The Riksbank should have read The Hitchhikers Guide to the Galaxy

Today is an example of what the military call a target rich environment so let me open with the words of advice from The Hitchhikers Guide to the Galaxy.

Don’t Panic

An organisation which seems to have abandoned such sense over the past year or so has been the Riksbank of Sweden. It was only yesterday that in my article on the spread of negative interest-rates the comments section suggested there would be a further cut today. Apparently they did not want to disappoint us.

To provide support for inflation so that it rises and stabilises around 2 per cent in 2017, the Executive Board of the Riksbank has therefore decided to cut the repo rate by 0.15 percentage points to −0.50 per cent.

There is much to consider here with the initial reports also coming with a tinge of reporting that the Swedish version of “More,More,More” was also being played. There is much to consider in an international context but let me open by discussing the consequences and problems which Sweden faces domestically. The first is a central bank that moved interest-rates in increments of 0.15%! How was that decided? So 0.1% silly but 0.15% is effective? You see back in 2008 the repo rate got as high as 4.75% so we see that if 5.1% of interest-rate reductions are not working you are as Britop in the film Snatch put it “on very thin ice my pedigree chums” arguing that another 0.15% will fix it.

The Swedish economy is doing rather well

Before we get to this bit let us dip into our textbook for the day.

A common mistake that people make when trying to design something completely foolproof is to underestimate the ingenuity of complete fools.

You see the Riksbank is cutting because the economy of Sweden is going rather well!

Growth in the Swedish economy is high and unemployment is falling, which suggests that inflation will rise in the period ahead.

In fact like the song New York, New York it is so good they told us twice.

The Riksbank’s very expansionary monetary policy has helped to strengthen the economy and reduce unemployment, and has contributed to an upward trend in underlying inflation since the beginning of 2014.

Last February I pointed out the incongruity of economic growth of 2.7% and an official interest-rate of -0.1%. Well this February I can point out that the divergence has got worse as economic growth forecast to be 3.5% this year and 2.8% next is now accompanied by a repo rate of -0.5%.


This is all justified on the grounds of inflation being below its 2% target. At the moment it is 0.1% which of course will be welcomed by Sweden’s consumers and workers as they find that their wages and income go further in real terms. If we look at the private-sector then manual wages are rising at 1.8% and non-manual at 2.5% so the Swedish economy is being boosted by the consequences of the oil price fall as real wags rise.

Now we have a problem or in fact two problems. You see most people think that central banks operate to reduce inflation whereas here the Riksbank is doing exactly the opposite of this in boosting it. This happened when central banks magically produced a 2% inflation target out of a box without any better justification than it seemed okay. The justification that it allows relative price changes is made to look a fraud by the large oil price moves which are exactly that. So not only is the central bank raising inflation it is announcing an expansionary policy which has some and maybe a lot of deflation in it. What could go wrong?

If we step back a bit we see that Sweden is in effect seeing its monetary policy being set by the supermassive black hole that is the Euro and that the real rationale here is to try to weaken the Krona. Initially it fell by 1% but I shall return to a problem highlighted here later as we mull that everybody cannot devalue.

House prices

Speaking of things which could go wrong let me help out with one which already is. From Sweden Statistics this morning.

Real estate prices for one- or two-dwelling buildings increased by 3 percent during the last three-month period November 2015 – January 2016, compared to the previous period August – October 2015.

As West Ham won this week let me help out with their theme song.

I’m forever blowing bubbles,
Pretty bubbles in the air,
They fly so high, nearly reach the sky,
Then like my dreams they fade and die.

If we look a little further back we see this.

Prices increased by 12 percent on an annual basis during the last three-month period November – January 2016, compared to the same period last year.

So real wages are up by around 2% and house prices are up by 12%. I await all the reports which if the UK is any guide will tell us how “affordable” all this is.

But never fear you see in the same way that the Bank of England is “vigilant” on the subject so is the Riksbank.

The Riksbank has highlighted the risks associated with the low interest rate level on many occasions.

However its message is rather like the bit in each Mario Draghi speech about reform in the Euro area.

It is also important that Finansinspektionen’s mandate for macroprudential policy is clarified.

Let me give you a clue, it is there in every meeting minute.

Anyway if things are under control this bit seems to be undertaking some form of guerilla warfare.

If no measures are taken, this, in combination with the low interest rate level, will further increase the risks. Such a development could ultimately be very costly for the national economy.

Back on July 2nd 2015 I gave my views on this.

Also I think that first-time buyers in Sweden will already be singing along to its most famous pop music export Abba.

S. O. S.

The international scene

Yesterday’s speech by and interview of Janet Yellen already seems from another world as the response was for the Japanese Yen to surge. It blasted through quite a few levels yesterday and overnight and is still through the 112 level versus the US Dollar as I type this. So we see a problem for the Riksbank which is that in rather short order the Yen has strengthened after an interest-rate cut into negative territory. Ooops!

Next we have bond yields and longer term interest-rates and again Janet Yellen seems to be rather like a Queen Canute. The US ten-year note yields 1.67% as opposed to the circa 2.2% when she raised interest-rates. Meanwhile even Forward Guidance 12.0 as well as all the previous versions of Mark Carney is in absolute disarray.

UK government borrowing costs lowest since Siege of Yorktown, 1781 (@minefornothing)

That refers to a ten-year Gilt yield of 1.32% which makes me think as I type it. But if we continue with the Carney debacle or as it has become called “Carnage” then the five-year yield has fallen to 0.71% and it is a benchmark for fixed-rate mortgages. Should it stay there Mark Carney should hang his head in shame whenever he meets anyone who remortgaged on the back of his Forward Guidance.

Meanwhile in the supermassive black hole which is the Euro area then the ten-year yield of Germany is 0.18% whilst that of Portugal is 4.2%. Plenty of work for the ECB hedge fund traders to do there.


It was only yesterday that I analysed the spread of negative interest-rates and I suggest readers remind themselves of that and also my past articles on Sweden. But for now let me note that helicopter money as a strategy is being mentioned in some quarters and our guidebook for the day tells us about that.

Since we decided a few weeks ago to adopt the leaf as legal tender, we have, of course, all become immensely rich.

Meanwhile the Bank of Japan is on the case of the soaring Yen.

22 thoughts on “The Riksbank should have read The Hitchhikers Guide to the Galaxy

  1. meanwhile Abe brain is hurting over why the economy does not work as expected with QE

    so much his brain hurts…..


    PS : I think he’s talking to Mark……

    • Hi Forbin

      As we stand that’s a longer term problem. There is Friday to get through first where the first weapon which is checking the foreign exchange markets has already been deployed. Unless they act markets will be tempted and we already a long way from the target for the arrows of Abenomics.

  2. Stingray was fantastic, and I haven’t seen that opening sequence for many years. That said, the thing you have to remember with Supermarionation is the central characters are just are just so many puppets-on-a-string.

    Perhaps this is somewhat like central bankers? It’s tempting to recall the fairy story of another puppet with wood for brains, Pinnochio. If I remember the end of his story, Pinocchio finds that the fairy left him a bag in which he thinks are the forty pennies that he originally gave to a snail, but instead is shocked to find forty freshly-minted gold coins.

    I guess the Riksbank bank can only daydream about that kind of inflation! Surely that other Scandinavian hero Hans-Christian Andersen can rustle up a new fairytale?

    • Here let me correct that for you for today’s problem

      …. instead is shocked to find forty freshly-minted gold coins, which rusted at the first hint of rain …..



      What actually led to fiscal and monetary breakdown in the every major society from Babylonia through the Roman and Byzantine empires to more modern times was the ability of large property owners to break free of taxes. The Roman treasury was bankrupted by wealthy landowners using their control of the senate to shift the fiscal burden onto classes below them.

      Sounds familiar ?

      you can only stuff so much oats into a horse …….

  3. Can Troy Tempest save us? Or is he mortgaged to the hilt on that ground-swallowing launch-pad des res, handing over the last of his reddies for the latest leased German jet-car on the driveway and his private school fees doubling for the nippers, while salaries at World Aquanaut Security Patrol have been frozen for years and there are even whispers in the canteen about staff trimming. If the banks can’t make a decent return these days, what chance is there for Troy and the rest of us?

    • Hi Peter

      You make a god point as NATO navies including the RN are now much smaller. Yet only today they have been called to the Aegean Sea to add to the extra patrols in the Baltic to deter Putin. It may be a while before Troy is allowed home to see his kids and Marina.

  4. Hi Shaun
    This is what happens when the ‘put’ is replaced by the ‘call’. The Fed will let the stock market go to hell this time. Everyone is jumping into bonds/gilts as fast as possible.
    As soon as there is the slightest figleaf of an indicator from the US economy to increase rates she will do so. And hang the rest of the world economy.

    • Hi JW

      You were right about the Yellen testimony as the Dow is some 300 or so points lower over the period. It will be an interesting night/morning as we wait to see what the Bank of Japan and the Yen have for us.

      As to the US Fed well it is notoriously insular isn’t it?

    • Tescos did the same thing

      ALDI and LIDL will laff all the way to the bank ….

      ( no doubt one they own and pays interest , not MIRP/BIRP )


  5. MIRPS & BIRPS, defaulting banks, helicopter money, QE … to a daft old non-economist like me it’s almost as if policy is being made up as we go along, but that can’t possibly be the case, can it? I guess I should have paid more attention at school instead of watching Stingray..

    Arthur: You know, it’s at times like this, when I’m trapped in a Vogon airlock with a man from Betelgeuse, and I’m about to die of asphyxiation in deep space, that I really wish I’d listened to what my mother told me when I was young.
    Ford: Why, what did she tell you?
    Arthur: I don’t know, I wasn’t listening.

  6. Hi Shaun – “it is announcing an expansionary policy which has some and maybe a lot of deflation in it.”.

    How is this deflationary?

    • I’m confused by this too., Shaun.
      If interest rates are negative it means that cash balances in a bank account will reduce.. So to call it interest is a bit of a misnomer. Interest is zero and a charge applied . Someone has to pay that charge, presumably through either increased charges on (zero interest) accounts, or reduced interest on savings accounts, or increased interest on loans. So the whole thing begins to operate like a tax – be you saver or borrower you will have less money…and therefore it’s not inflationary……. It’s beginning to look like cash under the mattress is a good idea.

      It’s quite obvious bankers, who understand these things much better than me, see it differently, so I must have it all backwards and don’t understand the practical implications of negative interest. (Sorry for the ramble).

      • Hi Noo2 and Eric
        If I may add my thought. If they can’t inflate away value by 2% a year they have to charge 2% interest on holding fiat currency ( NIRP of -2%). Same effect overall I think. So CPI of 1% leads to NIRP of -1%.
        Totally idiotic and brainless , but that’s your average CB now.
        I believe the Fed is going to break out of this ‘through the looking glass world’. In doing so it will force all sorts of bubbles to go ‘pop’.

    • Hi Noo2

      it is deflationary because it is a tax on money. Or to put it another way the banks lose (as they get charged at the central bank) they so far have struggled to get savers to accept negative interest-rates so they end up putting mortgage rates up to keep their “spread”. That seems to be the evidence.

      Maybe as time goes by more will give savers negative rates but of course that is deflationary and I am using that word in the aggregate demand sense not the way it is in common usage.

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