc
These cut cocksuckers?
https://en.wikipedia.org/wiki/Nobel_Memorial_Prize_in_Economic_Sciences
LTCM when genius fails
A good book about how genius Nobel prize winning economist fail.
But succeed with a good public backstop
These fucking useless pustule PhDs' need to get out more often. Clearly, they don't know jackshit about anything.