Northern Jitters – Another Bubble Economy Goes Bust

We occasionally write in these pages about countries that are widely assumed to have either escaped the crisis, or are held to represent bastions of fundamental economic soundness amid a sea of misery. We are doing this  mainly to show that they have not and are not.

In fact, as we have pointed out with regard to various cases ranging from Canada to Denmark, there are actually almost no fundamentally sound economies in sight anywhere. The reason is in every case the same: first a policy is instituted that is characterized by the nowadays widely accepted doctrines of Anglo-Saxon central banking socialism, according to which prosperity can be achieved by artificially suppressing interest rates and/or printing money until the cows come home. Then invariably a credit-driven malinvestment bubble emerges, until in the end the whole house of cards collapses, usually the more spectacularly the later in the game it happens.

The distortions have never been greater, judging from credit and money supply data. Often the motives of central banks are predicated on even worse ideas than those espoused by the Bernanke dog-and-pony show, such as the notion that a strong currency is somehow 'bad' and must be suppressed by hook or by crook (see the Swiss and Danish National Banks as examples for this tendency). This is simply Mercantilism, which doesn't even deserve to be called an economic doctrine – it is an absurdity whose proponents should be deeply embarrassed.

 

Readers may recall that we have frequently discussed the lately crumbling housing bubbles in Scandinavian countries with their heavily exposed banking systems. There is still a touching, but probably quite misguided belief that 'nothing bad can happen', even while households and corporations groan under unheard of debt loads, which have in many cases been collateralized with the very houses the value of which is now undergoing an unwelcome downward shift.

One country we have neglected to write about was one of the 'Northern Bloc' euro area members, the Netherlands, home of the stern executor of depositors down South and bondholders at home, Jeroen Dijsselbloem.

It turns out that the Netherlands are caught in a post bubble economic downward spiral that by the looks of it could easily get worse before it gets better. That implies of course that one of the countries at the forefront of dispensing austerity in the euro area is in danger of missing its own 'fiscal compact' deficit targets, and that may actually turn out to be the least of its problems.

According to Der Spiegel:


“The Netherlands, Berlin's most important ally in pushing for greater budgetary discipline in Europe, has fallen into an economic crisis itself. The once exemplary economy is suffering from huge debts and a burst real estate bubble, which has stalled growth and endangered jobs.

[…]

"Underwater" is a good description of the crisis in a country where large parts of the territory are below sea level. Ironically, the Netherlands, once a model economy, now faces the kind of real estate crisis that has only affected the United States and Spain until now. Banks in the Netherlands have also pumped billions upon billions in loans into the private and commercial real estate market since the 1990s, without ensuring that borrowers had sufficient collateral.

Private homebuyers, for example, could easily find banks to finance more than 100 percent of a property's price. "You could readily obtain a loan for five times your annual salary," says Scheepens, "and all that without a cent of equity." This was only possible because property owners were able to fully deduct mortgage interest from their taxes.

Instead of paying off the loans, borrowers normally put some of the money into an investment fund, month after month, hoping for a profit. The money was to be used eventually to pay off the loan, at least in part. But it quickly became customary to expect the value of a given property to increase substantially. Many Dutch savers expected that the resale of their homes would generate enough money to pay off the loans, along with a healthy profit.”

 

(emphasis added)

A classical bubble in other words, caused by the ECB implementing too low interest rates after the mild downturn that followed the collapse of the late 90's technology stocks mania. The Netherlands however are now suffering from an extended 'hangover' in spite of the ECB's repo rate plumbing new depths. The housing bubble has died on them. The stock market reflects the ongoing malaise – it looks almost like a carbon copy of the CAC-40 in Paris, which in turn looks ever more like the post bubble Nikkei. These countries are potentially facing a very severe bust of hitherto rarely experienced duration in the post WW2 era:

 


 

AEX

The AEX Index in Amsterdam, long term, via BigCharts. The former highs are but a distant memory. This index has adopted the look of the CAC-40, which in turn is doing a good job of emulating the post bubble Nikkei. Not exactly a comforting thought – click for better resolution.

 


 

Crisis on the Amstel

Looking at the Netherlands' debt related data, especially household debt, is vertigo-inducing. One should not forget that in a fractionally reserved banking system based on fiat money, every additional debt actually creates money in the system that becomes a liability of the banks. In other words, the entire system becomes ever more rickety the more extended the credit expansion becomes. As you will see further below, Dutch banks have to deal with exposure that appears to be in the 'too big to bail' category.

Der Spiegel continues:


More than a decade ago, the Dutch central bank recognized the dangers of this euphoria, but its warnings went unheeded. Only last year did the new government, under conservative-liberal Prime Minister Mark Rutte, amend the generous tax loopholes, which gradually began to expire in January. But now it's almost too late. No nation in the euro zone is as deeply in debt as the Netherlands, where banks have a total of about €650 billion in mortgage loans on their books. Consumer debt amounts to about 250 percent of available income. By comparison, in 2011 even the Spaniards only reached a debt ratio of 125 percent.

The Netherlands is still one of the most competitive countries in the European Union, but now that the real estate bubble has burst, it threatens to take down the entire economy with it. Unemployment is on the rise, consumption is down and growth has come to a standstill. Despite tough austerity measures, this year the government in The Hague will violate the EU deficit criterion, which forbid new borrowing of more than 3 percent of gross domestic product (GDP).”

 

(emphasis added)

This sounds like a serious crisis indeed and one with the potential to become quite nasty. The Netherlands as a capital-rich nation harboring a well educated workforce with a well-developed work ethic may well be better able to withstand the pressures of such a debt load than others, but these numbers are staggering.  Stagnation almost seems to be a best case scenario under the circumstances.

 


 

Netherlands economy

A selection of economic data/yardsticks via der Spiegel – click for better resolution.

 


 

So is there anyone in the Netherlands who might have an idea as to what to do? We were quite surprised to find out the following:


The Dutch were long among Europe's most diligent savers, and in the crisis many are holding onto their money even more tightly, which is also toxic to the economy. "One of the main problems is declining consumption," says Johannes Hers of the Centraal Planbureau in The Hague, the council of experts at the Economics Ministry.

His office expects a 0.5-percent decline in growth for 2013. Some 755 companies declared bankruptcy in February, the highest number since records began in 1981. The banking sector is also laying off thousands of employees at the moment.

Because of the many mortgage loans on the books, the financial industry is extremely inflated, so much so that the total assets of all banks are four-and-a-half times the size of economic output.”

 

(emphasis added)

That's right dear readers, the ministry of economics in The Hague actually employs a body that calls itself the 'Centraal Planbureau', or the 'central planning bureau'. Not surprisingly, it is a proponent of the very same hoary underconsumption theories ('savings are bad'!) that just won't die no matter how many times worthy economists have disproved this fallacy. Hayek famously showed in the 1920s already why two of Keynes' intellectual forerunners, William Trufant Foster and Waddill Catchings, were entirely mistaken with their underconsumption theory of depression (we recommend reading the linked article by Robert Blumen, both because it is historically interesting and because it conveys important theoretical points in an easily readable manner; it provides useful ammunition in related debates). In the 1920s!

And here we are, nearly a century later and the 'central planning bureau' in The Hague, filled with 'experts on economics' is yammering that there is not  enough consumption in the Netherlands. This is why we keep saying that the science of economics has evidently taken a wrong turn at some point. Clearly there are too many quacks and many of them unfortunately happen to be in influential positions.

Lastly, with the banking system of the Netherlands sitting on a Cypriosque mountain of loans approaching 450% of GDP and supported by dodgy looking collateral, we can easily imagine that a few haircuts may eventually be on their way. Luckily Mr. Dijsselbloem is an experienced financial barber by now. Or is that a financial hair-stylist?

 


 

eurogroup

A group of financial hair-stylists that way too often meets in Brussels and elsewhere to decide over the disposition of other people's money.

(Photo credit: John Thysa / AFP / Getty Images)

 



2 Responses to “Nether-Crumble”

  • Maybe next time they will merely pass out Double Bubble, so we can have bubbles on demand. Financing consumption by bankrupting the consumer over time and creating mal-investment as a remedy eventually runs out of time. Any attempt for a major remedy might very well create a sit down strike by producers.

  • SavvyGuy:

    Wait a minute, isn’t this the place where the tulip-mania bubble originated? Hmmm…history never repeats, but it sure does rhyme!

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • 21st Century Shoe-Shine Boys
      Anecdotal Flags are Waved   "If a shoeshine boy can predict where this market is going to go, then it's no place for a man with a lot of money to lose." - Joseph Kennedy   It is actually a true story as far as we know – Joseph Kennedy, by all accounts an extremely shrewd businessman and investor (despite the fact that he had graduated in economics*), really did get his shoes shined on Wall Street one fine morning, and the shoe-shine boy, one Pat Bologna, asked him if...
  • India: The Genie of Lawlessness is out of the Bottle
      Recapitulation (Part XVI, the Last) Since the announcement of demonetization of Indian currency on 8th November 2016, I have written a large number of articles. The issue is not so much that the Indian Prime Minister, Narendra Modi, is a tyrant and extremely simplistic in his thinking (which he is), or that demonetization and the new sales tax system were horribly ill-conceived (which they were). Time erases all tyrants from the map, and eventually from people’s...
  • Christopher Columbus and the Falsification of History
      Crazed Decision The Los Angeles City Council’s recent, crazed decision* to replace Christopher Columbus Day with one celebrating “indigenous peoples” can be traced to the falsification of history and denigration of European man which began in earnest in the 1960s throughout the educational establishment (from grade school through the universities), book publishing, and the print and electronic media.   Christopher Columbus at the Court of the Catholic Monarchs (a...
  • The Government Debt Paradox: Pick Your Poison
      Lasting Debt “Rule one: Never allow a crisis to go to waste,” said President Obama’s Chief of Staff Rahm Emanuel in November of 2008.  “They are opportunities to do big things.”   Rahm Emanuel looks happy. He should be – he is the mayor of Chicago, which is best described as crisis incarnate. Or maybe the proper term is perma-crisis? Anyway, it undoubtedly looks like a giant opportunity from his perspective, a gift that keeps on giving, so to speak. [PT] Photo...
  • The Forking Paradise - Precious Metals Supply and Demand Report
      Forking Incentives A month ago, we wrote about the bitcoin fork. We described the fork:   Picture a bank, the old-fashioned kind. Call it Acme (sorry, we watched too much Coyote and Road Runner growing up). A group of disgruntled employees leave. They take a copy of the book of accounts. They set up a new bank across the street, Wile E Bank. To win customers, they say if you had an account at Acme Bank, you now have an account at Wile, with the same balance!   BCH, son...
  • The United States of Hubris
      Improving the World, One Death at a Time If anyone should have any questions about whether the United States of America is not the most aggressive, warlike, and terrorist nation on the face of the earth, its latest proposed action against the supposed rogue state of North Korea should allay any such doubts.   Throughout history, the problem with empires has always been the same: no matter how stable and invincible they appeared, eventually they ran into “imperial...
  • Long Term Statistics on AAPL
      Introductory Remarks by PT Below we present a recent article by the Mole discussing a number of technical statistics on the behavior of AAPL over time. Since the company has the largest market cap in the US stock market (~ USD 850 billion – a valuation that exceeds that of entire industries), it is the biggest component of capitalization-weighted big cap indexes and the ETFs based on them. It is also a component of the price-weighted DJIA. It is fair to say that the performance of...
  • Tragedy of the Speculations
      The Instability Problem Bitcoin is often promoted as the antidote to the madness of fiat irredeemable currencies. It is also promoted as their replacement. Bitcoin is promoted not only as money, but the future money, and our monetary future. In fact, it is not.   A tragedy... get the hankies out! :) [PT]   Why not? To answer, let us start with a look at the incentives offered by bitcoin. We saw a comment this week, which is apropos:   "Crypto is so...
  • To Hell In A Bucket
      No-one Cares... “No one really cares about the U.S. federal debt,” remarked a colleague and Economic Prism reader earlier in the week.  “You keep writing about it as if anyone gives a lick.” We could tell he was just warming up.  So, we settled back into our chair and made ourselves comfortable.   The federal debtberg, which no-one cares about (yet). We have added the most recent bar manually, as the charts published by the Fed will only be updated at the end of the...
  • Despite 24/7 Trading: Bitcoin Investors are Taking off for the Weekend on Friday Already
      Crypto-Statistics In the last issue of Seasonal Insights I have discussed how the S&P 500 Index performs on individual days of the week. In this issue I will show an analysis of the average cumulative annual returns of bitcoin on individual days of the week.   Bitcoin, daily. While this is beside the point, we note the crypto-currency (and other “alt coins” as well) has minor performance issues lately. The white line indicates important lateral support, but this looks to...
  • Precious Metals Supply and Demand
      Fundamental Developments There were big moves in the metals markets this week. The price of gold was up an additional $21 and that of silver $0.30. Will the dollar fall further?As always, we are interested in the fundamentals of supply and demand as measured by the basis. But first, here are the charts of the prices of gold and silver, and the gold-silver ratio.   Gold and silver prices in USD terms (as of last week Friday) - click to enlarge.   Next, this is a...
  • Janet Yellen's 78-Month Plan for the National Monetary Policy of the United States
      Past the Point of No Return Adventures in depravity are nearly always confronted with the unpleasant reality that stopping the degeneracy is much more difficult than starting it.  This realization, and the unsettling feeling that comes with it, usually surfaces just after passing the point of no return.  That's when the cucumber has pickled over and the prospect of turning back is no longer an option.   Depravity and bedlam through the ages. The blue barge of perdition in the...

Support Acting Man

j9TJzzN

Austrian Theory and Investment

Archive

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]

 

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com