This would be funny if it wasn’t so tragic. (There’s probably an Ibrahimovic joke somewhere in here but I’m neither happy nor into football.) The direction of this current move by the Swedish Riksbank (central bank) to lower the repurchase rate by 25 basis points to 0 basis points basically puts Sweden in zero interest rate policy – ZIRP!
What is the outside curve ball that makes it so particularly sad? Well we have a treasurer who’s been campaigning on lunacy, and who now has manged to paint herself into a corner. Swedish news are covering this story as it develops, and all the details are pretty grim:
- Swedish exports are doing ok, but local consumption and investment has been really low as of late.
- Consumer price inflation has thus been rather low.
- One can only draw the conclusion that the domestic velocity of money is decelerating when the quantity of products traded (GDP) is growing.
- Household debt, particularly for those who
ownrent their house from the bank, is unsustainable with levels of consumer debt at 180% of disposable income and 112% of GDP (low estimate using 2012 personal income data but current GDP per capita figures, probably somewhere between 115-120% of GDP in actuality).
Let’s recap the policy proposals by the current finance minister in the electoral lead-up and following her latest budget proposals in ruling power:
The current government proposes to:
- Try to make home lending easier by scrapping the 85% loan-to-value requirement
- Enact a “strict” budget to reach a government surplus target of 1% of GDP in the long run.
- This is to be achieved by raising taxes, primarily on high income earners and banks.
- Further raise the bank capital requirements (capping bank revenue from net-interest income).
- Lower taxes on retired people and more than compensate for this by increasing them for companies hiring inexperienced workers.
Let’s recap what the current situation is:
- Sweden has astronomical consumer debts as a percentage of GDP and the most normal multiplier should thus be shied away from.
- House prices represent the majority of this and puts the country in what foreign analysts would classify as a b-word.
- 30% interest rate tax deductions at the moment.
- The government has net assets that the current government will never sell due to an anti-market political stance.
- The government aims to run a budget surplus by holding back on government spending.
- …and raise taxes.
- Particularly on those whose employment probably results in consumption and investments (youth) while distributing money to people that are the most likely to save said money (pension recipients).
- Unemployment at 7.2%.
- The Riksbank want to keep some sort of credibility and thus refrains from quantitative easing.
So if I have money in Sweden that I want to invest (thank all the forces of nature that I don’t!) the best way of investing it is in either foreign assets or in housing, both of which further slows the local velocity of money. Not that it matters with this incredible confluence of policy mistakes…
Yes, I understand that people who are closer to zero net disposable income after housing, utilities and base nutrition generate greater multiplier effects from consuming their earnings. Not news. But ultimately that money ends up in either investments or saving. Since the current government looks at the private sector as a piñata to be accessed, with banks in particular, who would want to invest? Given that future earnings will be lower than today with this government it must thus be at prices lower than today and probably with fewer people than today, unless you invest in economies that are actually providing real returns. Cue capital flight in 3… 2… This thus helps exporters, but if they already have operations abroad why not expand their foreign operations? Who the **** will be investing in this economy?
Recap and evaluation of how to dig ourselves out of here:
I get more and more convinced that this government has little to no economics understanding. On top of that, a difficult parliamentary position means that the time for pandering will start if the budget is seriously debated and alternative budgets proposed. Populist budgets (like the proposals above in point form) will thus gain power, and actual economics will fall ever further away from the decision-making rooms.
What are my solutions to this? Well… in this environment racking up government debt (which controls the prime rates through the banking system) should be a no-no. Should companies invest? Yes, but could you bring yourself to do so in this political environment? Should consumers borrow more? Hell no, but they will anyway, and the proceeds will go to housing or temporary spending which someone else will save/carry abroad. Should the government run a deficit to stimulate the economy? Yes, but that won’t happen…
We’re thus left with the government selling assets and spending that money to get the economy rolling, either by re-investing in high-multiple areas or projects, lowering taxes to stimulate consumption, or by tilting the tax policies in ways that promotes velocity of money acceleration.
I’m not holding my breath. Inflation down, velocity of money down, asset prices up on bubbly fundamentals. Oh my will the crash be hard when the crash comes!