Central Bank Panic: Sweden's Central Bank Expands QE! Keeps Negative Interest Rate

Why has the stock markets of developed economies run amuck over the past week?

The US S&P

Europe's Stoxx 600

Japan's Nikkei 225 (not update for today's or April 21st trade where the said index spiked by 2.7%)

My guess? Aside from the supposed agreements by oil producers to cut oil production, which has become a key stimulus, another substantial part of the answer could be from the implicit Shanghai Accord. Global central banks appear to have undertaken an unannounced coordinated project of implementing monetary easing of their respective domestic financial system designed to propel risk asset markets higher or stoke the 'animal spirits'. Such tacit project, which may have emerged during the G-20 meeting in February, have been sold to the public as intended for inflation and growth enhancement.

Stock markets have become an instrument for policy making, thereby its sustained perversion. Thus, as global central banks remain on a panic mode, such translates to panic buying for stock market casino gamblers whom are the main beneficiaries from such policies.

Well, Sweden's central bank just announced an expansion of QE

From Marketwatch.com

The Swedish central bank raised its bond-buying target to 245 billion Swedish krona ($30.35 billion) on Thursday, saying the move, coupled with the bank's negative benchmark interest rate, is aimed at holding down the national currency and safeguarding a rise in inflation.

The revised policy plan will see the Swedish Riksbank, the world's oldest central bank, buy an additional SEK45 billion in government bonds in the second half of this year, on top of the SEK200 billion it is in the process of buying by the end of June.

Its main interest rate will remain at minus 0.5% where it has been since February.

Yesterday the Bank of Japan signaled that it may expand the purchasing of stock market ETFs

From Yahoo.com

Bank of Japan Governor Haruhiko Kuroda said on Wednesday the central bank's presence in the exchange-traded fund (ETF) market is "not too big," signalling that topping up purchases of ETFs could be a real, near-term option.

Later today, the ECB will have its decision day. Global markets seem all focused on central bank actions.

In short, to keep stock markets in suspended animation, away from the reckoning of harsh economic reality, central banks will continue to rain "stimulus" on stimulus addicts.

Video: Sweden's Prosperity Has Been Due to Socialism. Dead Wrong! Says Johan Norberg

From Free to Choose Network (hat tip Cafe Hayek)

Many people claim the U.S. should be more like Sweden and give more benefits. Should we? In this short video clip, Free To Choose Media Executive Editor and Cato Institute Senior Fellow Johan Norberg explains how Sweden became successful first, and how expanded government actually pulled them down.

I had a post with a similar theme in 2012 

Sweden's Riksbank Panics: Sends Interest Rates Deeper Into Negative Zone!

As turmoil slams global stock markets (see Europe's major bourses above--as of this writing) anew, the Swedish central bank the Riksbank seems to have panicked. The Riksbank slashed its interest rates further into NEGATIVE territory.

From the Telegraph

Swedish interest rates have been pushed deeper into negative territory, as the country’s central bank became the latest to introduce monetary stimulus in a world of falling oil prices.

The Riksbank elected to cut its policy rate from minus 0.35pc to minus 0.5pc on Thursday, lower than the 0.45pc anticipated by analysts. Policymakers said that the decision reflected a “stronger economy, but longer period of low inflation”. 

“The Riksbank’s very expansionary monetary policy has helped to strengthen the economy and reduce unemployment,” the central bank said, adding that more stimulus had nonetheless become necessary, as “the upturn in inflation is still not on a firm footing”.

Officials cited disappointingly weak inflation data, and slashed their own inflation forecasts. The Riksbank now expects Swedish inflation to rise to just 0.7pc by the end of the year, as opposed to the 1.3pc it had predicted last December. It also cut its estimates for inflation for 2017 and 2018.

So far, the announcement only spiked the USD-Swedish Krona for a short time as the USDSEK has practically returned to earth....

Deepening of the NIRP has done little, so far, to help the Swedish stock market as seen via the intraday Stockholm 30 index. 

What was supposed to be magic from the Central Bankers seem as being discounted or ignored.

Financial Inclusion Sweden Edition: From Banks to Microwaves

The Philippine government, mainly through the BSP, has been pursuing measures to promote allegedly “inclusive growth” via “Financial inclusion”—which is the formalization of the finances of the informal sector through formal financial institutions supervised by the central bank. [In my view, this represents a subtle war on the informal sector, as a first step]

The Swedish government’s recent actions have taken financial inclusion to more advanced levels, they reveal of what financial inclusion has truly been about—financial repression at its finest! Said differently, the Swedish experience reveals its real purpose...the outright confiscation of society's resources!

The Swedish experience have not been limited to only negative interest rates (and the recent QE4) but on efforts to push for a cashless society through…what else….the abolition of cash! 

A cashless society should be a nirvana for central bankers as they would be in total control of everyone’s resources!

I have posted a similar version earlier but my emphasis was on the war on interest rates.

Austrian economist David Howden at the Mises Blog has a trenchant insight on the Swedish government’s ongoing 'war on cash'. (bold added)

It used to be that central banks were constrained in setting monetary policy by the zero lower bound. Nominal interest rates cannot fall below zero because people would just hold cash under their mattresses instead.

Of course, if the existence of cash is getting in the way of monetary policy why not just eliminate cash completely? 

Sweden is the first country to experiment with negative interest rates in a cashless society. 

The Swedish central bank held its benchmark interest rate at -0.35% today, the level it has been at since July. 

Although retail banks have yet to pass on that negative to rate to Swedish consumers, the longer it’s held there the more financial pressure there is for banks to pass the costs onto their customers. That’s a problem because Sweden is the closest country on the planet to becoming an all-electronic cashless society. 

Remember, Sweden is the place where, if you use too much cash, banks call the police because they think you might be a terrorist or a criminal. Swedish banks have started removing cash ATM machines from rural areas, annoying old people and farmers. Credit Suisse says the rule of thumb in Scandinavia is: “If you have to pay in cash, something is wrong.” 

Ironically, this latest episode of the war on cash has benefitted one sector of the economy: microwaves. 

A resistance is forming, and some people are protesting the impending extinction of cash. Björn Eriksson, former head of Sweden’s national police and now head of Säkerhetsbranschen, a lobbying group for the security industry, told The Local, “I’ve heard of people keeping cash in their microwaves because banks won’t accept it.” 

Let´s hope that using a microwave doesn´t come to be seen as a suspicious act warranting a call to the police in Sweden.

Well, a “resistance is forming” and microwaves as household cash vaults/boxes are simply symptoms of financial inclusion morphing into financial exclusion. 

And the escalation of political crackdown on people's savings through cash, directly and indirectly, will only fuel more opposition. 

Oh, expect an economic-financial downturn or a crisis to intensify governments everywhere to push for a war on cash, and equally, the vehemence of its drawback.

And that emerging “resistance” movement may be ventilated in politics (first as lobby, then on the streets) as the public will most likely take on other unorthodox options to preserve one’s savings.

Think foreign currency (for the average Swedes, instead of the krona, they may save in "cash" in their household "microwaves" through the euro, the pound, the US dollar), bitcoins and or gold/precious metals. Local physical currency alternatives may also emerge in parallel with the krona.

Financial repression will only push people out of the formal institutions.

Sweden’s Central Bank Launches QE4, Norway’s Wealth Fund Suffers Biggest Loss and China’s Steel Demand Slumps at Unprecedented Speed

Why are central bankers around the world in a panic?

From Bloomberg: (bold mine)

The Riksbank expanded its bond-purchase plan for a fourth time since February as policy makers in Sweden struggle to keep pace with stimulus measures in the euro zone.

The quantitative easing program was raised by 65 billion kronor ($7.6 billion). The bank opted to keep the benchmark repo rate at minus 0.35 percent, as estimated by 13 of the 15 analysts surveyed by Bloomberg. Two had foreseen a cut.

“There is still considerable uncertainty regarding the strength of the global economy and central banks abroad are expected to pursue an expansionary monetary policy for a longer time,” the Riksbank said in a statement on Wednesday. “An initial raise in the rate will be deferred by approximately six months compared with the previous assessment.”

How low can the Riksbank go?

Since the European Central Bank signaled last week it may expand an already historic stimulus program as early as December, policy makers outside the euro zone have girded for the next stage of a currency war that few have adequate tools to fight. The Riksbank’s expanded QE program means it will have purchased 200 billion kronor in bonds by the end of June 2016, it said.

“The Riksbank is haunted by the krona and a soft ECB,” Torbjoern Isaksson, an economist at Nordea, said by phone. Nordea will probably stick to its forecast that the Riksbank will lower its repo rate further in December, Isaksson says.

When central banks panic, this represents a Pavlovian classical conditioning signal for the greater fools to indulge in a buying mania of risk assets

chart from Zero Hedge

Aside from stocks, the previous easing by the Riksbank has only been inflating Sweden’s incredible housing bubble.

Yet all the easing by the central bankers seem to have failed to do its wonders even in stocks. One of the unfortunate casualty is a government fund.

Norway’s sovereign wealth fund reportedly suffered its biggest loss in four years. From another Bloomberg report (bold mine)

The world’s largest sovereign wealth fund posted its biggest loss in four years, dragged down by Chinese stocks and Volkswagen AG, just as the Norwegian government prepares to make its first ever withdrawals to plug budget deficits.

The $860 billion fund lost 273 billion kroner ($32 billion) in the third quarter, or 4.9 percent, the Oslo-based investor said on Wednesday. Its stock holdings declined 8.6 percent, while it posted a 0.9 percent gain on bonds and a 3 percent return on real estate. It was the first back-to-back quarterly loss in six years.

“We have to expect fluctuations in the value of the fund when there are large movements in the market,” said Yngve Slyngstad, its chief executive officer. “With the fund as big as it is today, this can have a considerable impact in the short term. The fund has a long-term horizon, however, and is in a good position to ride out short-term volatility.”

The period was marked by turbulence as worries of a China slowdown and prospects of a U.S. rate increase wiped trillions of dollars off the value of global markets. The MSCI World Index lost 9 percent while the MSCI Emerging Markets Index plunged 19 percent in the quarter. The selloff was exacerbated by a rout in commodities.

The fund had a loss of 21.3 percent on Chinese stocks in the period and 16.6 percent on its emerging market equities.

To compound on the woes of the Norwegian government, the growing budget gap as consequence of low oil prices and high social spending would probably lead to a drawdown by the government on her wealth fund. So the fund's 'long term horizon' may never occur.

From CNBC:

The signs are worrying: For the first time ever, Norway announced plans to tap its fund to make up for lost oil revenues earlier this month.

The country plans on withdrawing around $450 million from the fund which had $820 billion under management as of the end of June of this year.

While this is not a massive slice of the pie, analysts are worried that the behemoth fund's days of stellar growth may be numbered especially with oil prices predicted to stay low for longer and the $100 per barrel price tag something of a distant memory.

The fund, officially called the Government Pension Fund Global, has accumulated over 25 years of investing oil revenues, making headlines at the start of last year when it rose to 5.11 trillion Norwegian crowns, which at the time was worth $828.66 billion. This meant every person in Norway became a theoretical crown millionaire for the first time thanks to strong oil and gas prices.

Sovereign wealth funds control around $7 trillion of assets, largely created through investing natural resource revenues. After Norway, oil rich Abu Dhabi and Saudi Arabia manage in the region of $770 billion and $670 billion respectively, according to data from Sovereign Wealth Fund Institute.

Norway's economy is currently not under any strain due to soundly managed finances according to economists. But with 40 percent of Norway's exports coming from oil and gas and oil prices down 60 percent since last summer, the fund has come under pressure.

Everything is interconnected. 

The losses of Norway’s sovereign wealth fund has been partly due to her exposure on Chinese risk assets. The Riksbank’s QE has been in response to the global economy also due to the rapid slowing of Chinese economy.

Yet deepening economic troubles continue haunt China.

According to a honcho of a big Chinese steel firms, demand for steel has slumped at an ‘unprecedented’ rate.

From another Bloomberg report (bold mine)

If anyone doubted the magnitude of the crisis facing the world’s largest steel industry, listening to Zhu Jimin would put them right, fast.

Demand is collapsing along with prices, banks are tightening lending and losses are stacking up, the deputy head of the China Iron & Steel Association said on Wednesday.

“Production cuts are slower than the contraction in demand, therefore oversupply is worsening,” said Zhu at a quarterly briefing in Beijing by the main producers’ group. “Although China has cut interest rates many times recently, steel mills said their funding costs have actually gone up.”

Behold the central bank magic! Instead of easing, funding costs goes up!

More…

China’s mills -- which produce about half of worldwide output -- are battling against oversupply and sinking prices as local consumption shrinks for the first time in a generation amid a property-led slowdown. The fallout from the steelmakers’ struggles is hurting iron ore prices and boosting trade tensions as mills seek to sell their surplus overseas. Shanghai Baosteel Group Corp. forecast last week that China’s steel production may eventually shrink 20 percent, matching the experience seen in the U.S. and elsewhere.

“China’s steel demand evaporated at unprecedented speed as the nation’s economic growth slowed,” Zhu said. “As demand quickly contracted, steel mills are lowering prices in competition to get contracts.”

Making Losses

Medium- and large-sized mills incurred losses of 28.1 billion yuan ($4.4 billion) in the first nine months of this year, according to a statement from CISA. Steel demand in China shrank 8.7 percent in September on-year, it said.

Signs of corporate difficulties are mounting. Producer Angang Steel Co. warned this month it expects to swing to a loss in the third quarter on lower product prices and foreign-exchange losses. The company’s Hong Kong stock has lost more than half its value this year. Last week, Sinosteel Co., a state-owned steel trader, failed to pay interest due on bonds maturing in 2017.

Crude steel output in the country fell 2.1 percent to 608.9 million tons in the first nine months of this year, while exports jumped 27 percent to 83.1 million tons, official data show. Steel rebar futures in Shanghai sank to a record on Wednesday as local iron ore prices fell to a three-month low.

Losses and unwieldy debt will have a feedback mechanism that escalates on the already dire conditions.

And more of China’s ‘epic bubble’ as shown in charts from the Bloomberg… (bold mine)

Companies with less cash than short-term debt, net losses and contracting revenue have jumped to 200, according to the filings through June 30 compiled by Bloomberg from firms listed on the Shanghai and Shenzhen stock exchanges. About half are in the commodities sector while about 20 percent are industrial companies. A maker of carbon materials used in batteries is among borrowers that may have trouble repaying obligations by year end, Guotai Junan Securities Co. said….

Desperate for yield, the mania on bonds intensifies

Investors are chasing lower-rated bonds after the central bank cut interest rates six times in a year. That’s dragged down the extra yield on five-year AA graded corporate securities over government notes to 196 basis points, near the lowest in five years. Brokerages including Oversea-Chinese Banking Corp. and Industrial Securities have warned that the exuberance may be creating a bubble.

The rise in corporate debt loads is outpacing economic expansion. Borrowings by companies listed on the Shanghai and Shenzhen stock exchanges jumped 22.7 percent in the most recent filings compared with the end of last year, exceeding the 6.8 percent economic growth for 2015 that analysts surveyed by Bloomberg forecast.

You see, these are great reasons to panic buy risk assets. Who knows, these frantic measures by central banks may just spark the much awaited miracle. It’s been a long wait since though. Central banks have been easing since late 2008. And in nearly 7 years, instead of stability, we see more signs of instability which is why we go back to square: Central banks freaking out!

Of course, if central banks fail, well then, the fool and his money are soon parted.

Guest Post: Per Bylund on Sweden’s Great Depression

Many myths beholds Sweden’s success story. Some say devaluation has saved Sweden from the crisis in the 1990s, others say it has been the welfare state. Much of the popular misimpressions have left out the most important ingredient: the Sweden’s largely ignored free markets.

Mr. Per Bylund, research professor in the Department of Management & Entrepreneurship in Baylor University‘s Hankamer School of Business and the John F. Baugh Center for Entrepreneurship & Free Enterprise and Associated Scholar with the Ludwig von Mises Institute and senior fellow at the Ludwig von Mises-institutet i Sverige published an indepth insight of Sweden’s real economic profile at this month’s Free Market edition of the Mises Journal. (with Mr. Bylund’s permission) [bold mine]

During the recent financial crisis, Sweden has emerged as one of very few financially sound economies. The country’s strong position, setting it apart from Western nations, makes it an interesting example of what could—or should—have been done. Indeed, Paul Krugman, the economist and Nobel Prize laureate, has repeatedly pointed approvingly at how the Swedes handled their depression in the early 1990s as the reason for their recent success. Specifically, he notes the nationalization of some banks at the time of the crisis. While he misses the point by focusing exclusively on a narrow selection of short-term measures rather than longer-term changes, as is the hallmark of a Keynesian, Krugman is right that Sweden has done some things right.

In September of 1992 the Riksbank, Sweden’s central bank, raised the interest rate to five hundred (500) percent in a vain attempt to save the fixed exchange rate of the Swedish krona (Sweden’s currency). This drastic measure was taken in conjunction with large spending cuts and tax increases to address the free-fall of the nation’s economy.

The economic meltdown was the culmination of two full decades of decline, and it fundamentally changed the political situation in Sweden.

Since that time, Sweden has, across the board, seen consistent government cutbacks while increasing restrictions on welfare policies, deregulating markets, and privatizing former government monopolies. The country has instituted an overall new incentive structure in society making it more favorable to work. The national debt tumbled from almost 80 percent of GDP in 1995 to only 35 percent in 2010.

In other words, the country successfully rolled back its unsustainable but world renowned welfare state. Despite Krugman’s wishful thinking, this is the real reason for Sweden’s success in riding out the present financial crisis.

The Rise and Fall of the Welfare State

Sweden experienced a century of high economic growth from approximately 1870 to 1970, which literally made one of Europe’s poorest countries into the world’s fourth richest. The first half of this period of growth was marked by extensive free-market reform, and the latter half is notable for Sweden’s staying out of both world wars and thus benefiting from intact industrial infrastructure when the rest of Europe lay in ruins. While a welfare state was established and expanded during the post-war period, it was generally built around capitalist institutions and therefore had limited impact on economic growth.

But the political situation changed. The 1970s and 1980s saw a welfare state run amok with a greatly expanded scope with new government benefits, the introduction of very rigid labor market regulations, active propping up of stagnating sectors of the economy, and drastic increases in tax rates with some marginal rates in excess of 100 percent. In an attempt to fully nationalize the economy, löntagarfonder (“employees’ funds”) instituted in 1983 to “reinvest” private companies’ profits in stock ownership and to be administered by the national labor unions.

During this period government deficits abounded and the national debt increased almost ten-fold from 1975 to 1985. Sweden also saw high price inflation, a situation aggravated by repeated devaluations of the currency’s exchange rate to boost exports: in 1976 by 3 percent; in 1977 by 6 percent at first, and then an additional 10 percent; in 1981 by 10 percent; and in 1982 by 16 percent.

Overall, the rapid expansion of the welfare state can be illustrated by the ratio between tax-financed and private sector employment, which rose from 0.386 in 1970 to 1.51 in 1990. Sweden was heading for disaster.

Explaining Sweden’s Great Depression

A popular explanation of the meltdown in the 1990s blames deregulation of the financial markets that occurred during November 1985. But as our research (still in progress) suggests, deregulation was an attempt to solve increasing problems to finance the Swedish government’s already weak and deteriorating financial situation. In the fiscal year 1984–85 alone, the interest payments on Sweden’s national debt amounted to 29 percent of tax revenue—equal to the government’s total spending on social security. The country’s unsustainable financial situation made deregulation necessary.

The increased access to financial markets made a desperate situation somewhat more tenable. But Sweden then experienced an immense increase in credit. Our numbers show that the volume of bank loans to non-financial businesses increased from 180 billion in late 1985 to 392 billion in late 1989, an increase of 117 percent total or 21 percent annually Where did all this money come from? Some of it can be explained by deregulation and the inflow of funds that followed. But it was also made possible by monetary inflation.

Several factors were at work during the 1986–1990 credit-infused boom that ended in the depression of 1990–1994. Some factors had no inflationary effect or even a deflationary effect, but other factors, especially those that relate to government policy, or are driven by government policy, were strongly inflationary and quite substantial

These include increases in the Riksbank’s advances to banks (a 975-percent increase from 1985 to 1989) and purchases of government debt and securities (a 47-percent increase from 1985 to 1987, followed by a 7-percent decrease from 1987 to 1989).

Sweden is an interesting case to study. We do indeed, as Krugman repeatedly tells us, have much to learn from it: from the long-lasting era of economic growth thanks to free markets to the rise and fall of the welfare state. The country’s recently (re)gained financial strength and its ability to resist a global recession are due, not to a strong welfare state as Krugman claims, but to the long-term rolling back of the expansive welfare that Keynesians so often praise

How the Welfare State Promotes Violence: The Swedish Edition

One of the least expected places for social upheavals to occur is Sweden.

Image from the Guardian

Why is this happening? 

The prolific Simon Black of the Sovereign Man eloquently explains (bold mine)

Anytime a free market guy rails against central planning and socialism, there is always someone who stands up and says “what about Sweden?” 

Ah, Sweden… a socialist’s paradise… a place where taxes are among the highest in the world, few people are wealthy, and the government is involved in people’s lives from cradle to grave.

And in all of these government surveys on ‘happiness’, places like Sweden, Norway, and Denmark consistently rank among the happiest countries in the world.

Well… the veneer is cracking.

Though the coverage has been limited, there’s been rioting in Sweden over the past week, specifically in the immigrant-dense suburbs around Stockholm where 80% of the population are first or second-generation immigrants.

Dan West, my right hand man at Sovereign Man, is actually Swedish and on the ground right now in the country. He recently sent me a note describing the situation:

“Hundreds of cars are burning. Schools were set on fire. Police stations were set on fire. Businesses were vandalized. Rioters clashed with police. Hundreds of masked rioters ran wild in the streets.

Seeing photos and video of this you’d think it was a war zone in some unstable part of the world, not Stockholm.

Allegedly it started last week because the police fatally shot a 69-year-old man who wielded a machete in public. Now people are angry and destroying things.

Swedish politicians say the root causes of these riots are inequality of the immigrant minorities.

Bear in mind, this is a place so obsessed with equality that the words “him” and “her” have been blended into “hem”… and taxpayers fork over 70% of their income to ensure that everyone can live to an equal level.

But to those of us living outside of this statist bubble, the real problem is obvious: however well-intentioned they may be, welfare states almost always attract people who want to be taken care of at the expense of others.

And ultimately this engenders serious conflict… between those who are on the receiving end, and those on the paying end.

Occasionally this conflict becomes violent. And that’s exactly what’s been playing out.

The government has all sorts of propaganda to influence the way Swedes view the welfare state and convince us that we should pay huge taxes to support others.

In other words, we should not be economically free so that others can live for free. This is the definition of a welfare state.

And in addition to such ‘thought controls’, the Swedish government also rules with capital controls, people controls, and media controls.

The government here tries to churn citizens out as if we’re widgets coming off a factory line, influencing everything from what we think to how we spend our time.

Yet despite such a finely-tuned system, the capital suburbs practically turned into a war zones over the past week.

The politicians here claim it can all be fixed with more redistribution of wealth. It’s not enough that the average working Swede pays ~70% in taxes; if only they could extract 80% or 90% in taxes, they could solve everything!

If all you have is a hammer, everything looks like a nail.

People have the wrong idea of this place. It is not a well-functioning welfare state. Any system based on giving people something for nothing, and sticking hard-working, productive citizens with the bill, is doomed to fail. Sweden is no exception.

People in North America who are rapidly being dragged into a welfare state should pay very close attention… because this is the future that awaits.”

The Zero Hedge adds more to the Swedish Welfare dilemma:

The recent riots in Stockholm may highlight widening divisions within Swedish society generated by rising inequality, cuts in welfare spending and a failure to integrate immigrants. Inequality has increased the most in Sweden of any OECD member country over the past 25 years.

Inequality

Inequality has increased by one-third since 1985, according to the OECD. Sweden has dropped to 10th place from first in 1995 in the OECD’s ranking of income distribution after the nation’s Gini coefficient rose to 0.27 from 0.21.The average income of the top 10 percent of income earners was more than six times that of the bottom 10 percent in 2008. That compares with a ratio of about four to one during the 1990s.

Immigration

The incidence of child poverty is more than five times as common to people whose parents were born outside Sweden, a report from Save the Children Sweden shows. Those born outside the country account for 14.3 percent of the population of 9.1 million. Sweden ranked fourth in terms of the total number of asylum seekers and second in terms of the number of asylum seekers relative to the population, according to UN data comparing 44 countries.

Employment Gap

Sweden has one of the largest employment gaps between natives and foreign-born residents of any OECD country. Employment rates between local and immigrant workers differ by more than 30 percentage points in some areas, according to Statistics Sweden. The unemployment rate among immigrants from countries outside the EU was 16.5 percent in 2011, compared with 5.7 percent for native Swedes, Statistics Sweden says.

Redistribution

Sweden’s welfare state has been squeezed by about 140 billion kronor of tax cuts since 2006, Eurostat data show. That has contributed to tax revenue as a share of GDP falling to 44.3 percent, below Denmark’s figure of 47.7 percent in 2011. Income taxes and cash benefits play a greater role in redistributing income in Sweden, reducing inequality by about 30 percent, compared with an OECD average of 25 percent.

A society that depends heavily on welfare state produces both political and income inequality as revealed by the brewing frictions between natives and foreign born residents in Sweden.

Yet the welfare state has been enabled and facilitated by debt and inflation which are the pillars of the paper money system.

As the great Ludwig von Mises wrote in Liberty and Property:

The welfare state with its methods of easy money, credit expansion and undisguised inflation continually takes bites out of all claims payable in units of the nation’s legal tender. The self-styled champions of the common man are still guided by the obsolete idea that a policy that favors the debtors at the expense of the creditors is very beneficial to the majority of the people. Their inability to comprehend the essential characteristics of the market economy manifests itself also in their failure to see the obvious fact that those whom they feign to aid are creditors in their capacity as savers, policy holders, and owners of bonds.

Today’s global polices have clearly been designed to favor the debtors over creditors. Such been primarily meant to boost the insolvent welfare states, their clients, patrons (political agents, banking system) and other related interests (cronies).

Nonetheless when parasites dominate the hosts, as revealed by the immense and unsustainable accretion of government debts and by the intensifying use of financial repression (negative interest rates, QE) that ”bites out of all claims payable in units of the nation’s legal tender”, such are signs of desperation that exposes the growing fragility and vulnerability of the welfare state which has painted itself to a corner. 

The Santa Claus principle is in a self-liquidates mode

Events in Sweden is a harbinger of things to come.

Has the Swedish Recovery from the Banking Crisis of the 90s been due to Devaluation?

Here is another claim by an advocate of inflationism: Devaluation kickstarted the recovery of the Swedish economy from the banking crisis of 1990s.

I will quote mainstream references as rejoinder, so as to assume neutrality.

From Wikipedia.org (bold emphasis mine)   

In the 1980s, a real estate and financial bubble formed, driven by a rapid increase in lending. A restructuring of the tax system, in order to emphasize low inflation combined with an international economic slowdown in the early 1990s, caused the bubble to burst. Between 1990 and 1993 GDP went down by 5% and unemployment skyrocketed, causing the worst economic crisis in Sweden since the 1930s. According to an analysis by George Berglund published in Computer Sweden in 1992, the investment level decreased drastically for information technology and computing equipment, except in the financial and banking sector, the part of the industry that created the crisis. The investment levels for IT and computers were restored as early as 1993. In 1992 there was a run on the currency, the central bank briefly jacking up interest to 500% in an unsuccessful effort to defend the currency's fixed exchange rate. Total employment fell by almost 10% during the crisis.

A real estate boom ended in a bust. The government took over nearly a quarter of banking assets at a cost of about 4% of the nation's GDP. This was known colloquially as the "Stockholm Solution". The United States Federal Reserve remarked in 2007, that "In the early 1970s, Sweden had one of the highest income levels in Europe; today, its lead has all but disappeared... So, even well-managed financial crises don't really have a happy ending."

The welfare system that had been growing rapidly since the 1970s could not be sustained with a falling GDP, lower employment and larger welfare payments. In 1994 the government budget deficit exceeded 15% of GDP. The response of the government was to cut spending and institute a multitude of reforms to improve Sweden's competitiveness. When the international economic outlook improved combined with a rapid growth in the IT sector, which Sweden was well positioned to capitalize on, the country was able to emerge from the crisis.

The crisis of the 1990s was by some viewed as the end of the much buzzed welfare model called "Svenska modellen", literally "The Swedish Model", as it proved that governmental spending at the levels previously experienced in Sweden was not long term sustainable in a global open economy. Much of the Swedish Model's acclaimed advantages actually had to be viewed as a result of the post WWII special situation, which left Sweden untouched when competitors' economies were comparatively weak.

The allegation of devaluation as having jumpstarted the recovery seems materially misplaced.

Instead, the devaluation looks to be part of the bubble forming process which ultimately ended with a “run” on the currency.

While “restructuring of taxes” served as the likely catalyst for the ensuing bust, I think this has been more about central bank tightening (whom jacked up rates up to 500%). 

While the Swedish government did intervene to rescue the banking system, overall, the general economic recovery has been mostly the result of the much maligned "AUSTERITY" defined here as cuts in government spending as shown by Sweden’s material decline in government’s debt to GDP, as well as, Sweden’s government’s budget which turned into surpluses, the restoration of trade COMPETITIVENESS and the DECLINE of Sweden’s “Svenska modellen” welfare state. [charts from tradingeconomics.com]

More anecdotal evidence from Johnny Munkhammar, a member of the Moderate Party of the Swedish Parliament, and the author of "The Guide to Reform" (Timbro/IEA 2007)at the Wall Street Journal in January 26, 2012 [bold added] 

But Socialism was fashionable in post-War Europe and Sweden was not immune. The 1970s were a decade of radical government intervention in society and in markets, during which Sweden doubled its overall tax burden, socialized a slew of industries, re-regulated its markets, expanded its public systems, and shuttered its borders. In 1970, Sweden had the world's fourth-highest GDP per capita. By 1990, it had fallen 13 positions. In those 20 years, real wages in Sweden increased by only one percentage point.

Remnants of its earlier success remained, and the idea of following "the Swedish model" had already caught hold around the world. Fine, except the roots of this success were confused with Stockholm's more recent big-government policies, which in fact were destroying the country's enviable prosperity. This confusion also played into domestic debates, stalling reform for too long.

By the late 1980s, though, Sweden had started de-regulating its markets once again, decreased its marginal tax rates, and opted for a sound-money, low-inflation policy. In the early 1990s, the pace quickened, and most markets except for labor and housing were liberalized. The state sold its shares in a number of companies, granted independence to its central bank, and introduced school vouchers that improved choice and competition in education. Stockholm slashed public pensions and introduced private retirement schemes, keeping the system demographically sustainable.

These decisive economic liberalizations, and not socialism, are what laid the foundations for Sweden's success over the last 15 years. After the reforms of the early 1990s, Swedes' real wages increased by roughly 35% in a decade. And, as businesses have become more productive and people's incomes have risen, living standards improved. More people eat at restaurants now, more people travel abroad, more people buy DVDs and new cars. More people get more.

It’s funny or bizarre to see political zealots mistake symptoms of the diseases for medical treatment (which in reality are snake oil nostrums).

Sweden Secret Recipe: Austerity, Tax Cuts and Economic Freedom

From Spectator.co.uk [bold emphasis mine] (hat tip Professor Mark Perry)

When Europe’s finance ministers meet for a group photo, it’s easy to spot the rebel — Anders Borg has a ponytail and earring. What actually marks him out, though, is how he responded to the crash. While most countries in Europe borrowed massively, Borg did not. Since becoming Sweden’s finance minister, his mission has been to pare back government. His ‘stimulus’ was a permanent tax cut. To critics, this was fiscal lunacy — the so-called ‘punk tax cutting’ agenda. Borg, on the other hand, thought lunacy meant repeating the economics of the 1970s and expecting a different result.

Three years on, it’s pretty clear who was right. ‘Look at Spain, Portugal or the UK, whose governments were arguing for large temporary stimulus,’ he says. ‘Well, we can see that very little of the stimulus went to the economy. But they are stuck with the debt.’ Tax-cutting Sweden, by contrast, had the fastest growth in Europe last year, when it also celebrated the abolition of its deficit. The recovery started just in time for the 2010 Swedish election, in which the Conservatives were re-elected for the first time in history.

All this has taken Borg from curiosity to celebrity. The Financial Times recently declared him the most effective finance minister in Europe. When we meet in his Stockholm office on a Friday afternoon (he and his aide seem to be the only two left in the building) he says he is just carrying on 20 years of reform. ‘Sweden was a textbook case of European economic sclerosis. Very high taxes and huge regulatory burden.’ An economic crisis in the early 1990s forced Sweden on the road to balanced budgets, and Borg was determined the 2007 crash would not stop him cutting the size of government.

‘Everybody was told “stimulus, stimulus, stimulus”,’ he says — referring to the EU, IMF and the alphabet soup of agencies urging a global, debt-fuelled spending splurge. Borg, an economist, couldn’t work out how this would help. ‘It was surprising that Europe, given what we experienced in the 1970s and 80s with structural unemployment, believed that short-term Keynesianism could solve the problem.’ Non-economists, he says, ‘might have a tendency to fall for those kinds of messages’.

He continued to cut taxes and cut welfare-spending to pay for it; he even cut property taxes for the rich to lure entrepreneurs back to Sweden. The last bit was the most unpopular, but for Borg, economic recovery starts with entrepreneurs. If cutting taxes for the rich encouraged risk-taking, then it had to be done. ‘In most cases, the company would not have been created without the owner,’ he says. ‘There would be no Ikea without [Ingvar] Kamprad. We would not have Tetra-Pak without [Ruben] Rausing. They are probably the foremost entrepreneurs we have had in the last few decades, and both moved out of Sweden.’

But they were not rich, I say, when they were starting out. ‘No, but they were becoming rich. If you have a high wealth tax and an inheritance tax, people emigrate because it becomes too costly to own a company. Ownership is a production factor. Entrepreneurs are a production factor. Yes, these people are rich and you can obviously argue that we want to encourage social cohesion. But it is also problematic if you drive out entrepreneurs from your country, because they are the source of job creation.’

In contrast to the phony austerity, as presented by media and the left, supposedly plaguing the crisis affected EU nations, Sweden’s fiscal conditions seems to validate the above report. (following 2 charts from Tradingeconomics.com)

Government debt to GDP has been in a material decline

While Sweden’s government budget has even posted surpluses.

And because of these truly pro-growth (economic freedom) measures, the chart above (from Professor Mark Perry) shows how Sweden has outperformed the US.

Learning From Sweden's Free Market Renaissance

The popular impression of Sweden is that her success had brought about by big welfare government.

In the following video, the Center for Freedom and Prosperity gives a succinct economic history on how Sweden attained her wealth based on limited government, rule of law and property rights, and how Sweden's success had been stalled by the emergence of big government.

And in learning from the recent mistakes, Sweden has embarked on a reform to scale down big government. (hat tip: Cafe Hayek)