World's Oldest Central Bank Asks Paul Krugman To Shut Up

About a year ago, everyone’s favorite easy money advocate Paul Krugman accused the world’s oldest central bank of turning Sweden into Japan by adopting a policy of “sadomonetarism.” The Riksbank, Krugman claimed, unnecessarily transformed itself from “recovery rockstar” to deflationary deathtrap by raising rates too early. Here’s Krugman

"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."

Why would they do such a thing? Well, they were apparently concerned about two things: inflation and a housing bubble. As reasonable as that may seem — especially in light of the fact that not two years earlier a bursting real estate bubble had collapsed the entire global financial system — Krugman wasn’t buying it, and accused the central bank of “inventing new rationales” for its misguided attempt to perpetuate a sound money policy. Here’s Krugman again: 

"Sadomonetarism is an attitude, common among monetary officials and commentators, that involves a visceral dislike for low interest rates and easy money, even when unemployment is high and inflation is low. You find many sadomonetarists at international organizations; in the United States they tend to dwell on Wall Street or in right-leaning economics departments. They don’t, I’m happy to say, exert much influence at the Federal Reserve — but they do constantly harass the Fed, demanding that it stop its efforts to boost employment…"


"Where does this gut dislike for low rates come from? At some level it has to reflect an instinctive identification with the interests of wealthy creditors as opposed to usually poorer debtors."

Got that? Essentially a sadomonetarist is a job-hating heretic who doesn’t believe that printing mountains of fiat currency solves economic problems and who is motivated by an overwhelming desire to perpetuate global inequality by enriching creditors at the expense of impoverished debtors. 

Anyone wondering if the Riksbank is ready to do a mea culpa now that Sweden has joined the Eurozone, Switzerland, and Denmark in NIRP-dom, got an emphatic answer today from the bank’s Deputy Governor Per Jansson who thinks Krugman’s assessment may indicate that he doesn’t have any idea what he’s talking about. Here’s Jansson, via Bloomberg

“When he described Sweden as sort of a deflationary economy, and makes these parallels to Japan, you wonder, has he ever had a look at the data?” 


“Has he seen how Swedish GDP recovered over these crisis years? It completely outperformed the euro area, of course, but even the U.K. It’s close to the U.S.’s performance.”

Jansson goes on to suggest that not only were the bank’s actions 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 the fact that the rate of household credit expansion was running some 50% ahead of overall economic growth. Krugman’s answer: the rapidly expanding economy wasn’t expanding rapidly enough and the rate at which things were getting more expensive could have been higher:

“Yes, Sweden was growing fast, but unemployment was still above pre-crisis levels and there was good reason to believe that there was still a substantial output gap.” 


“Growth in a depressed economy isn’t a reason to raise rates. On the inflation front, core inflation was well under 2 percent.”

At the end of the day, Jansson thinks there’s still hope for Krugman — he just needs to stop writing and start reading.

“You would wish when he says this, that Sweden looks like Japan and stuff,” 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.”