Thursday, 8 January 2015

Household Debt-Fueled Monetary Inflation Storms Forward in Norway

The money supply* in Norway expanded 6.2% on last year in November according to numbers released by Statistics Norway today. This was a slight increase from the 6.1% reported last month. 

Just like most other countries, the Norwegian economy is dominated by central bank driven inflationary policies encouraged by politicians and special interest groups. In November, the money supply in the country stood at more than NOK 1.8 trillion, a 257.2% increase from the around NOK 526.8 billion reported in December 1995.

The substantial monetary inflation that has been taking place during the last two decades helps explain why prices, including house prices, are so much higher in Norway today than back then. On this note, it's important to be aware that monetary inflation leads to a general loss in purchasing power compared to what would have been the case without such expansion. Measuring this purchasing power of the Norwegian krone (the local currency) against gold is one way to demonstrate the negative consequences of this monetary expansion.

A major driver of the growth in the money supply has been the growth in household debt. As banks in Norway, just like elsewhere, create new money when they lend (no, only a very small part of lending is financed by savers), the money supply increases when banks increase net lending. A big chunk of this is of course related to mortgages. In November, household debt increased 6.8% compared to last year, slightly lower than the long term average of 7.0% since 1988. 

As debt growth has outpaced income growth for Norwegian households for at least two decades (see chart below), the result is an ever increasing debt to income ratio. As of 2013 (based on data published mid December 2014), the debt situation for Norwegian households compared to pre-tax income is as follows:

The table clearly demonstrates that households are becoming ever more indebted compared to income. For example, the bottom row shows that only 9.3% of households had debt exceeding 3 times pre-tax income in 2004. By 2013, this had risen to 15.8%. The numbers are likely to become even worse in 2014 as debt growth continues to outpace income growth.

As of Q2 2014

But doesn't the increase in house prices justify the increase in debt? Well, actually, it's the other way around, but with the slight glitch that when house prices fall the debt does not decline with it. Also note that price increases for housing in a country does not make the average citizen wealthier. If it was that simple to create real wealth, we could all just swap houses at prices above market and become wealthier as a result. All house price growth ever does is to fuel ever more debt growth and higher bank profits until it all comes to a halt or ends with a bang as Norwegian banks, with their extremely fragile balance sheets, run into liquidity problems.

For now, the Norwegian debt fest continues and real estate agents and banks are celebrating. Exporters are also happy with the plummeting Norwegian krone while the rest of us working in the private sector pay for their parties through the loss in purchasing power of the currency (at home and abroad) and interest payments on ordinary bank savings not even covering CPI inflation.

I'll conclude this post with what I wrote in a similar post published at this time last year:
Bottom line: the citizens of Norway, perhaps the richest country on earth, are debt slaves and this will not end unless some visionary and prudent politician, one who understands and applies real economics (read: how the free market really works and how big government and fractional reserve/central banking impoverish citizens) and care about the country's long term prosperity appears out of nowhere in four years time (next election). 
Unfortunately, politicians rarely accommodate non-inflationary policies (why would they, their concerns are mostly for the short term, i.e. next election). We'll simply have to wait for the market to correct it all, which can take a very long time indeed. 

* Calculated as M2 money supply excluding Money Market Fund Shares (MMF).

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