Regulators are “Worried”- but it is way too Late

We have discussed the immense credit bubbles in Scandinavian countries in these pages several times in recent years. As it turns out, they have now become even bigger. The euro area debt crisis has had a number of side effects. One of them is that not only Switzerland, but also other countries in Europe outside of the euro zone have tried their best to keep their currencies from appreciating. This is based on the erroneous mercantilist notion that having a strong currency is somehow “bad”.

In Denmark the central bank’s benchmark lending rate has been stuck at minus 0.75 percent since February. Denmark’s households are incidentally the most leveraged in the world, with household debt amounting to over 530 percent of the country’s economic output.



1-denmark-interest-rateDenmark’s central bank benchmark rate – stuck at a negative 75 basis points – click to enlarge.


2-Denmark interbank lending ratesDenmark’s three month interbank lending rates stand at minus 20 basis points, because banks can still earn a positive spread with the benchmark rate at minus 75 basis points – click to enlarge.


Not surprisingly, Denmark’s housing bubble, which had actually begun to look a bit frayed around the edges, has recently revived with great gusto. The same is happening in Norway and Sweden, two countries in which household debt, mortgage credit and house prices are likewise chasing one record after another. Regulators in these countries – this is to say, members of the same class of bureaucrats that is responsible for creating these bubbles with ultra-loose monetary policy in the first place, are now declaring themselves to be “worried” about the monsters they have let loose. According to the Financial Times:


“Stories of frenzied bidding rounds and record-high prices are causing concern among policymakers and economists, as central banks in all three Scandinavian countries appear set to keep interest rates at historically low levels for several more years.


Few expect the bubble to burst soon, with official interest rates well into negative territory in Sweden and Denmark and at a historic low in Norway. Many fear that the damage could be great when rates do rise or the economies slow.

“What I’m really worried about is that we will have a recession and the housing bubble will burst and the recession will be much worse,” said Hilde Bjørnland, a professor of economics at BI business school in Oslo.

Apartment prices in Copenhagen have risen by a quarter in the past year and are up by about two-thirds since 2011, according to data from Danske. Danes can get a mortgage at a fixed net rate of just 2.9 per cent for 30 years, while average household debt is equivalent to three times their disposable income — the highest in the world.

In Norway, apartment prices have rocketed more than sevenfold since 1992. But despite worries about how the falling oil price is hurting the Norwegian economy the cost of housing has continued to gallop ahead, with a record number of dwellings sold in June.

Anecdotal evidence backs this up. The former home of the Soviet spy Rudolf Abel in an Oslo suburb sold for NKr6.1m ($750,000) this year, well above the NKr4.2m asking price. In Copenhagen, brokers talk of people buying places without seeing them.

“This market is so hot now. Low interest rates just allow people to bid more and more — and that is what they are doing,” one Oslo estate agent said. Magdalena Andersson, Sweden’s finance minister, called a 13 per cent rise in house prices in the year to May a “worrying development”. Her Norwegian counterpart, Siv Jensen, said after the International Monetary Fund pointed to rising house prices and household debt as the main threats to financial stability: “I share the concern about rising housing prices.”

Central bankers are also on high alert even as interest rates continue to tumble. Sweden’s Riksbank cut its main policy rate to minus 0.35 per cent last month; Denmark’s deposit rate is at minus 0.75 per cent; while Norway has cut rates twice since December to a record low of 1 per cent.

“There is no doubt that house prices and debt levels are the main risks to this strategy,” said a Scandinavian central bank official. Authorities are trying to take stabilization measures but analysts query whether they are sufficient. Norway’s government is aiming to toughen up lending rules, while Sweden’s financial regulator tried but then backed down from plans to force mortgage holders to pay down their debt, not just interest. Economists say proper measures would include tackling the tax system, which in all three Scandinavian countries grants tax deduction for interest payments.”


(emphasis added)

So central bankers first introduce negative interest rates – a total perversion of economic logic, since time preferences are always positive – and then they say they are “concerned” about the bubbles this has set into motion. In reality, these developments are an ongoing indictment of central economic planning by the purveyors of fiat money. It is a thoroughly sick system that will eventually lead to an economic catastrophe of gargantuan proportions.

Don’t be misled by the fact that nothing untoward has happened yet – this is a position akin to people buying the Nasdaq at an astronomical P/E in early 2000 because the “bears have been wrong so far”. The timing of the catastrophe is always uncertain – but it is apodictically certain that it will happen, and the longer it takes for it to happen, the worse it will be.


3-Denmark household debt to GDPDenmark’s household debt amounts to more than 531% of the country’s GDP – click to enlarge.


Can anything be done to prevent a crash? Nope, nothing at all – it is way too late for that. The only choices that remain are to allow the bubble to deflate as soon as possible by abandoning the inflationary policy, or just keep going until something breaks of its own accord. In the worst case, the underlying currency system will end up in complete ruins.


How Big can the Bubble Become?

As economist Claus Vistesen has remarked to us, with Denmark’s current account surplus of nearly 7% of GDP and its highly liquid (and giant) mortgage bond market, investors see no clouds in the horizon and money keeps pouring in. He calls Denmark “Germany squared” – and points out that although political decision makers know that what is happening is pure madness, Denmark remains a “poster boy for stability” and hence continues to attract safe haven flows.

According to Claus, things could get dicey very quickly if e.g. the country’s current account surplus were to disappear, but we believe that even with negative central bank lending rates and no dependence on foreign capital flows, there has to be a limit to how large the debtberg can become and how high house prices can go. The principal amounts are becoming ever larger and the huge debts one has to take on if one wants to finance a house purchase are by now producing almost comical debt-to-income ratios. For instance, the average Danish household now sports a debt-to-income ratio of 310%.


4-Denmark current accountDenmark’s strong current account balance has induced foreign investors to overlook the risks, on the idea that the country need not fear capital outflows as long as it persists  – click to enlarge.


Money supply growth in the Nordic countries has been going “parabolic” for many years. Below at the charts of Denmark’s narrow money supply M1 and Norway’s money supply M2 (we couldn’t find M1 data for Norway, but the M2 chart should suffice to convey the message).


5-Denmark M1Denmark’s narrow money supply M1 – the slight dip in 2010-2011 caused a 15% crash in house prices, but the central bank immediately revved up the printing press again.


In Norway, money supply growth is slightly less erratic than in Denmark, but is likewise on a steadily accelerating path. The difference between Denmark, Norway and Sweden is that in Denmark, there has already been a mild housing bust after the 2008 GFC, while in Norway and Sweden, the respective housing bubbles barely skipped a beat and just kept growing after a few quarters of sideways movement.


6-Norway M2Norway’s money supply aggregate M2 – another major inflationary bubble – click to enlarge.


7-norway-housing-indexNorway’s house price index has been a one-way street since forever – click to enlarge.


We keep wondering what the basic idea behind these policies is, and the only conclusion that suggests itself is that many people apparently believe in the proverbial free lunch. This is of course not what the planners are saying. There is always some other rationalization that is forwarded, such as the need to prevent the currency from strengthening, or the need to combat the alleged evil of declining prices or the need to support the economy with easy money.

Economic growth in these countries is by the way pathetic, we believe mainly because of their loose monetary policy. This policy continually undermines the economy on a structural level, as it distorts relative prices and thereby falsifies economic calculation. The end result is that more and more scarce capital is invested in the wrong lines. It all looks fine as long as monetary pumping continues, but is immediately revealed as a house of cards when the pumping stops.

What one must ask is what will happen if these bubbles so to speak begin to implode under their own weight. This shouldn’t be ruled out, given the sheer size of the debt that has been created. Our guess would be that central bankers would then decide to increase monetary pumping even more (what else?). At that point it could easily happen that the currently ubiquitous faith in the machinations of central banks evaporates. In fact, we feel reasonably certain that this is how it will all end – even though we can obviously not predict when it will happen.



The Scandinavian economies are fairly small, and it is probably widely held that if a debt crisis develops there at some point, it won’t affect other economies much. However, this will largely depend on contingent circumstances at the time. When Sweden went through a banking crisis in the 1990s, it didn’t affect other countries and Sweden ultimately succeeded in getting it under control.

The difference between then and now is that today’s credit and asset bubbles are far larger in both absolute and relative terms than those of the 1990s, and that numerous countries remain severely impaired in the wake of the most recent crises (i.e. the US mortgage credit and housing bubble crisis of 2008 and the subsequent euro area debt crisis). This probably makes economies around the world far more contagion-prone. One should therefore not dismiss the bubbles in the Nordic countries as unimportant side-shows. They could eventually turn out to be “black swans” – unexpected sources of instability.

Even many countries the economic and fiscal situations of which look strong on a superficial and comparative level, are in a far weaker position today than prior to the last crisis. In the next crisis we will probably see a “sauve qui peut” scenario, as policymakers everywhere will have their hands full with their own problems.

What the data from the Scandinavian countries once again show is that there is an enormous reservoir of potential problems out there (see also our recent missive on the new record high in Italy’s non-performing loans as an example of problems that are festering in the background, are temporarily masked by monetary pumping and therefore ignored). We are not sure what it will take to shake the current complacency in financial markets, but something will undoubtedly present itself in due time.


Charts by: St. Louis Federal Reserve Research, tradingeconomics




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2 Responses to “Scandinavian Bubbles in Overdrive”

  • APM:

    Pater Tenebrarum, you are using a quarterly series (not annualized) at constant prices to divide the debt stock of Danish households. The correct analysis is: Total Credit to Households and Non-Profit Institutions Serving Households, Adjusted For Breaks, for Denmark©, Billions of Danish Krones, Not Seasonally Adjusted (CRDQDKAHABIS) / Current Price Gross Domestic Product in Denmark©, Billions of Danish Krones, Not Seasonally Adjusted (DNKGDPNADSMEI) which yields a ratio of about 130%. Nominal GDP in Denmark was DKK 1,919 billion in 2014 (USD 330.8 billion at historical exchange rates) and total household debt was DKK 2,446 billion. Still a quite a debtberg of course!

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