Friday, 12 December 2014

What Has The Norwegian Central Planning Bureaus Done to Our Currency and Wealth?

Since I first started this blog some two and a half years ago, I have on numerous occasions written about the mismanagement of the Norwegian economy. In fact, it was one of the primary reasons I started writing in the first place. The word "mismanagement" is justified in this context in my opinion as Norway is to a great extent managed centrally by a large government and public sector running not only schools and hospitals, but a range of government programs too long to mention here. Actually, the list of subsidies, grants, transfer payments and interventions have become so long I gave up on trying to get to the bottom of it a long time ago. I doubt even the prime minister has heard of half of them. I'm now merely keeping track of government spending in monetary terms instead which, of course, does not tell the whole story.

I have long since also written about the fragility of the Norwegian economy. Contrary to popular belief, this fragility does not stem from the country's vast oil and gas reserves and the many world-class Norwegian companies operating in the offshore sector making it such a dominant force in Norway. We are "too dependent on oil" is the reasoning behind this belief. But the fragility originates instead from a weak mainland economy dominated by the public sector and easy money policies. Ownership of vast natural resources is a blessing for any country in economic terms. But when an economy is run by reckless politicians abusing this economic blessing by myopically growing the public sector at the expense of the mainland economy, then it should come as little surprise the Norwegian economy is on the brink of a major economic downturn. If not now, then it is bound to happen sooner or later unless changes are made for the better. Special interest groups lobbying for funds and accommodated by elected politicians working hard to please the indulgence can only lead to the lot grabbing an ever larger share of a cake substantially lagging potential in size. Citizens end up worse off than they otherwise would in economic terms as a result. Productivity and efficient use of society's scarce resources are undoubtedly more important than any amount of oil reserves in the long run.

With the recent collapse of oil prices, all hell is now breaking loose in the mainstream press with economic pundits, left and right, slashing their growth forecasts for the Norwegian economy. Understandably so. And Norges Bank, the central bank, just did what any central bank facing slowing economic growth would do; lowering the interest rate like it is some source of untapped economic growth fit to counteract (potential) economic contractions. Central banks have proven long ago they are unfit to "fine tune" the economy and to manage the very business cycles they themselves put in motion through the monetary system they are supposed to hold the reins. Norges Bank is no different in this respect and has done little but spur bank credit expansion. Since 1995, the quantity of the Norwegian krone has increased a mind-boggling 254%. Little wonder prices, including house prices, have shut up. This increase in the money supply has done the value of the Norwegian krone few favours. The market price of a currency is at the end of the day decided by supply, which includes the increase in the money supply, and demand. All things remaining the same, an increase in the quantity of money will bring about a reduction in its value. A depreciating currency, or a less appreciating one than otherwise, is just one of the costs of the easy money policies favoured, and ultimately borne, by the many. It's time for the left wing of politics to put an end to these policies that can only lead to impoverishing many, or make them worse off than without, in the long run. There is no free lunch. Except for the banks of course which are able, despite their shamefully weak balance sheets, to increase profits through the simple act of creating money out of nowhere. Who needs alchemy when you own the printing press and get bailed out by the even larger central bank printing press when you become insolvent? The banking sectors' low capital compared to its assets nevertheless presents a major source of financial risk to the Norwegian economy.

The Norwegian economy is more fragile than many can imagine. A bloated public sector with a weak mainland business sector busy trying to serve it combined with easy money policies over an extended period has brought about unsustainable economic structures destroying wealth throughout the economy. Economic prosperity is not brought about by creating ever more money while expanding the public sector, quite the contrary. Isn't it about time the tax payer asks: how come I pay so much to the government? How come I've become a debt slave in one of the richest countries on earth? And how come my money is worth so little, both home and abroad? I have attempted to briefly answer these questions above, albeit in very broad terms.

The article is largely based on research and opinions published earlier on EcPoFi and ØkPoFi (both hyperlinked to the relevant sources should you wish to dig deeper).


Norwegian Bank Balance Sheets: The Great Source for Financial Instability

In Norwegian: