A common misconception in Sweden is to view inflation as a general price increase on goods and services. The central bank will put together a cart of groceries and measure this from time to time to measure if there is inflation.

Now this is of course a childish way to describe inflation as it doesn’t tell you anything about the true nature of inflation.

The average shopping cart is a joke in measuring inflation

Just to put the “average shopping cart” measurement method out-of-the-way it is completely subjective to bias. One may put any type of groceries in such a cart as deemed fit. One may not even know what the changes relates to. An inefficient agriculture would most likely raise prices on food. Is that inflation? No, that is just more expensive groceries. Higher prices on imported goods, import taxes, a lower exchange value. A numerous number of things that doesn’t provide us with any clear answer.

The inflation is, and has always been, an increase in the amount of money in circulation. If the supply of money is regulated there would be X amount of money in circulation. With a more expensive shopping cart next week I would be able to buy less for the same amount of X. That is a decline in economic growth but it is not inflation as it should be defined.

Inflation, as the Central bank even exemplifies on their website, is

If a central bank is supplying too much money the prices rise and the value of money will decline. The most common example of this are times with high inflation, called hyper inflation. This is characterized with central banks printing too much money. Riksbanken

Focusing on the first part inflation is the printing of money. That prices rise is true. But there doesn’t need to be an overall price rise to have inflation as I describe further on how money is printed today.

In the old days the central banks would go to town on the printing presses. Ordering coins and bills that would be shipped to banks or loaned directly to companies. This is not the case anymore as the statistics on Riksbankens website isn’t truly showing what is happening.

Fractional reserve banking and a Fiat currency

As money today for the most part consist of numbers in a computer system it is not needed to look for how many bills and coins there are in circulation. That is a declining number as the demand for cash is low. The demand is high for computer money.

Banks in modern financial system has a nice regulation granted by government to create money. By issuing credit the Banks are creating money. They are allowed to create this money as long as the sufficient reserve are held with the central bank. A number the central bank in return has entered into the computer.

So to see how much money there is one needs to look at how much credit there is. And in Sweden there is a lot!

Credit=Debt=Money

If we have a look at the money created as debt it is M3. These are debt based computer money the banks create by giving loans. I have put together an index starting at 1999 at 100 going through to March 2018. The numbers are taken from Swedish Statistics (SCB).

As the picture tells the Consumer Price Index as measured hasn’t really moved by that much and seems like quite the joke to even be an official tool for monetary policy.

During this same period 1999 – 2017 the amount of money has more than tripled and the effect of this is due to an increasing amount of debt.

If we add wages into this equation we can see that they, in fixed prices, have increased by a linear amount every year but is nowhere near the increase in the amount of money.

The wages are average and not medium but Sweden do actually have quite small difference between average and median wage. Somewhere around 13 % difference so the coefficient between the top and bottom earners are quite similar.

From the above graph we can derive that the increase in money certainly hasn’t increased the wages (as an increase in productivity) nor has it increased prices on consumer goods as measured by the CPI.

Where have all the money gone?

The money has gone into debt. Into the enormous Swedish housing bubble that are now beginning to hiss.

It is easy to see how the household debt has developed during the same years.

The lending to Household has risen by 4,5 times since 1999. It has gone from 767 billion SEK to 3 838 billion SEK from 1999 to 2018. That is a time span of 19 years. Mean while the average household income has increased by the low 1,5 times.

There have been no sign of a slowing down on household lending as seen on the graph. It is constantly increasing even during IT crash 2000 and financial crisis 2008. None of it seems to have affected the populations desire to borrow money.

Looking at the interest rate the households are now paying it has moved from 6,5 % in 1999 to 1,96 % in 2018. Of course that is the driving force behind the increasing demand for bigger loans. The total rent bill to pay by the house holds would on average be 49,85 billions SEK in 1999 and with a 4,5 times larger borrowing it is 75,2 billion SEK. This ratio pretty much give us the increase in average wages. Around 1,5.

The sensitivity in this is not something to joke around with though. If you have an economy fueled by debt to this extent, you borrow 4,5 times more money but are only seeing a 50 % increase in productivity the money isn’t allocated to productive use.

Sweden is in for a world of hurt with a low-interest driven monetary policy

Now as capital that has been created during the last almost 20 years hasn’t been put into productive business we have sort of set the stage for a lower production in the future.

By not investing the capital we have consumed it and by not investing we have nothing to see return on in the future. The likelihood of wages increasing by 50 % the coming 20 years is low.

The money has been placed in building of housing that no one is asking for and it is consumed by the construction industry. There has been no infrastructural investments or saving of money.

It can be considered gone.

The problem with this is that let’s assume that in another 20 years the wages has now only increased by 20 %. So we can get a total factor of 1,8 times increase in wages. In the mean time the interest has gone back up to 6,5 %. If borrowing has stopped at current levels, ceteris paribus, the yearly interest payments will be 250 billion SEK. Compared to year 1999 this is a ratio of 5 times but we only have wage gains on 1.8 times the same wage in year 1999.

All this monetary policy tells us is that printing money is a bad thing, has always been and will always be. It drives households into borrowing money to use for non-productive use such as real estate. A house doesn’t produce anything. You see no societal good from buying and selling properties.