Tagged: Macroeconomics

Sweden on the Brink

I left my native country, Sweden, in 1999. It was the same summer that I handed in my doctoral thesis at my Danish alma mater. After the usual haggling, rewriting and turf peeing by dissertation committee members, I defended it in the spring of 2000. By then, Ashgate, a reputable British publisher of quality academic work, had approached me asking if they could publish my thesis. The book, Uncertainty, Macroeconomic Stability and the Welfare State, was my first concerted effort at understanding the systemic problems with the welfare state.

I enrolled in the Ph.D. program at Roskilde University in late 1995, going full scholarship the following spring, while commuting back and forth across the border. I spent every other week in Denmark, every other week at home, immersing myself in economics and political economy at a level I could only have dreamed of doing at a Swedish university.

Part of my reason for leaving Sweden was that the country offered practically no useful graduate education in economics. Under a centralized regime run by the Institute for International Economics in Stockholm, all Swedish graduate programs had been aligned in the image of new classical macroeconomics (Lucas-Sargent and Kydland-Prescott for you nerds out there) which meant that all you learned as a grad student was advanced correlative statistics. Oh yes, and two years’ worth of eclectic optimization problems.

All of this has destroyed the ability of the practitioners of economics in Sweden to even remotely approach pertinent economic policy issues. While it is impossible to practice political economy in Sweden, you can easily become a full professor in the discipline by spending your entire career studying how one consumer interacts with one consumer product. You can also become a full professor if you spend your entire career studying non-linear taxation of trees as they are being chopped down in some forest somewhere.

What you cannot do is earn a doctorate actually studying economics.

As a result of the new classical, contagious intellectual illness that started spreading through the economics profession in the 1980s, everything analytical has been thrown out the window. All they worry about are econometrics and Walrasian algebra (my apologies for taking the great science of mathematics in vain), both of which are as useful in real-world economic analysis as astrology is to engineers. Econometricians can do a fair amount of good work in isolated microeconomic studies, but if you are in any way interested in the systemic nature of our economy, the interaction between the free market, political ideologies, economic institutions, government spending, taxes and money, you can forget a graduate program in economics. Especially in Sweden.

In fact, you are even better off reading Murray Rothbard.

I did not read Murray Rothbard, at least not back then, but I left Sweden for greener pastures. After having thrived in Denmark for a few years, teaching macroeconomics and the welfare state at my Danish alma mater, I moved to America. Here, I have had the opportunity to actually practice what I learned in grad school, and I have found a plucky and thriving – albeit intellectually somewhat shallow – vegetation of political economists, centered primarily around think tanks.

America is a better country thanks to her free-spirited mindset. Sweden, on the other hand, is a country in macroeconomic decadence, and the fault for that falls in no small part on the shoulders of my old econ friends from college. Many of them are now prominently placed in politics, or spend their days regurgitating multivariate regressions, all in the service of their almighty government.

As a result of the intellectual desert that has engulfed the economics profession in Sweden, for the past 30 years the country has been on a slow but inevitable economic downslope. After a tepid 1980s, with economic growth so slow that the Social Security-style ATP pension system imploded, the country was plunged into the Great Big Dungeon of 1992. Starting in late 1990, the economy collapsed at such a pace that unemployment went from two to 15 percent in 18 months. The economy contracted for three years in a row.

Having graduated college and done a brief stint in airport rescue putting out fires, I was working in economic policy, trying to put out less conspicuous but more devastating fires. I was contracted as a writer and speaker with a small publication that nominally leaned left, but was mostly anti-establishment in its editorial practice. I traveled around the country talking and opining about how the government’s efforts to balance the budget was choking the economy to death. It was a line of work that predictably made me a persona non grata in certain circles of power.

It was considered impolite to criticize the prime minister and his cabinet for its Greek-style destruction of the economy. Hence, another reason to set my eyes on Denmark.

Alas, I was proven right. The Swedish economy never recovered from the implosion back in the early ’90s. In my book Industrial Poverty from 2014, I reported in detail on the destructive austerity policies of 1995-1998, and how they ended the budget deficit but choked the economy half to death in the bargain.

Since then, the Swedish government has used all sorts of artificial policy measures to keep the economy alive. They marginally eased the tax burden, in part with its own version of the American EITC (Earned Income Tax Credit), which of course has only led to higher marginal effects in the income-tax system. They have not really reduced the top tax rate (despite some ill informed libertarian pundits on this side of the Atlantic trying to claim the opposite) and they have secured a firm grip on the economy by means of a value added tax that applies to everything from cars and train tickets to food and tap water.

Sweden competes with Denmark for the most burdensome taxes in the world. They are doing a fine job with it, so fine in fact that they have depressed economic growth to a point where households increasingly depend on government to make ends meet. Figure1 reports the share of household income – technically “production factor income” which refers to households as the labor force – that comes from workforce participation. (I used this chart a year ago in an article for a Swedish publication, hence the Swedish references.) In short: this chart shows how the Swedish government, through fiscal policies hostile to economic growth and productive workforce participation, has depressed wages and salaries as a source of income.

Figure 1*

Source of raw data: Statistics Sweden (scb.se)

In short: Swedes have become more and more dependent on government, and less and less able to feed themselves.

To still maintain some kind of industrialized standard of living, Swedish households have been forced to go deep into debt. As of 2019, Swedes had the second highest debt-to-income ratio reported in the EU. While Eurostat does not produce this statistic for all EU member states (a glaring deficiency) the sample is big enough to point out how miserably indebted Swedes are. Figure 2 compares them to the only country with a more indebted population – equally tax-burdened Denmark – and to Spain, for a reason we will return to in just a second. It is noteworthy how the debt burden on the shoulders of the Swedes has increased steadily since the austerity years of the 1990s:

Figure 2

Source: Eurostat

If it wasn’t for growing debt, the Swedes would be stuck in a sub-industrial standard of living. It is not the debt itself that is the problem, but the rise in the debt ratio. Thanks to a combination of onerous and bureaucratic zoning and housing-standard regulations on the one hand, and an extremely high immigration rate on the other, housing prices have increased beyond what is even remotely reasonable.

At the same time, without household access to expanding debt, the Swedish economy would not have done half as well as it is has over the past 25 years. As Figure 1 indicated, Swedes cannot live on work alone, but have to find other ways to afford a standard of living in resemblance of that of their neighboring countries.

Speaking of which, the Danes are even more indebted than the Swedes. The reason is two-fold: that they are an even more cramped for land to develop for housing (Denmark is nothing but subdivisions and farmland) and that they have a car-registration tax that doubles the price of passenger vehicles.

However, as Figure 2 reports, the Danes reversed the rising debt ratio a few years ago by reforming the interest deduction in their income-tax code. By gradually reducing the deduction, the Danes keep household finances relatively stable while also creating an economic incentive toward better financial sustainability.

The Swedes followed suit a couple of years later, but not with a smart dynamic solution. Theirs was a one-time reform with higher down payment requirements and other changes to real-estate financing. Now, though, they are worried that their reform is going to bring the housing market into a downward spiral. If that happens, it will rip the entire Swedish economy with it – and when that happens, it will not be pretty.

To keep household debt as cheap as possible, the Riksbank – the Swedish central bank – has operated with negative interest rates for almost six years. They recently returned to zero rates, which led to a policy backlash: as Tyler Durden over at ZeroHedge reports in a good summary, the Swedish economy – together with Europe as a whole – entered into a second artificial economic shutdown because of the coronavirus hype.

Durden also explains that the Riksbank responded with an “unexpected” new Quantitative Easing strategy, while trying to keep its interest rate at zero (instead of going negative again). While Durden, a ranking financial expert, sees the policy as unexpected from a strict monetary perspective, the deeper reason for a new, massive round of money printing: deficit monetization. This, in turn, is necessary to avoid the two policy moves that would throw households into debt default:

  1. Higher taxes – an otherwise popular go-to strategy for Swedish politicians, especially when the economy is in a deep recession (because what is better for an economy in a recession than higher taxes?); and
  2. Higher interest rates – which would come in response to a plummeting currency.

The latter would happen if the former happened. The country’s economy is perennially weak – only exports have done well – which has led to constant stress on public finances, both in terms of weak revenue and in terms of high demand for tax-paid entitlements. Swedish fiscal rules prescribe hard budget balancing, to which the political leadership will gladly respond with tax hikes. In a situation where household debt is basically more important than work-based income to keep consumption above the industrial-poverty level, any tax hike can poke a fatal hole in the debt bubble.

When the economy shows its first signs of implosion, foreign investors will be lightning quick to withdraw their money from the country. As capital starts flowing out, the currency plummets. This triggers an uncontrollable import-price spiral, to which the Riksbank can only respond with sharp increases in interest rates.

At which point the real estate market gets its guts kicked out.

The Riksbank knows that all that stands between tenuous macroeconomic stability and a Greek-or-worse style implosion of the country, is Quantitative Easing.

If I were thusly preferenced, I would repeat today what speculators did to the Swedish krona in 1992. I would take a loan in their currency, deposit it into a U.S. account and wait for six months. By then the krona will have depreciated with the declining economy, enough so to allow for a neat little profit.

Back in 1992, just before the Great Big Collapse of the Swedish currency, the krona stood in a five-to-one exchange rate with the dollar. If you took out a loan of one million kronas, you had $200,000; once the krona collapsed you paid back the loan, but since the exchange rate was now eight to one, you only had to use $125,000 to be free of the debt.

That’s a neat little profit of 37.5 percent.

It remains to be seen what the profits will look like today. One risk factor, of course, is the U.S. monetary policy. If Trump’s election-fraud challenges turn out to be as solid as Sidney Powell says they are, he will be sworn in again on January 20. In that case we can expect a moderation of U.S. fiscal and monetary policy. If, however, Biden prevails we can most certainly expect Mad Monetary Theory on steroids, whereupon the dollar will be significantly weakened. However, all other things equal, the Swedish krona is ripe for another implosion – and therefore a grateful target for speculators.


*) The color codes are linked to political majorities in the Swedish parliament. The choice of color is not translatable to an American context.

V-Shaped Recovery: Trump Was Right

Never bark at the Big Dog. The Big Dog is always right.

The GDP data for the third quarter is out. The V-shaped recovery is a fact.

I predicted exactly this back in May. So did President Trump. We both did it in the face of bold, almost condescending forecasts from economists all over the country, the world even, who predicted a protracted recession that would last all the way to 2022.

Some of them, of course, wished for a long recession so Trump would not get re-elected, but those who thought they were just doing their job now have some new homework to do. Their stubborn reliance on econometrics for forecasting once again came back like those proverbial, roosting chickens.

I, on the other hand, work with theory and methodology from good old political economy. Over and over again, John Maynard Keynes, Friedrich von Hayek, Frank Knight, Arthur Okun, Paul Davidson, George Shackle and Armen Alchian prove their superiority.

Now that the gloating is done, let’s see what Trump’s V-shaped recovery looks like. According to the advance estimate from the Bureau of Economic Analysis (BEA), inflation-adjusted GDP increased by 7.4 percent from Q2 to Q3.* Private consumption roared back with an 8.9-percent increase. Most of that came in the form of durables, which ostensibly has to do with the windfall income from the stimulus checks.

It remains to be seen exactly what people spent their money on, but it is reasonable to expect a combination fo windfall consumption and the advantage of cheap credit. The part of the stimulus checks that did not go toward paying down debt was likely used for home electronics: phones, computers, flat-screen TVs. In other words, items that did not come with long-term installment payments.

On the other hand, once the recovery was underway and people got their jobs back, extremely cheap consumer credit appears to have stimulated car sales again. We should have a better grip on the details in late November.

Another big, good news item in the Q3 GDP numbers is gross fixed capital formation, or business investments. Up 16.3 percent from Q2, America’s businesses are once again putting their money into the Trump economy.

The biggest improvement in investments, 14.2 percent, came in the form of equipment purchases. This covers everything that can be put into a factory or an office for the purpose of business operations, as well as things needed for shipping and deliveries. Think of “equipment” as everything from delivery trucks and wrenches to computers and assembly-line robots.

Another show of commitment to the Trump economy comes in the form of housing. Investments in residential dwellings rose more than 12.3 percent over Q2. In fact, home construction was 6.6 percent higher in Q3 than it was in Q3 2019!

Home construction intersects business confidence with consumer confidence. If people buy homes, they believe in their own financial future. If businesses build those homes, they believe in the local economy.

But wait – we are not done with the good news. While fiscal conservatives rightly criticized Congress for its stimulus checks, government consumption – spending that pays people to do work – was down more than 1.1 percent in Q3 over Q2. Non-defense consumption by the federal government was down a healthy 4.9 percent; the equivalent for states and local governments dropped a minute 0.8 percent.

At the same time, defense spending rose by three quarters of a percent. Again, a good priority by the federal government. Unfortunately, the annual numbers for federal spending do not look as good: from Q3 in 2019 to Q3 this year, federal non-defense consumption is up almost 4.2 percent. Hopefully, the restraint shown in Q3 over Q2 will be extended into Q4.

Speaking of annual numbers: U.S. GDP in Q3 was $18,584 billion in inflation-adjusted numbers (base year 2012). This is 2.9 percent below where it was in Q3 last year. If this V-shaped recovery continues, it is not impossible that real GDP for the whole year will be positive. It is a tall order, requiring an unlikely 3.6-percent increase for Q4, but if Trump is re-elected and Biden’s ominous tax plan withers away, this growth number can actually materialize.

Again, the latest numbers from the Bureau of Economic Analysis are all good news. The not-so-good news is in the hints of inflation in these numbers. A simple subtraction of real GDP from current-price GDP – a crude inflation estimate – suggests a price bubble in Q3. By this calculation, prices on consumer durables rose 2.4 percent from Q2, a remarkably high price increase.

It is worth noting that the same prices dropped by only 0.8 percent in Q2. This could all be attributable to the aforementioned windfall spending, but I would not rule out that we are seeing the first hints of a monetarily driven spike in inflation. Let us keep in mind that Q3 was the first quarter when the Federal Reserve’s new MMT-style money printing made its first full appearance in the economy.

I hold it for unlikely that the money-to-prices transmission mechanisms have already kicked in with the force needed to spike prices, but I do not rule it out. Let us not forget that the velocity of money has dropped below 1 for the first time on record. This is dangerous: ultra-cheap liquidity always finds its way out somewhere in the economy. First it flows into equity markets – hence our stock-market boom – then it finds its way into consumer markets via cheap credit and government handouts.

We saw the first combination of that this year. The brunt of the handouts was temporary, which means that part of the transmission mechanism from money to prices has been turned off again. However, if Congress persists in its plans for another stimulus bill, the inflation outlook may change very quickly.

The BEA also published some interesting numbers on personal income. We will have to return to those later. Enjoy the rest of your day!


*) Normally I do not discuss quarter-to-quarter numbers, but due to the exceptional nature of the swings in the economy this year, it is merited to make an exception.