Sweden and Denmark are offering an Alice In Wonderland future for monetary policy

Often we are told in Britain of the Scandanavian nations and Sweden in particular setting a good example and they are regularly held up as a model to follow. This particularly happens in the areas of social policy and education. However the last year or so has seen developments in monetary policy which has had me musing if they are setting a template for the future for all of us. This is in the area of negative interest-rates and expansionary monetary policy when you have an economy which is expanding and indeed booming. This is an inversion and some would say perversion of monetary policy theory where a central bank is supposed to lean against trends rather than give them a further push!

Denmark provides an example of this if we examine the situation described in the latest monetary review of its central bank the DNB. A Martian economist might think that things were going well at this point.

GDP growth in Denmark is expected to be 2.0 per cent this year and to remain at that level in 2016 and 2017. The projection thus reflects continuation and strengthening of the upswing that has already been underway for some time.

However our Martian economist will be scratching his or her head a little at this bit.

(The DNB) reduced the rate of interest on certificates of deposit on four occasions in January and early February, to -0.75 per cent. This is an all-time low for a Danish monetary policy interest rate.

The combination of solid growth with little or no consumer inflation might seem like not far off economic nirvana so why mess with it? We are seeing domestic policy in Denmark being made subservient to the exchange rate which is pegged to the Euro. A type of competitive devaluation our Martian might think should he or she be aware of the 1920s and 30s. Also our Martian would exclaim “you don’t say!” at this bit.

there is a risk that a prolonged period of very low interest rates will trigger an unhealthy development with self-reinforcing price rises for owner-occupied dwellings.

Ah a house price boom, what could go wrong? For now Denmark has a monetary environment where many mortgage bonds trade at negative yields and where households are unsurprisingly keen to remortgage.

indicating that the volume of remortgaging is exceptionally high, as was also the case last quarter.

So Denmark has potentially sacrificed balance in its internal economy on the altar of keeping its Krone pegged to the Euro. Unless of course you think that issuing Treasury Bills at -0.98% as it has done this morning – yes the investor and not the government is paying interest – is (the new) normal.

Sweden

This is an even more extraordinary development as it has not been forced down this particular path by a type of fixed exchange-rate policy. Indeed as it is supposed to have a central bank accused of being “sado-monetarists” by Paul Krugman you might wonder  even more about its current path. Back on February 11th they made a move which would confuse our Martian economist even more which I described the next day as this.

This is very significant as imagine if growth happens as they anticipate and inflation does pick-up at the policy horizon of circa two years then they have just made completely the wrong move!

They moved into negative territory with interest-rates cut to -0.1% but in a Krugmanlike state of mind they decided that not only this but some QE was required as government bond purchases were announced. Only a fortnight or so later we discovered that economic growth was running at an annual rate of 2.7%. So very strongly pro-cyclical monetary policy as they add a supercharger to an engine that was already turbocharged!

What happened next?

There was another cut to -0.25% on UK Budget Day  as our Martian looked for some headache pills to stop his or her brain hurting. Now let me bring you fully up to date with some news from Sweden Statistics from this morning.

In March the annual growth rate for lending to households increased by 0.2 percentage points, from 6.2 percent in February to 6.4 percent in March.

As you can see the fear I expressed for Denmark seems to be bubbling along in Sweden and our Martian’s alarm would rise if we narrow our focus.

Housing loans account for 81 percent of total lending to households, and increased by SEK 160 billion to SEK 2 526 billion. The annual growth rate was thus 6.8 percent in March.

This boom has been at least partly caused by the fact that mortgage-rates are very low and have been falling. The numbers below compare to 2.43% a year ago.

Households’ average interest rates for housing loans for new agreements from MFIs fell from 1.81 in February to 1.74 percent in March.

Rather then being middle of the road that seems “chirpy,chirpy,cheap,cheap” to me and it would appear that Swedish companies think so too.

Most of the loans to non-financial corporations comprised loans with multidwelling buildings as collateral.

So there you have it a housing market which is being pumped up and a money supply which is either growing at an annual rate of 13.8% (M1) or 7% (M3). If we take a rule of thumb for wider monetary growth of 7% we subtract expected economic growth of 3% and get inflation of 4%. Thus a central bank of “sado-monetarists” would be singing along with Dawn Penn.

No,No,No….

The Riksbank this morning

Firstly it confirmed its view that the outlook is bright from its eyrie by upgrading its economic growth forecasts.

The expansionary monetary policy is having a positive impact on the Swedish economy…….GDP growth in Sweden is good and the labour market is continuing to improve.

Thus our Martian looking at surging money supply growth and in particular lending for mortgages and housing would be expecting a tightening of policy. But instead rather than an economics text-book it would appear that the Riksbank has been reading Alice In Wonderland recently.

My dear, here we must run as fast as we can, just to stay in place. And if you wish to go anywhere you must run twice as fast as that.

So rather than a tightening we got an expansion.

the Executive Board of the Riksbank has decided to purchases government bonds for a further SEK 40-50 billion.

Also a hint of more interest-rate cuts combined with a Forward Guidance style promise of lower interest-rates for longer.

In addition, the repo-rate path has been lowered significantly compared with the decision in February. The repo rate has been left unchanged at −0.25 per cent but may be cut further.

And in a Mad Hatter style panic they appeared willing to throw the kitchen sink at things.

The Riksbank is also prepared to launch a programme for loans to companies via the banks and to intervene on the foreign exchange market………..Purchases of other assets than government bonds are also a possibility.

I think that in terms of possible monetary expansion that is about it, for now at least! Although for some who had in my opinion really got carried away with their rhetoric that fact that there was not an interest-rate cut today was a surprise. Of course Lewis Carroll got there first.

Why, sometimes I’ve believed as many as six impossible things before breakfast.

Comment

There is much to consider at the moment from monetary policy in the Nordic regions but I am afraid that not much of it is good. Sweden in particular but Denmark too seem set on a helter-skelter type monetary policy where the economy is sacrificed to the growth now gods with this sort of perspective about time.

Alice:How long is forever? White Rabbit:Sometimes, just one second.

You have to ask what is the Riksbank of Sweden afraid of? If we are being told the truth about the Swedish economy,it is time for it to be reminded of the words on the front of the HitchHikers Guide to the Galaxy which in big friendly letters says.

DON’T PANIC

Meanwhile the Bank of England may be observing a far slower quarterly GDP growth rate of 0.3% and think it is missing out on this fashion for negative interest-rates! Especially if the current rally in the UK Pound continues (US $1.53+,1.40 versus the Euro,182 Yen). at which point in my opinion the Nutty Boys should be on repeat.

Madness, madness, they call it madness
Madness, madness, they call it madness
I’m about to explain
A-That someone is losing their brain

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18 thoughts on “Sweden and Denmark are offering an Alice In Wonderland future for monetary policy

  1. …. I know who I was when I got up this morning, but I think I must have been changed several times since then …

    I really don’t understand what’s going on Shaun. Are they mad? Or is it me? Or is the money transmission system broken. Foot to the floor, engine screaming, but the wheels are only just turning.

    All roads lead back to the banks!

    • Hi Eric

      “But I don’t want to go among mad people,” Alice remarked.
      “Oh, you can’t help that,” said the Cat: “we’re all mad here. I’m mad. You’re mad.”
      “How do you know I’m mad?” said Alice.
      “You must be,” said the Cat, “or you wouldn’t have come here.”

      Actually that does seem apposite for the US Federal Reserve tonight still hinting at interest-rate rises after a series of weak numbers including today’s 0.2% annualised GDP growth report for Q1. We were not so keen on our’s which was 6 times better than that…

      More generally they seem to be individually weak and collectively subject to group think. It is as if they keep seeing the trailer for the modern era remake of the film The Fly.

      “Be Afraid. Be Very Afraid!”

      • Wait for the second half figures for the uS Shaun. I suspect The Fed has seen what I see. I expect the Fed to start raising rates this September/October althoug a fly in the growth ointment is building inflationary pressures I’ve been observing in the US these last 2 months…..

  2. Great column, Shaun, as usual.

    The evidence that loose monetary policy is feeding housing bubbles isn’t hard to find in both countries. In Sweden the real estate price index increased by 9% annually in 2015Q1. The Danish price index for owner-occupied flats was up by 8.2% in 2014Q4 after an increase of 8.6% in 2014Q3.

    • Hi Andrew and thanks for the numbers.

      The fear must be of a further house price surge and even as we stand there is clear asset price inflation in your numbers. I was contacted a couple of years ago by a Swedish journalist on such issues so it is not as if they have appeared from nowhere.

      Yet in a universe far far away the Riksbank can proclaim.

      “Weaker international economic activity or a rapid appreciation of the krona could also lead to inflation not rising fast enough……ensure that inflation rises sufficiently quickly….Monetary policy reflects the fact that the Riksbank’s tolerance for low inflation is very limited.”

      Should the oil price hold here it will all look very different in 6 months time in inflation terms.

    • Andrew,

      A good point.Iirc the SNB took a shower courtesy of M2 growth causing a housing bubble I believe,as they fought to maintain the euro peg.

      Looks likes the Danes are failing to learn from someone else’s mistake.

  3. I think there is a cunning plan in operation by the 0.01% to make wage slaves of the 99.99%. Keep them so far in debt that they have no alternative but to keep their noses to the grindstone and they will be too exhausted and worried to riot. House price inflation satisfies this plan better than anything else they can dream up.

    • that cunning plan – keep ’em fed and keep ’em entertained

      footy , eastenders and big macs …..

      controller the MSM so that what ever their lying eyes see , the media shouts ” all is well!!”

      the farmyard animals are maybe wondering what the pigs are about ….. ( ie the Banks )

      meanwhile Shaun keeps up the revolutionary acts of telling the truth !

      keep at ’em ,Shaun !

      Forbin

  4. I wonder just how accurate the forecasts and economic data are that governments and central banks are using to determine their future policy? I understand why the Danes are doing what they are (is it worth the risk though?) but the Riksbank? Do they know something we don’t? Or are they working from forecasts that are at best doubtful? If their ability is on par with the B of E then it may be the latter.

    I have just been reading about the latest 1st quarter Spanish GDP figures and something doesn’t make sense. The actual earnings in cash terms is the same as last year and yet GDP growth is being reported!They also claim there is no deflation! Can’t have one without the other if the actual amount hasn’t changed! It’s an election year so I imagine much is being manipulated and once again I doubt the accuracy of official figures.

    I have said before that I do not believe that you can measure and forecast economies to decimal places. I found it difficult to forecast a decent sized business to an accuracy of a few percent here or there so an entire economy…….? It doesn’t matter too much when growth is significant but when it is in low single figures I do wonder about major policy moves being dictated by the difference between such tiny numbers. If it were me I would either sit on my hands or make a common sense decision ignoring tiny percentage differences.

  5. I’d suggest that the small players pushed out of shape by the Euro monetary policies keep their debts & borrowing low. This means if we get a bout of euro instability/collapse – their currencies should float sensibly allowing RELATIVE monetary stability. Remember – the worse the currency gyrations, the more the bottom 80% will get hurt. Above that it’s probably a question of luck being short or long on cash dependent on economic events.

    • Hi ExpatnBG

      Perhaps they could join a sterling bloc. Come on in the water’s lovely! Well except it is merely a bit better than the Euro, so there are not that many choices right now. I have to say that Denmark seems to be picking out the worst ones though…..

  6. Jean Claude Juncker: “When it’s really bad sometimes you have to lie”. I think it is really bad, but that doesn’t mean it couldn’t get worse. How do you spell catharsis?

  7. ‘There was another cut to -0.25% on UK Budget Day as our Martian looked for some headache pills to stop his or her brain hurting. Now let me bring you fully up to date with some news from Sweden Statistics from this morning.

    In March the annual growth rate for lending to households increased by 0.2 percentage points, from 6.2 percent in February to 6.4 percent in March.

    As you can see the fear I expressed for Denmark seems to be bubbling along in Sweden and our Martian’s alarm would rise if we narrow our focus.

    Housing loans account for 81 percent of total lending to households, and increased by SEK 160 billion to SEK 2 526 billion. The annual growth rate was thus 6.8 percent in March.

    So there you have it a housing market which is being pumped up and a money supply which is either growing at an annual rate of 13.8% (M1) or 7% (M3).’

    I’m genuinely intrigued as to what on earth they can do for their next trick?I mean,seriously,where do you go from there.?

    • Hi Dutch

      So far there are four missing options for Sweden and the Riksbank

      1. Currency Intervention
      2. Directly offering loan subsidies ala Bank of England FLS
      3. Buying equities and real estate
      4. Outright debt monetisation

      I have no idea why they are doing what they are doing let alone promising “more,more,more”

      What happens if they actually have a recession?

      • That latter point was what I was so poorly trying to point out.It beggars belief that countries with that sort of loan growth are going to negative rates.

        Crazy times.

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