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.
“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.”
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:
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).”
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.
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.”
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?
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”
Most read in the last 20 days:
- India: The World’s Fastest Growing Large Economy?
Popular Narrative India has been the world’s favorite country for the last three years. It is believed to have superseded China as the world’s fastest growing large economy. India is expected to grow at 7.5%. Compare that to the mere 6.3% growth that China has “fallen” to. India's quarterly annualized GDP growth rate since 2008, according to MOSPI (statistics ministry) - click to enlarge. The IMF, the World Bank, and the international media have celebrated...
- Don’t Blame Trump When the World Ends
Alien Economics There was, indeed, a time when clear thinking and lucid communication via the written word were held in high regard. As far as we can tell, this wonderful epoch concluded in 1936. Everything since has been tortured with varying degrees of gobbledygook. One should probably not be overly surprised that the abominable statist rag Time Magazine is fulsomely praising Keynes' nigh unreadable tome. We too suspect that this book has actually lowered the planet-wide IQ –...
- Silver Speculators Gone Wild – Precious Metals Supply and Demand
Silver Gets Frisky Last week, the prices of the metals had been up Sunday night but were slowly sliding all week — until Friday at 7:00am Arizona time (14:00 in London). Then the price of silver took off like a silver-speculator-fueled-rocket. It went from $16.68 to $17.25, or 3.4% in two hours. March Silver, 30 min. candles. Someone certainly piled in last Friday... - click to enlarge. What does it mean? We don’t know. We would bet an ounce of fine gold against a...
- What is the Best Time to Buy Stocks?
Chasing Entry Points Something similar to the following has probably happened to you at some point: you want to buy a stock on a certain day and in order to time your entry, you start watching how it trades. Alas, the price rises and rises, and your patience begins to wear thin. Shouldn't a correction set in soon and provide you with a more favorable buying opportunity? Apple-Spotting – a five minute intraday chart showing the action in AAPL on February 1, 2017 - an...
- Incrementum Advisory Board Meeting, Q1 2017 and Some Additional Reflections
Looming Currency and Liquidity Problems The quarterly meeting of the Incrementum Advisory Board was held on January 11, approximately one month ago. A download link to a PDF document containing the full transcript including charts an be found at the end of this post. As always, a broad range of topics was discussed; although some time has passed since the meeting, all these issues remain relevant. Our comments below are taking developments that have taken place since then into...
- Gold and Silver Divergence – Precious Metals Supply and Demand
Gold and Silver Divergence – Precious Metals Supply and Demand Last week, the prices of the metals went up, with the gold price rising every day and the silver price stalling out after rising 42 cents on Tuesday. The gold-silver ratio went up a bit this week, an unusual occurrence when prices are rising. Everyone knows that the price of silver is supposed to outperform — the way Pavlov’s Dogs know that food comes after the bell. Speculators usually make it...
- Trump and the Draining of the Swamp
Swamp Critters BALTIMORE – The Dow is back above the 20,000-point mark. Federal debt, as officially tallied, is up to nearly $20 trillion. The two go together, egging each other on. The Dow is up 20 times since 1980. So is the U.S. national debt. Debt feeds the stock market and the swamp. What’s not up so much is real output, as measured by GDP. It’s up only 6.4 times over the same period. Debt and asset prices have been rising three times as fast as GDP for 36 years! Best...
- Making America Great Again – How to Judge Policy
A Simple Formula MIAMI – How do we know if new programs will make the economy better... or worse? Here’s a simple formula: W = rv (w-w – w-l) That is, wealth is equal to the real value of win-win exchanges minus the loss from win-lose exchanges. Yes, dear reader, it’s as simple as that. Like a whittler working on a piece of wood, we’ve shaved so much off, there is nothing left of it... except the essential heartwood. When devising a win-win,...
- When Trumponomics Meets Abenomics
Thirty Year Retread What will President Trump and Japanese Prime Minister Shinzo Abe talk about when they meet later today? Will they gab about what fishing holes the big belly bass are biting at? Will they share insider secrets on what watering holes are serving up the stiffest drinks? [ed. note: when we edited this article for Acting Man, the meeting was already underway] Japan's prime minister Shinzo Abe, a dyed-in-the-wool Keynesian and militarist, meets America's...
- The Great Wailing
Regret and Suffering BALTIMORE – Victoribus spolia... So far, the most satisfying thing about the Trump win has been the howls and whines coming from the establishment. Each appointment – some good, some bad from our perspective – has brought forth such heavy lamentations. Oh no! Alaric the Visigoth is here! Hide the women and children! And don't forget the vestal virgins, if you can find any... You’d think Washington had been invaded by Goths, now...
- Gold Sector Update – What Stance is Appropriate?
The Technical Picture - a Comparison of Antecedents We wanted to post an update to our late December post on the gold sector for some time now (see “Gold – Ready to Spring Another Surprise?” for the details). Perhaps it was a good thing that some time has passed, as the current juncture seems particularly interesting. We received quite a few mails from friends and readers recently, expressing concern about the inability of gold stocks to lead, or even confirm strength in gold of...
- Receive a One Percent Gift When Buying or Selling a Home
How to Save Money When Buying or Make More When Selling a Home In your professional capacity and perhaps also in your private life, you may be closely involved with financial and commodity markets. Trading in stocks, bonds or futures is part of your daily routine. Occasionally you probably have to deal with real estate as well though – if you e.g. want to purchase an apartment or a house, or if own a home you wish to sell. The people who took this photograph probably want to...