Regulators are “Worried”- but it is way too Late

We have discussed the immense credit bubbles in Scandinavian countries in these pages several times in recent years. As it turns out, they have now become even bigger. The euro area debt crisis has had a number of side effects. One of them is that not only Switzerland, but also other countries in Europe outside of the euro zone have tried their best to keep their currencies from appreciating. This is based on the erroneous mercantilist notion that having a strong currency is somehow “bad”.

In Denmark the central bank’s benchmark lending rate has been stuck at minus 0.75 percent since February. Denmark’s households are incidentally the most leveraged in the world, with household debt amounting to over 530 percent of the country’s economic output.

 

 

1-denmark-interest-rateDenmark’s central bank benchmark rate – stuck at a negative 75 basis points – click to enlarge.

 

2-Denmark interbank lending ratesDenmark’s three month interbank lending rates stand at minus 20 basis points, because banks can still earn a positive spread with the benchmark rate at minus 75 basis points – click to enlarge.

 

Not surprisingly, Denmark’s housing bubble, which had actually begun to look a bit frayed around the edges, has recently revived with great gusto. The same is happening in Norway and Sweden, two countries in which household debt, mortgage credit and house prices are likewise chasing one record after another. Regulators in these countries – this is to say, members of the same class of bureaucrats that is responsible for creating these bubbles with ultra-loose monetary policy in the first place, are now declaring themselves to be “worried” about the monsters they have let loose. According to the Financial Times:

 

“Stories of frenzied bidding rounds and record-high prices are causing concern among policymakers and economists, as central banks in all three Scandinavian countries appear set to keep interest rates at historically low levels for several more years.

[…]

Few expect the bubble to burst soon, with official interest rates well into negative territory in Sweden and Denmark and at a historic low in Norway. Many fear that the damage could be great when rates do rise or the economies slow.

“What I’m really worried about is that we will have a recession and the housing bubble will burst and the recession will be much worse,” said Hilde Bjørnland, a professor of economics at BI business school in Oslo.

Apartment prices in Copenhagen have risen by a quarter in the past year and are up by about two-thirds since 2011, according to data from Danske. Danes can get a mortgage at a fixed net rate of just 2.9 per cent for 30 years, while average household debt is equivalent to three times their disposable income — the highest in the world.

In Norway, apartment prices have rocketed more than sevenfold since 1992. But despite worries about how the falling oil price is hurting the Norwegian economy the cost of housing has continued to gallop ahead, with a record number of dwellings sold in June.

Anecdotal evidence backs this up. The former home of the Soviet spy Rudolf Abel in an Oslo suburb sold for NKr6.1m ($750,000) this year, well above the NKr4.2m asking price. In Copenhagen, brokers talk of people buying places without seeing them.

“This market is so hot now. Low interest rates just allow people to bid more and more — and that is what they are doing,” one Oslo estate agent said. Magdalena Andersson, Sweden’s finance minister, called a 13 per cent rise in house prices in the year to May a “worrying development”. Her Norwegian counterpart, Siv Jensen, said after the International Monetary Fund pointed to rising house prices and household debt as the main threats to financial stability: “I share the concern about rising housing prices.”

Central bankers are also on high alert even as interest rates continue to tumble. Sweden’s Riksbank cut its main policy rate to minus 0.35 per cent last month; Denmark’s deposit rate is at minus 0.75 per cent; while Norway has cut rates twice since December to a record low of 1 per cent.

“There is no doubt that house prices and debt levels are the main risks to this strategy,” said a Scandinavian central bank official. Authorities are trying to take stabilization measures but analysts query whether they are sufficient. Norway’s government is aiming to toughen up lending rules, while Sweden’s financial regulator tried but then backed down from plans to force mortgage holders to pay down their debt, not just interest. Economists say proper measures would include tackling the tax system, which in all three Scandinavian countries grants tax deduction for interest payments.”

 

(emphasis added)

So central bankers first introduce negative interest rates – a total perversion of economic logic, since time preferences are always positive – and then they say they are “concerned” about the bubbles this has set into motion. In reality, these developments are an ongoing indictment of central economic planning by the purveyors of fiat money. It is a thoroughly sick system that will eventually lead to an economic catastrophe of gargantuan proportions.

Don’t be misled by the fact that nothing untoward has happened yet – this is a position akin to people buying the Nasdaq at an astronomical P/E in early 2000 because the “bears have been wrong so far”. The timing of the catastrophe is always uncertain – but it is apodictically certain that it will happen, and the longer it takes for it to happen, the worse it will be.

 

3-Denmark household debt to GDPDenmark’s household debt amounts to more than 531% of the country’s GDP – click to enlarge.

 

Can anything be done to prevent a crash? Nope, nothing at all – it is way too late for that. The only choices that remain are to allow the bubble to deflate as soon as possible by abandoning the inflationary policy, or just keep going until something breaks of its own accord. In the worst case, the underlying currency system will end up in complete ruins.

 

How Big can the Bubble Become?

As economist Claus Vistesen has remarked to us, with Denmark’s current account surplus of nearly 7% of GDP and its highly liquid (and giant) mortgage bond market, investors see no clouds in the horizon and money keeps pouring in. He calls Denmark “Germany squared” – and points out that although political decision makers know that what is happening is pure madness, Denmark remains a “poster boy for stability” and hence continues to attract safe haven flows.

According to Claus, things could get dicey very quickly if e.g. the country’s current account surplus were to disappear, but we believe that even with negative central bank lending rates and no dependence on foreign capital flows, there has to be a limit to how large the debtberg can become and how high house prices can go. The principal amounts are becoming ever larger and the huge debts one has to take on if one wants to finance a house purchase are by now producing almost comical debt-to-income ratios. For instance, the average Danish household now sports a debt-to-income ratio of 310%.

 

4-Denmark current accountDenmark’s strong current account balance has induced foreign investors to overlook the risks, on the idea that the country need not fear capital outflows as long as it persists  – click to enlarge.

 

Money supply growth in the Nordic countries has been going “parabolic” for many years. Below at the charts of Denmark’s narrow money supply M1 and Norway’s money supply M2 (we couldn’t find M1 data for Norway, but the M2 chart should suffice to convey the message).

 

5-Denmark M1Denmark’s narrow money supply M1 – the slight dip in 2010-2011 caused a 15% crash in house prices, but the central bank immediately revved up the printing press again.

 

In Norway, money supply growth is slightly less erratic than in Denmark, but is likewise on a steadily accelerating path. The difference between Denmark, Norway and Sweden is that in Denmark, there has already been a mild housing bust after the 2008 GFC, while in Norway and Sweden, the respective housing bubbles barely skipped a beat and just kept growing after a few quarters of sideways movement.

 

6-Norway M2Norway’s money supply aggregate M2 – another major inflationary bubble – click to enlarge.

 

7-norway-housing-indexNorway’s house price index has been a one-way street since forever – click to enlarge.

 

We keep wondering what the basic idea behind these policies is, and the only conclusion that suggests itself is that many people apparently believe in the proverbial free lunch. This is of course not what the planners are saying. There is always some other rationalization that is forwarded, such as the need to prevent the currency from strengthening, or the need to combat the alleged evil of declining prices or the need to support the economy with easy money.

Economic growth in these countries is by the way pathetic, we believe mainly because of their loose monetary policy. This policy continually undermines the economy on a structural level, as it distorts relative prices and thereby falsifies economic calculation. The end result is that more and more scarce capital is invested in the wrong lines. It all looks fine as long as monetary pumping continues, but is immediately revealed as a house of cards when the pumping stops.

What one must ask is what will happen if these bubbles so to speak begin to implode under their own weight. This shouldn’t be ruled out, given the sheer size of the debt that has been created. Our guess would be that central bankers would then decide to increase monetary pumping even more (what else?). At that point it could easily happen that the currently ubiquitous faith in the machinations of central banks evaporates. In fact, we feel reasonably certain that this is how it will all end – even though we can obviously not predict when it will happen.

 

Conclusion

The Scandinavian economies are fairly small, and it is probably widely held that if a debt crisis develops there at some point, it won’t affect other economies much. However, this will largely depend on contingent circumstances at the time. When Sweden went through a banking crisis in the 1990s, it didn’t affect other countries and Sweden ultimately succeeded in getting it under control.

The difference between then and now is that today’s credit and asset bubbles are far larger in both absolute and relative terms than those of the 1990s, and that numerous countries remain severely impaired in the wake of the most recent crises (i.e. the US mortgage credit and housing bubble crisis of 2008 and the subsequent euro area debt crisis). This probably makes economies around the world far more contagion-prone. One should therefore not dismiss the bubbles in the Nordic countries as unimportant side-shows. They could eventually turn out to be “black swans” – unexpected sources of instability.

Even many countries the economic and fiscal situations of which look strong on a superficial and comparative level, are in a far weaker position today than prior to the last crisis. In the next crisis we will probably see a “sauve qui peut” scenario, as policymakers everywhere will have their hands full with their own problems.

What the data from the Scandinavian countries once again show is that there is an enormous reservoir of potential problems out there (see also our recent missive on the new record high in Italy’s non-performing loans as an example of problems that are festering in the background, are temporarily masked by monetary pumping and therefore ignored). We are not sure what it will take to shake the current complacency in financial markets, but something will undoubtedly present itself in due time.

 

Charts by: St. Louis Federal Reserve Research, tradingeconomics

 

 

 

Emigrate While You Can... Learn More

 


 

 
 

Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.

   

Bitcoin address: 12vB2LeWQNjWh59tyfWw23ySqJ9kTfJifA

   
 

2 Responses to “Scandinavian Bubbles in Overdrive”

  • APM:

    Pater Tenebrarum, you are using a quarterly series (not annualized) at constant prices to divide the debt stock of Danish households. The correct analysis is: Total Credit to Households and Non-Profit Institutions Serving Households, Adjusted For Breaks, for Denmark©, Billions of Danish Krones, Not Seasonally Adjusted (CRDQDKAHABIS) / Current Price Gross Domestic Product in Denmark©, Billions of Danish Krones, Not Seasonally Adjusted (DNKGDPNADSMEI) which yields a ratio of about 130%. Nominal GDP in Denmark was DKK 1,919 billion in 2014 (USD 330.8 billion at historical exchange rates) and total household debt was DKK 2,446 billion. Still a quite a debtberg of course!

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • Is the Canary in the Gold Mine Coming to Life Again?
      A Chirp from the Deep Level Mines Back in late 2015 and early 2016, we wrote about a leading indicator for gold stocks, namely the sub-sector of marginal - and hence highly leveraged to the gold price - South African gold stocks. Our example du jour at the time was Harmony Gold (HMY) (see “Marginal Producer Takes Off” and “The Canary in the Gold Mine” for the details).   Mining engineer equipped with bio-sensor Photo credit: Hulton Archive   As we write these...
  • Fed Credit and the US Money Supply – The Liquidity Drain Accelerates
      Federal Reserve Credit Contracts Further We last wrote in July about the beginning contraction in outstanding Fed credit, repatriation inflows, reverse repos, and commercial and industrial lending growth, and how the interplay between these drivers has affected the growth rate of the true broad US money supply TMS-2 (the details can be seen here: “The Liquidity Drain Becomes Serious” and “A Scramble for Capital”).   The Fed has clearly changed course under Jerome Powell...
  • Are Credit Spreads Still a Leading Indicator for the Stock Market?
      A Well-Established Tradition Seemingly out of the blue, equities suffered a few bad hair days recently. As regular readers know, we have long argued that one should expect corrections in the form of mini-crashes to strike with very little advance warning, due to issues related to market structure and the unique post “QE” environment. Credit spreads are traditionally a fairly reliable early warning indicator for stocks and the economy (and incidentally for gold as well). Here is a...
  • The Gold Standard: Protector of Individual Liberty and Economic Prosperity
      A Piece of Paper Alone Cannot Secure Liberty The idea of a constitution and/or written legislation to secure individual rights so beloved by conservatives and among many libertarians has proven to be a myth. The US Constitution and all those that have been written and ratified in its wake throughout the world have done little to protect individual liberties or keep a check on State largesse.   Sound money vs. a piece of paper – which is the better guarantor of liberty?...
  • Fed President Kashkari Hears Voices – Are They Lying?
      Orchestrated Larceny The government continues its approach towards full meltdown. The stock market does too. But when it comes down to it, these are mere distractions from the bigger breakdown that is bearing down upon us.   Prosperity imbalance illustrated. The hoi-polloi may be getting restless. [PT]   Average working stiffs have little time or inclination to contemplate gibberish from the Fed. They are too worn out from running in place all day to make much...
  • US Stocks and Bonds Get Clocked in Tandem
      A Surprise Rout in the Bond Market At the time of writing, the stock market is recovering from a fairly steep (by recent standards) intraday sell-off. We have no idea where it will close, but we would argue that even a recovery into the close won't alter the status of today's action – it is a typical warning shot. Here is what makes the sell-off unique:   30 year bond and 10-year note yields have broken out from a lengthy consolidation pattern. This has actually surprised us, as...
  • Switzerland, Model of Freedom & Wealth Moving East – Interviews with Claudio Grass
      Sarah Westall Interviews Claudio Grass Last month our friend Claudio Grass, roving Mises Institute Ambassador and a Switzerland-based investment advisor specializing in precious metals, was interviewed by Sarah Westall for her Business Game Changers channel.   Sarah Westall and Claudio Grass   There are two interviews, both of which are probably of interest to our readers. The first one focuses on Switzerland with its unique, well-developed system of  direct...
  • Exaggerated Economic Growth of the Third World
      Exciting Visions of a Bright Future Fund Managers, economists and politicians agree on the exciting future they see in the Third World. According to them, the engine of the world’s economic growth has moved from the West to what were once the poverty-stricken societies of the Third World. They feel mushy about the rapid increase in the size of the Middle Class in the Third World, and how poverty is becoming history.   GDP of India vs. UK in 2016 – crossing...
  • Choking On the Salt of Debt
      Life After ZIRP Roughly three years ago, after traversing between Los Angeles and San Francisco via the expansive San Joaquin Valley, we penned the article, Salting the Economy to Death.  At the time, the monetary order was approach peak ZIRP.   Our boy ZIRP has passed away. Mr. 2.2% effective has taken his place in the meantime. [PT]   We found the absurdity of zero bound interest rates to have parallels to the absurdity of hundreds upon hundreds of miles of...
  • Why You Should Expect the Unexpected
      End of the Road The confluence of factors that influence market prices are vast and variable.  One moment patterns and relationships are so pronounced you can set a cornerstone by them.  The next moment they vanish like smoke in the wind. One thing that makes trading stocks so confounding is that the buy and sell points appear so obvious in hindsight.  When examining a stock’s price chart over a multi-year duration the wave movements appear to be almost predictable.   The...
  • How Dangerous is the Month of October?
      A Month with a Bad Reputation A certain degree of nervousness tends to suffuse global financial markets when the month of October approaches. The memories of sharp slumps that happened in this month in the past – often wiping out the profits of an entire year in a single day – are apt to induce fear. However, if one disregards outliers such as 1987 or 2008, October generally delivers an acceptable performance.   The road to October... not much happens at first - until it...
  • Yield Curve Compression - Precious Metals Supply and Demand
      Hammering the Spread The price of gold fell nine bucks last week. However, the price of silver shot up 33 cents. Our central planners of credit (i.e., the Fed) raised short-term interest rates, and threatened to do it again in December. Meanwhile, the stock market continues to act as if investors do not understand the concepts of marginal debtor, zombie corporation, and net present value.   The Federal Reserve – carefully inching forward to Bustville   People...

Support Acting Man

Item Guides

Austrian Theory and Investment

j9TJzzN

The Review Insider

Archive

Dog Blow

350x200

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

Mish Talk

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com