Buying Votes with Oil Money
People usually don't care much about Norway, on account of its relatively small size, population-wise (4.5 million inhabitants). However, as we have noted on previous occasions, its economy is beset by the Scandinavian bubble disease, with household debt growing to the sky and real estate prices exploding into the blue yonder. The central bank, faced with what it deems an overvalued currency, has kept interest rates at rock-bottom, continuing to fuel these twin bubbles. Nothing can possibly go wrong of course.
However, Norway is also quite unique due to being blessed with large oil wealth. Considering the tiny population, this oil wealth has allowed politicians to both save funds for a rainy day (said rainy day will arrive once the oil runs out, or so the theory goes), as well as financing a vast socialistic welfare state. Note that just because the central authority has lots of money to throw around, socialism cannot really be improved upon. It would still be far better for the country if the services provided by the government were provided by the market. And yet, Norway's government wants to throw more money around and enlarge the welfare state even further, in the hope of getting re-elected. As this is what it is going to use some of the accumulated wealth from oil sales for, we can state that saving for the dreaded 'rainy day' has for now given way to the exigencies of elections.
Throwing even more funds on the bubble bonfire that is Norway is not really apt to improve the country's economic risk profile. According to Bloomberg:
“Prime Minister Jens Stoltenberg pledged to build Norway’s welfare system, financed by the nation’s $750 billion oil fund, as he trails in the polls behind an opposition that’s promised tax cuts.
Stoltenberg, who is seeking an unprecedented third four-year term in September elections, said western Europe’s biggest oil producer needs a more developed system of public benefits as his Labor-led coalition raises spending by 19 percent in 2013.
“The main mission of the campaign is to tell voters why ours is the best government to lead Norway in the future, both when it comes to economic challenges and when it comes to further developing the Norwegian welfare state,” Stoltenberg said yesterday in an interview in Oslo. “It’s absolutely possible to win three elections in a row in Norway and that’s what I’m going to campaign for.”
Norway, where survey unemployment was 3.5 percent in April and manufacturing labor costs are almost 70 percent above the European Union average, is grappling with signs of overheating as its oil wealth drives up asset prices. Stoltenberg and his main rival, Conservative Party leader Erna Solberg, have both sought to entice voters with campaign promises that risk stoking demand further in the $480 billion economy.”
Let's ignore the Keynesian verbiage and focus on the decisive points: the government has increased spending by 19% this year alone. Should Norway ever be forced to compete with anyone outside of the oil business, it would probably be in for a Greece-like shock treatment given its labor costs.
It has a huge asset bubble, a central bank that exhibits a Greenspan-like abdication of responsibility for the bubbles it fosters, and a government that thinks its most important task is to greatly expand the welfare state – which is already of the cradle-to-the-grave variety. It all sounds a bit like that other golden cage, Denmark (although the latter comes minus the oil).
The Biggest Housing Bubble in the Region
Norway's bubble meanwhile is really in a class of its own. It has far outclassed the likewise impressive housing booms of its less oil-lubricated neighbors. Denmark is already struggling with the air coming out of its bubble, in spite of interest rates remaining near zero. There is a slight wobble visible in Sweden as well. Norway? Up and away!
Housing bubbles in socialist paradises up North. Norway's is by far the most impressive – via Mises.org.
Even more stunning is however the following chart comparing real house prices in Norway with those in the US:
Norway's real house prices compared to the US – the US housing mania looks like a fairly harmless blip by comparison – via Mises.org.
We have taken these charts from an article by Mark Thornton at Mises.org, who discussed the Oslo bubble earlier this year. Thornton notes that as of the time of writing, Norway's economic data looked so good, they almost looked too good to be true. This continues to be the case (read: the bubble is still expanding).
However, Thornton also points out where the weaknesses are likely to be found:
“We cannot know for certain that Norway is experiencing a bubble. However the reasons we suspect a bubble starts with their economy. Norway’s rosy economy is not the result of good policy, but of oil revenues that subsidize their socialist government. Norway ranks 40th on the Freedom Index, below Belgium (38) and Armenia (39), and only above countries like El Salvador (41) and Peru (42). A steep drop in oil prices would be a severe blow to their economy. However, as oil revenues are continuing to pour into the government budget and sovereign wealth fund, it makes the Norwegian economy look like a good bet.
Instead of allowing the krone to increase in value with this increase in demand, the Norwegian central bank, the Norges Bank, has instead countered with an increase of supply. They have intentionally set interest rates artificial low. The overnight deposit rate has been set at 1.5 percent since last December. They are trying to prevent the krone from appreciating in value, but their efforts have not been completely successful. Preventing this appreciation of the krone is intended to protect exporters, including their national oil company. However, it also helps pump up the housing bubble.
Monetary inflation, as measured by Norway's M2 measure of the money supply, has lately been running at 8%. During the economic crisis, circa 2007, it ran as high as 20%. From 2008 to the present monetary inflation has averaged about 7.5%.”
This is like Switzerland on steroids (Switzerland's central bank also pursues an extremely inflationary policy in order to keep the Swiss Franc down). Of course economists everywhere regard the actions of both the Norges Bank and the SNB as perfectly fine. After all, 'what can they do'? No-one seems to think an appreciating currency a good thing, which is utterly bizarre.
Norway not only swims in a sea of oil money – which is fine in principle, but as Thronton notes, also dangerous, as oil prices presumably won't remain high forever (and the government keeps ratcheting up its spending as though high oil prices were set in stone) – it also swims in a sea of krone currency its central bank has created ex nihilo.
Just as Dubai one day found out that trees don't grow to the sky, even if one is surrounded by oil wealth, Norway could come to learn a bitter lesson as well once its bubble bursts.
Norway's socialist prime minister Jens Stoltenberg: provider of welfare-statism financed by oil revenues (a.k.a. 'the pusher').
(Photo credit: Ramin Talie/Bloomberg)
Stoltenberg photographed from behind. Sorry, we couldn't resist.
(Photo credit: Nicolas Winding Refn)
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