Monday, 1 December 2014

The Household Debt Fest Continues Undeterred in Norway

The money supply growth rate for Norway fell to 6.1% on a year on year basis in October, down from 6.6% last month. The growth rate remains lower than the long term average, but do keep in mind that the money supply has expanded very aggressively for many years having increased 254.0% since 1995 (data not available for earlier periods).

A primary driver of the money supply is household borrowing. During the December 2004 to December 2013 period, household debt increased by an astonishing NOK 1,328,991 million, or 108.2%, pushing the debt to income ratio up to 210% as of the end of 2013. This remains among the highest debt to income ratio in the world to my knowledge, the foundation of my stance that the average Norwegian, who lives in one of the richest countries in the world, has been turned into a debt slave (e.g. here). 

This year as of October, household debt is up another NOK 138,922 million, or 5.4%, which is no doubt higher than increases in income, This means the debt to income ratio for the average Norwegian household will increase yet further in 2014. As of October, total household debt stands at NOK 2,696,281 million. With about five million people living in Norway, this equates roughly to an average debt per head of NOK 539,256 (ca $77,300).

How in the world has this mind-boggling debt growth been possible? The simple answer is a deliberate policy of low interest rates and low capital requirements for banks

Bottom line: Norway has in many ways pushed itself into a corner and is facing four major risk factors that could throw the economy into turmoil: 1) High household debt 2) High house prices driven by the debt growth 3) Fragile bank balance sheets and 4) A Norwegian economy dominated by the offshore industry and government spending and a weak mainland economy. 

In the large scheme of things, there are two items that should dominate any debate about the economy: a return to sound money and a drastic reduction in government spending and its domination of the Norwegian mainland economy. Sadly, none of these are discussed on a political level. I would therefore expect the current economic situation to only become worse as the new government has turned out to be an even bigger spender than the previous one (here, in Norwegian) and as it is also an advocate of artificially low interest rates. The debt fest will continue until market forces brings it to a halt. It could turn out to be ugly.