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"The Danger Is That It Bursts Just Like In The US": Sweden Goes Full Krugman, Gets Massive Housing Bubble

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Earlier this year, Riksbank Deputy Governor Per Jansson expressed his displeasure with comments made in April of last year by everyone’s favorite Nobel laureate Paul Krugman. The dispute revolves around Sweden’s decision in 2010 to raise rates, a move Krugman says turned the country into a Japan-style deflationary deathtrap. To wit, from Krugman’s blog

"In 2010 Sweden’s economy was doing much better than those of most other advanced countries. But unemployment was still high, and inflation was low. Nonetheless, the Riksbank — Sweden’s equivalent of the Federal Reserve — decided to start raising interest rates."

 

"There was some dissent within the Riksbank over this decision. Lars Svensson, a deputy governor at the time — and a former Princeton colleague of mine — vociferously opposed the rate hikes. Mr. Svensson, one of the world’s leading experts on Japanese-style deflationary traps, warned that raising interest rates in a still-depressed economy put Sweden at risk of a similar outcome. But he found himself isolated, and left the Riksbank in 2013."

 

"Sure enough, Swedish unemployment stopped falling soon after the rate hikes began. Deflation took a little longer, but it eventually arrived. The rock star of the recovery has turned itself into Japan."

Krugman went on to accuse the Riksbank of being a bunch of job-hating heretics who don’t believe that printing mountains of fiat currency solves economic problems and who are motivated by an overwhelming desire to perpetuate global inequality by enriching creditors at the expense of impoverished debtors. They are, Krugman said, sadomonetarists. 

For his part, Per Jansson wasn’t particularly pleased with Krugman’s assessment, suggesting that he “write fewer articles and have more of a look at the data and then come back again.”

“I don’t know why he does that; it’s a mystery and it doesn’t make him come across as a guy who is very well informed,” Jansson added.

Why did Sweden start raising rates in 2010? Well, as we noted in March, “the bank’s actions were not indicative of an institution suffering from some psychotic desire to drive up unemployment and inflict pain upon the masses, they were in fact based on ‘normal things’ like inflation and a housing bubble and the fact that the rate of household credit expansion was running some 50% ahead of overall economic growth.”

In any event, Krugman needn’t have been concerned, because as you can see from the following, and as discussed here on Sunday evening, Sweden not only stopped hiking, but in fact plunged headlong into NIRPdom.

So one would think, if Krugman is correct, that cutting rates by 235 bps since 2011 all the way down to -0.35% would have things humming along nicely in terms of “healthy” inflation. Only, that’s not what’s happened. This is:

Meanwhile, the housing bubble and household credit expansion issues the Riksbank was so concerned about have predictably gotten far worse thanks to record low rates. To wit, from Bloomberg

The worsening housing shortage -- exacerbated by record immigration -- and surging house prices reveal that deeper financial instability risks lie ahead.  The combination of already too-high household debt and negative rates "may ultimately be very costly for the economy,'" the central bank said last week in its monetary policy report.

 


And as we saw earlier this month when the Riksbank remained on hold ahead of Mario Draghi, keeping a lid on krona strength (i.e. fighting to ensure that inflation doesn't crater) may turn out to be increasingly difficult going forward with the ECB widely expected to expand PSPP, meaning that ironically, once everyone goes full Keynes, it makes it ever more difficult for anyone to realize the benefits because one country's easing simply negates another's, necessitating still more easing by the first country, and around we go. Case in point, from Riksbank Governor Stefan Ingves: "...any rapid strengthening of krona would pose risk to inflation rise [so] Riksbank won’t be passive if ECB makes big changes in its policy."

Worse still, not only is Sweden bumping up against diminishing returns in its easing efforts, but as we discussed at length in July, for a time things had actually begun to move in the wrong direction, as investors fretted about the lack of market depth created by the Riksbank's QE program. “The financial conditions -- the currency and the bond yields -- are moving in the wrong direction,” Roger Josefsson, chief economist at Danske Bank A/S told Bloomberg. So in other words, even as risks associated with NIRP (e.g. excessive debt buildup and a worsening housing bubble) have materalized, some of expected benefits (e.g. rising inflation) have not, which certainly begs the question if the risk/reward profile associated with NIRP and expanded QE is still attractive.

Of course it's not all bad. Unemployment has fallen dramatically and GDP data from previous quarters was revised up in what Goldman called a "non-neglible way" on Friday.

But the question one has to ask here is this: what, ultimately, has ZIRP and then NIRP and QE actually done for Sweden? The effect on inflation has clearly been muted (the Riksbank's protestations aside) and the effect on the housing market has been to inflate what looks like a rather formidable bubble. Meanwhile, the global currency wars mean the upward pressure on the krona is likely to persist no matter what the Riksbank does. If we assume that GDP and unemployment would have, at least to some extent, improved on their own, one could quite plausibly make the argument that all Sweden has done with monetary policy since 2010 is embed an enormous amount of risk into the economy without getting much back.

Of course when that rather inconvenient suggestion is made, central bankers in the new normal almost always blame lawmakers or regulators or someone other than themselves and Sweden is apparently no different. Here, for instance, is what the bank had to say earlier this month:

"Low interest rates contribute to the trends of rising house prices and increasing indebtedness in the Swedish household sector continuing. Current debt levels already pose a substantial risk to the Swedish economy. It is thus essential that the Riksdag (the Swedish parliament), the Government and other authorities implement measures to reduce this risk. If no measures are taken, this, in combination with the low level of interest rates, will further increase the risks, which may ultimately be very costly for the economy."

As for Ingves, well, he's not optimistic (via FT):

Sweden’s central bank governor has warned that new crisis-busting tools policymakers are embracing around the world to counter asset bubbles and other financial dangers are susceptible to political inaction and turf wars.

 

Stefan Ingves, governor of the Riksbank, said so-called macroprudential policies — such as capital requirements and leverage limits — had so far failed in Sweden where house prices and personal debt levels have soared to record levels.

 

“Macroprudential, particularly if markets are going up, up, up is about saying ‘no’. Apparently that’s hard to do,” Mr Ingves said.

One could easily say the same thing about the Riksbank although, to be fair, the central bank would also be in control of macroprudential policy making if it had its way, but that doesn't exonerate NIRP. That is, we might replace one word from the quote above and get this: "sound money, particularly if markets are going up, up, up is about saying 'no' but apparently that's hard for central bankers to do." At least one banker in Stockholm agrees: 

“To have such a low interest rate at the same time as Sweden has rather good economic growth and rapid increases in house prices — it seems crazy,” said one senior banker.

But Ingves has his story and he's sticking to it: “We deal with inflation, we keep an eye on the exchange rate, we do our best to reach our inflation target. But that means that somebody else has to deal with the problem we have in our housing market." 

On that note, we'll close with the following from Lars Jonung, professor emeritus at Lund University, who told newspaper Dagens Nyheter the following:

“[The Riksbank] have lowered rates too much, absolutely. It creates meaningful financial risks and increases household debt. The danger is that it bursts just as it did in the US and Iceland.”

 

*  *  *

Bonus: As Krugman said last week in the Japanese context, countries "need to reach a point where everyone believes that they have pulled out of deflation. And then if that can be believed, then they may be able to stay out of trouble thereafter".

Do you "believe" in "hockeynesian" success stories? The Riksbank apparently does...

 

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Mon, 09/14/2015 - 18:52 | 6548507 AlaricBalth
AlaricBalth's picture

Well. At least they will still have the Swedish bikini team.

http://blogs.telegraph.co.uk/finance/files/2012/12/sbt1312803693qw.jpg

Mon, 09/14/2015 - 18:56 | 6548519 coinhead
coinhead's picture

"There is no means of avoiding the final collapse of a fiat system ended by mass Bitcoin adoption. The alternative is only whether the crisis should come sooner as the result of voluntary abandonment of further fiat money, or later as a final and total catastrophe of the currency system involved." 

 

 

                                                                                                                                                                         ~Ludwig von Cryptose

Mon, 09/14/2015 - 19:42 | 6548640 Stares straight...
Stares straight ahead's picture

Speaking of fiat, I need to tell y'all two true stories.

About two years ago, I was discussing with some of my employees the merits of saving some of their income in gold or gold coins. One of them mentioned that she was afraid to do this in the event that something happened to her job and needed to pay her rent. She would rather keep a cash reserve for emergencies. I asked her if her landlord would be willing to take gold in lieu of cash. This would allow her to store some of her savings in gold, and in an emergency, she could use the gold to satisfy her rent. She promised me she would ask her landlord. She reported a few days later that the landlord paid her bills month to month and had no savings. So, no, she would not be able to take gold in lieu of cash.

I have thought about this often, since then. So I decided to try this experiment in another way:

Several months ago, I asked my banker if he would take an equivalent amount of gold in lieu of cash for my mortgage on a commercial property. I said I had no concerns, but was just curious that in the event of a cash flow issue, gold could be used to settle the mortgage. He said he would ask the owner of the bank, it was not a decision he could make. A couple weeks later, I saw him again. I asked him what the owner of the bank had said. He said that they would not take gold because it would require an armored car to transport it and they would need to pay for storage, security guards, etc. I asked him, "Do you realize how ridiculous that is on a few different levels?" With a smile, He responded, "Yes, I do." I said, "so paper money has supplanted that which it used to represent symbolically?" And he said, "it's strange, but that appears to be the case."

This is how the Federal Reserve can do what it is doing.

Mon, 09/14/2015 - 20:16 | 6548725 nmewn
nmewn's picture

I suppose the next greatest "thing" from Fonestar instead of BitBlockchains is BitArmoredCars and armed BitGuards ;-)

Mon, 09/14/2015 - 20:30 | 6548753 Stares straight...
Stares straight ahead's picture

(Obviously, you have spotted the irony of needing guards for gold but not for cash equivalent! And still preferring the cash equivalent.)

"What's in your wallet?"

Mon, 09/14/2015 - 23:51 | 6549343 eatthebanksters
eatthebanksters's picture

Krugman is a shining example of what a worthless award is the Nobel Prize for Economics (or Peace)...its all driven by progessive socialist judges. And we all know over the long haul how well real socialism works.  Krugman is my anti-Christ...perhaps the biggest know it all asshole with a mouthpiece for the left.  He is unfailingly intolerant and bigoted and has such a high opinion of his knowledge and believes that it is the governments responsibiity to tell its citizens what is good for them....and what's good for them is what Krugman says is good for them.  What a fucktard.

Tue, 09/15/2015 - 02:59 | 6549573 Manthong
Manthong's picture

“Sadomonetarists”  ?

Is that better or worse than being a fiatophile?

     or a masomunerachist?

          or maybe a moolamaniac?

 

Tue, 09/15/2015 - 09:16 | 6550128 BigJim
BigJim's picture

Kind of ironic that Krugman's "Nobel" in Economics was actually instituted by.... the Swedish Riksbank.

Mon, 09/14/2015 - 20:29 | 6548758 MalteseFalcon
MalteseFalcon's picture

Monetary policy is not going to solve the problem.

Monetary policy is not going to solve the problem.

Monetary policy is not going to solve the problem.

Monetary policy is not going to solve the problem.

Monetary policy is not going to solve the problem.

Monetary policy is not going to solve the problem.

Monetary policy is not going to solve the problem.

Monetary policy is not going to solve the problem.

Mon, 09/14/2015 - 21:58 | 6549024 Joe Camel
Joe Camel's picture

This reminds me of the beginning of The Simpsons when Bart is being punished by writing sentences on the chalkboard.

Replace Bart with Krugmann and have this sentence on the chalkboard.

Mon, 09/14/2015 - 22:19 | 6549098 A Nanny Moose
A Nanny Moose's picture

All this time, I thought full retard was the pinnacle. Now that I think about it, Full Kruggybear is the next obvious step. Definitely meme-worthy.

Forward!!!

Mon, 09/14/2015 - 18:58 | 6548527 mtndds
mtndds's picture

Damn, that pic made me pop a chub.  Nice.

Mon, 09/14/2015 - 19:52 | 6548690 Gambit
Gambit's picture

Lol on "pop a chub"

Mon, 09/14/2015 - 19:03 | 6548540 junction
junction's picture

The U.S. economy was in much better shape in 1973 when states still had enforceable usury laws and bank credit cards carried a 12% interest rate.  Now the banksters who charge up to 29.9% credit card interest rates pay near ZIRP rates and the U.S. economy resembles a zombie movie.

Mon, 09/14/2015 - 19:27 | 6548617 indygo55
indygo55's picture

How could you NOT love the Swedish bikini team?

Tue, 09/15/2015 - 00:59 | 6549451 Dr. Bonzo
Dr. Bonzo's picture

You mean those lanky Somalis with the massive overbite and the gangly limbs? That's an easy one.

Mon, 09/14/2015 - 21:00 | 6548827 booboo
booboo's picture

The hockey stick should have been represented by a swedish mountain horn, same shape.

Tue, 09/15/2015 - 07:12 | 6549764 Debt-Is-Not-Money
Debt-Is-Not-Money's picture

Whenever you see a hockey stick superimposed on a graph you're going to get "pucked"!

Mon, 09/14/2015 - 22:14 | 6549083 A Nanny Moose
A Nanny Moose's picture

Nice. What sport do they play? :P

Mon, 09/14/2015 - 18:55 | 6548516 RopeADope
RopeADope's picture

I am confused as to why there is a hockey stick in the middle of a trend, that CPIF inflation looks like lower highs and lower lows.

I must be too stupid to get a Nobel prize...

Tue, 09/15/2015 - 07:14 | 6549767 Debt-Is-Not-Money
Debt-Is-Not-Money's picture

Tribe: yes,

stupidity: no.

Mon, 09/14/2015 - 18:56 | 6548520 Tinky
Tinky's picture

When he uttered this quote, Will Rogers was anticipating Krugman and the current, debt-fueled bubble:

"If stupidity got us into this mess, then why can't it get us out?"

 

Mon, 09/14/2015 - 19:05 | 6548538 The Most Intere...
The Most Interesting Frog in the World's picture

Housing bubbles make me feel good.

Mon, 09/14/2015 - 19:05 | 6548547 nnnnnn
nnnnnn's picture

 

 

notice  1995  sweden enters eu

https://en.wikipedia.org/wiki/1995_enlargement_of_the_European_Union

 

notice immigrant rush

populatuion of sweden went from 8 to 10 million now (9,801,616)

 

super rich profit from real estate artificial price raise based on crime and genocide

 

 

 

Mon, 09/14/2015 - 19:09 | 6548554 lynnybee
lynnybee's picture

fascinating YOUTUBE on a new Stockholm being built:    https://www.youtube.com/watch?v=w7IaCcAJQwY

Mon, 09/14/2015 - 20:50 | 6548796 Bastiat
Bastiat's picture

Insanity.

Tue, 09/15/2015 - 06:19 | 6549701 Tinky
Tinky's picture

Interesting – thanks.

Mon, 09/14/2015 - 19:15 | 6548581 stant
stant's picture

"Who ist dis Krug mon anyway"?

Mon, 09/14/2015 - 19:24 | 6548606 adr
adr's picture

So very soon anyone outside the top 1% will not be able to afford a home.

Thanks to the top 1% owning most of the homes the rest can't afford the rent the 1% charges.

So I ask, where are people supposed to live?

 

Then the answer comes. FEMA camps.

Remember 200sq ft homes for four are fashionable and in style. HGTV says so.

Mon, 09/14/2015 - 19:24 | 6548607 Northern Lights
Northern Lights's picture

The worst country to live in if you're a white hetero-male.

If there is one country in the world I'd wish would implode, Sweden would be that country.

Mon, 09/14/2015 - 19:37 | 6548647 venturen
venturen's picture

Eating the seed corn tastes so good....but then there is nothing for the future!

Mon, 09/14/2015 - 19:46 | 6548676 luna_man
luna_man's picture

 

 

CRIMINALS are all DELUSIONAL!

 

monkey see, monkey do

Mon, 09/14/2015 - 20:20 | 6548729 fukidontknow
fukidontknow's picture

Gold

Krugman's dreams

Mon, 09/14/2015 - 20:50 | 6548797 NoWayJose
NoWayJose's picture

Nothing that a few thousand ISIS fighters can't fix...

Mon, 09/14/2015 - 20:57 | 6548821 CheapBastard
CheapBastard's picture

Looks like the entire Global RE market, NYSEand bankers wallets were the three major recipients of the global QEs. The rest of the world and asets, not so much.

Mon, 09/14/2015 - 21:49 | 6548983 Radical Marijuana
Radical Marijuana's picture

When it comes to "housing," Sweden's policy is an aspect of it acting suicidal:

http://www.youtube.com/watch?t=832&v=w7IaCcAJQwY

A New Stockholm To Be Built Within 6 Years

Mon, 09/14/2015 - 22:20 | 6549107 TeraByte
TeraByte's picture

Household debt 83% of GNP and 171% of disposal income. Tough luck, but by us (everybody) it is always different.

Mon, 09/14/2015 - 23:03 | 6549233 honestann
honestann's picture

Want proof that banksters and so-called economists are malicious, psychotic, evil?  Read the following sentence from the article:

The effect on inflation has clearly been muted (the Riksbank's protestations aside) and the effect on the housing market has been to inflate what looks like a rather formidable bubble.

Get it?  It says "inflation has been muted" and also "the housing market has inflated into a formidable bubble".

Uh, huh.

The very biggest expense of all... a home... has exploded higher in price (about 3.5x higher according to the chart in the article).

Think about what that sentence claims.  The biggest expense... a home... is 3.5 times higher.  And inflation is muted?  Seriously?  Are these people completely insane?

Yes, they are.  Quite obviously so.

Any average grade moron will immediately understand that if their biggest expense by far rises 3.5 times, then they have invariably suffered monumental inflation... even if no other product changed in price.  And, of course, after paying 3.5 more for the biggest expense, who will have any money left over to buy anything else?  And duh, that "everything else" IS the economy.  Duh.

These banksters are totally evil.  They have to know that the most beneficial thing they could possibly do is... crash home prices!

But they do the opposite, all over the world, and thereby destroy the world economy... with certain knowledge they are doing precisely that.

Tue, 09/15/2015 - 07:09 | 6549755 Zapporius
Zapporius's picture

It's what they are NOT telling you. Yes they are sadistic sociopaths, like all chimps. But they do it for the reason, calculated, and the fact that we "don't get it" is because our brains refuse the grasp the obvious:

You CANNOT have growth economy with a finite energy/resources, without descending into patricians/slaves paradigm. If energy/resources are finite, something has to give for the "growth", and that expense is being deducted from clueless masses.

It will only get worse, until A) we have pharaos and build them pyramids, or B) we get civil unrest, rush the Bastille, and survive the anarchy and reset that follows. In any scenario, they got the upper hand.

The tragedy of humans is that they are looking up to butchers for answers.

Tue, 09/15/2015 - 09:21 | 6550152 BigJim
BigJim's picture

 The effect on inflation has clearly been muted (the Riksbank's protestations aside) and the effect on the housing market has been to inflate what looks like a rather formidable bubble.

Ha, yes, I caught that too. Having said that... a house doesn't get consumed. When the stuff you consume goes up in price relative to your earnings, you're obviously poorer. But when people pay more for housing it's more akin to investing; once it comes time to downsize, the additional money you paid into buying a house gets returned...

... as long as house prices don't crash, obviously. Or you're a renter.

Tue, 09/15/2015 - 02:18 | 6549531 Mediocritas
Mediocritas's picture

Mr Krugman thinks this:

There is a causative relationship between credit-worthiness and the rate of interest. A reliable borrower can negotiate for a lower rate whereas an unreliable borrower should expect a higher rate.

Therefore, pushing down the price of credit will make more people credit-worthy, hence encourage more borrowing and spending!

No really, that's what he thinks.

He does not understand that credit-worthiness is NOT driven by interest rates. Risk calculations (essentially the probability of remaining employed) remain the same regardless of interest rates, the only thing that changes is the $ valuation of that risk. So when rates go lower, the $ valuation of risk goes higher (the amount lenders are prepared to lend) even though the underlying risk itself (will the borrower default?) has not changed. Hence, the effect of lower interest rates is simply higher asset prices with no change to credit access based on worthiness.

It ain't rocket science.

The economic issues we are facing are qualitative, not quantitative, but all the Krugmans of this world focus on are quantitative easings, believing that increased quantity will somehow, magically, improve qualitative factors.

Tue, 09/15/2015 - 09:30 | 6550187 BigJim
BigJim's picture

But there's a lag between the lowering of interest rates and the inflation of asset prices. And in that lag, the absolute credit risk of "risky" borrowers drops because - clearly - credit risk is proportional to the amount borrowed. I might lend a "risky" friend $100, but I'd never lend him $10,000, not just because I'm more able to afford a $100 loss but because he's more likely to be able to pay $100 back.

When interest rates drop, the overall amount borrowed drops, too; until the Cantillon Effect works its magic and prices rise. And as the prices rise, the amount at risk of those existing loans shrinks relative to the equity, further decreasing the risk of loss.

It's unsustainable, obviously, but if you're a banker, why should you care? You'll hopefully be retired by then; and, if not, there's a 99% chance the central banks will bail you out.

Tue, 09/15/2015 - 02:26 | 6549545 Clowns on Acid
Clowns on Acid's picture

Sweden economy in trouble? Nohting that a few 100 thousand Syrian muslims can't solve.

Tue, 09/15/2015 - 09:32 | 6550205 BigJim
BigJim's picture

Yeah, it makes me laugh when I hear these earnest "economists" say that Europe "needs" these young immigrants to help pay the pensions of the aging natives... regardless of their skill levels or culture, it's assumed they'll - somehow! - be as productive as the Germans are.

Tue, 09/15/2015 - 03:32 | 6549592 Panic Mode
Panic Mode's picture

A new house hunting TV program: Inflation, inflation, inflation.

Tue, 09/15/2015 - 10:14 | 6550395 Why.Not.
Why.Not.'s picture

We laugh, but...

I have a friend who works as an economist at the Central Bank of Croatia, which is teetering on the brink of entering the eurozone and Schenken (should it continue to exist). He is well aware of Krugman, reads his columns and takes them seriously. Hey. New York Times, Nobel Prize winner... What could possibly be wrong with treating The Krug as a viable source of information and opinion?

My friend is far from alone in Europe and elsewhere. I live in Thailand now, and the poison has entered the system here also. The myths and lies are all so appealing to governments, and that's why the stupidity won't die. No one in the game bears any personal responsibility for the failures, especially Krugman and his ilk, so the carnage will continue.

Do NOT follow this link or you will be banned from the site!