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:
- Why Do We Let Other People Tell Us What to Do?
Lame Theories of Government We have been disappointed with political ideas and theories of government. They are nothing but scams, justifications, and puffery. One tries to put something over on the common man… the other claims it was for his own good… and the third pretends that he’d be lost without it. Most are not really “theories” at all… but prescriptions, blueprints for creating the kind of government the “theorist” would like to have. Not surprisingly, it is a...
- Gold and Gold Stocks – Back to Tricky, but Interesting Signals Emerge
A Relentless Short Term Decline When we last discussed the gold sector, we noted that with gold approaching its 200 day moving average, a pullback had to be expected soon. In the meantime, a bit more than just a pullback has happened, as a severe sell-off started after the October FOMC announcement. Photo via genius.com However, as you will see below, this has most likely merely reset the clock a bit in terms of anticipating a medium term trend change (even if...
- Gold and Gold Stocks – It Gets Even More Interesting
Technical Backdrop If only we could get a dime for every bearish article on gold that has been published over the past two weeks...but one can't have everything. When a market is down 83% like the HUI gold mining index is, we are generally more interested in trying to find out when it might turn around, since it is a good bet that it is “oversold”. Of course, it if makes it to 90% down, it will still be a harrowing experience in the short term. We like these catastrophes because...
- The Greatest Racket of All Time
The Successes of the Global War on Terror One would think that the so-called “Global War on Terror”, which has been given fresh impetus by the Paris attacks, must be going swimmingly. What else could explain the great enthusiasm with which it is pursued? It may be recalled that it started in earnest after the WTC attack – also a declaration of war, as it was put at the time. As is often the case when Islamist fundamentalists strike, the actual attackers immolated themselves on...
- The Long, Cold Winter Ahead
Not Immune Cold winds of deflation gust across the autumn economic landscape. Global trade languishes and commodities rust away like abandoned scrap metal with a visible dusting of frost. The economic optimism that embellished markets heading into 2015 have cooled as the year moves through its final stretch. Photo credit: David Byrne If you recall, the popular storyline since late last year has been that the U.S. economy is moderately improving while the...
- How Do People Destroy Their Capital?
There is no Santa Claus I have written previously about the interest rate, which is falling under the planning of the Federal Reserve. The flip side of falling interest rates is the rising price of bonds. Bonds are in an endless, ferocious bull market. Why do I call it ferocious? Perhaps voracious is a better word, as it is gobbling up capital like the Cookie Monster jamming tollhouses into his maw. There are several mechanisms by which this occurs, let’s look at one...
- Junk Bonds Under Pressure
While the Stock Market is Partying ... There are seemingly always “good reasons” why troubles in a sector of the credit markets are supposed to be ignored – or so people are telling us, every single time. Readers may recall how the developing problems in the sub-prime sector of the mortgage credit market were greeted by officials and countless market observers in the beginning in 2007. Photo credit: Getty Images At first it was assumed that the most highly...
- Angry Belgian Muslims and the Price of Welfare Statism
Ill-Tempered Mohammedans in the Socialist Paradise In the wake of recent revelations about the identities of the morons involved in the horrific Paris attacks (happily, most of them shuffled off the mortal coil as well, thereby improving the aggregate degree of moral clarity and intelligence in the world), a friend pointed us to an article at Unz Review that asks: “Why Does Belgium Have Such Angry Muslims?” Our instinctive, immediate reaction was to argue that the bland, boring...
- Can Investors Trust the New Gold Fixing?
Statistical Analysis of the New Gold Fixing Since 20 March 2015 a new gold price fixing organized by the London Bullion Market Association has been in operation. It has replaced the previous price determination process, which was in place for more than a century and became subject to criticism as it was highly vulnerable to manipulation. Has manipulation now ceased? Gold fixing at N.M. Rothchild and Sons offices in London. The first fixing took place there on 12 September...
- Incumbents Swept from Office Around the World
Election Trends in 2015 – No Incumbent is Safe In the political sphere, this year has started with a bang, when Syriza won the Greek parliamentary election. All of Europe's attention was focused on this outcome and its aftermath over the coming six months or so. As it turned out, it was a bad omen for political incumbents nearly everywhere. More recently, we have seen the government of Stephen Harper in Canada go down in flames, with its opponents winning an unexpected landslide...