Monday, January 02, 2006

Sweden's Increasing Monetary Imbalances

In sharp contrast to America (see entry below), Sweden have had relatively strong macroeconomics but much weaker microeconomics. While Sweden is better than most third world countries in terms of reliability of property rights and the justice system, and better than for example France, Germany and Italy in terms of product market regulations it suffers from the highest taxes in the world and have extremely strong unions which imposes very high minimum wages. This have as I have noted before created hugh problems with falling employment and mass unemployment (most of it hidden).

But Sweden have on the other hand had stronger macroeconomics than America and most continental European countries. Sweden have a small public sector surplus in contrast to the hugh deficits in all G7 countries except Canada. Meanwhile credit expansion have -until recently as will be discussed below- been more limited than in most other countries and so the household savings rate have remained decent and the debt burden not too troublesome.

However, because Swedish consumer price inflation have been limited as a result of increased competition in the retail sector and because Sweden have a central bank, Riksbanken, which is obliged to keep consumer price inflation at 2%, Riksbanken have been forced to reduce interest rates to ridiculously low 1.5% in order to increase monetary inflation to counteract the downward pressure on consumer price inflation from increased competition.

But just like when the American central bank in the 1920s flooded the economy with money to counteract the deflation created by the fast productivity growth, this have started to create a asset price bubble, mainly in housing. Housing prices are now increasing at double digit rates in Sweden. And now we read in Dagens Industri that credit expansion in Sweden accelerated to 13% in November, the highest since the last Swedish housing bubble, that in the late 1980s. This is of course a direct result of the interest rate cuts from Riksbanken.

Still, it is actually hard to blame the board members of Riksbanken for this. After all, they are obliged by law to do everything they can to keep consumer price inflation at around 2%, and thus they have acted properly given that obligation. Many board members have in fact expressed concern over the negative side effects of this policy and have for that reason indicated that part of the rate cuts will soon be repealed, despite the fact that this means that they will be undershooting the formal consumer price inflation target they are supposed to target.

The problem is instead the inflation targeting policy -and more broadly the whole fiat money system- which is bound to create this sort of problems. Central planning is a bad thing within the monetary area, just as in all others.


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