Call the Men in the White Coats Before it’s too Late

Today Sweden’s Riksbank “shocked the markets” by cutting its main refinancing rate further into negative territory, to minus 50 basis points. Note that according to the FT, “Sweden’s economy is booming”, and the Riksbank itself “forecasts that economic growth will be 3.5 per cent this year, a little lower than the 3.7 per cent in 2015”. Sweden also happens to be home to credit and real estate bubbles that are among the biggest on the planet.

Sweden’s central bank governor Stefan Ingves: yet another dangerous monetary quack

Photo credit: Thommy Tengborg / TT via AP

We hereby nominate the governor of the Riksbank Stefan Ingves for the “Upper Class Twit of the Year” award. We also urge all the good people in Sweden whose brains are not totally addled yet to quickly call for the men in white coats and have him committed before he can do even more damage.

Sweden’s central bank goes full retard by setting the repo rate at minus 50 bps, and promising even further cuts! – click to enlarge.

As we have pointed out many times, negative interest rates are an abomination. They could not possibly exist in a free market, unless the universe were to contract and arrow of time were to reverse. It is an apodictic certainty that the imposition of negative rates will lead to malinvestment, capital consumption, and ultimately impoverishment. So what gives? Why would the Swedish central bank lower rates even further into negative territory in the face of 3.5% GDP growth and raging credit and property bubbles?

Sweden’s raging credit bubble: total credit to the non-financial private sector – click to enlarge.

Monetary Quackery

The AP reports:

“Sweden’s central bank, worried about a long period of low inflation, decided Thursday to cut its key interest further below zero to a record minus 0.50 percent — and didn’t rule out further action. Describing it as a “uniquely low interest rate,” Riksbank Governor Stefan Ingves didn’t want to speculate on future measures but said that “unfortunately the world looks different to what it did in December,” when the bank last discussed the economic situation. He pointed to a further drop in oil prices, turmoil in global markets and Japan’s decision last week to cut one of its key rates into negative territory, which has pushed down the yields payable on its bonds. “The period of low inflation will be longer than we expected, increasing the risk of weakening confidence in the inflation target … and (of) inflation not rising toward the expected target,” of some 2 percent in 2017, Ingves said.”

(emphasis added)

In other words, the reason for imposing even deeper negative rates is the insistence of today’s orthodox Keynesian monetary quacks that the purchasing power of the money the central bank issues must decline by 2% per year in terms of an arbitrary consumer price index. Note here that there actually is no such thing as a “general price level” – that is a meaningless artificial construct, as there exists no constant against which such a measurement could possibly be made, given that money itself is subject to the forces of supply and demand just as any other good.

The Swedish krona plummets against the euro in reaction to the Riskbank announcement – click to enlarge.

There exists not even the tiniest shred of theoretical or empirical evidence that would prove that it is economically advantageous for society at large when the purchasing power of money constantly depreciates. In fact, the exact opposite is the case. As Rothbard notes, money is the only good in the economy an increase in the supply of which cannot possibly confer a social benefit. As a noteworthy historical example, the US economy has never again experienced greater real growth per capita than in the “Gilded Age”, a time during which consumer prices were in a mildly declining trend for decades.

Theory shows that distorting interest rates and pumping up the money supply distorts relative prices in the economy, which falsifies economic calculation. The result is a boom as capital malinvestment gathers pace, just as the one Sweden is now experiencing. This feels good while it is happening, but in reality it benefits only a tiny class of profiteers who have first dibs on newly created money. When it inevitably turns into a bust, all the accounting profits of the boom are ultimately revealed as imaginary, and then some. General impoverishment is assured.

Residential property prices in Sweden are an outward symptom of an orgy of malinvestment that threatens to eventually annihilate the country’s banking system:

A symptom of malinvestment on a staggering scale – Sweden’s housing bubble. Since house prices have peaked in the US in 2006, they have nearly doubled again in Sweden. When Sweden suffered a housing bust in the early 1990s, its banking system nearly imploded. When the current bubble bursts there will be a lot of wailing and gnashing of teeth. When the time comes, Sweden’s citizens will hopefully realize who they can thank for it – click to enlarge.

Confidence in Central Planners Crumbles

As recent moves in stock prices and gold have shown, markets are slowly but surely losing confidence in central bank policies – even the mainstream media are taking notice of late. This is as it should be – the sooner the credibility of these superfluous non-market institutions is lost, the sooner we can hope to see a return to sound money and a resumption of genuine economic progress.

A chart by Bloomberg shows that stocks have been in trouble ever since major central banks like the ECB and BoJ began to impose negative interest rates as well – click to enlarge.

As Allister Heath quite rightly remarks in an article at the Telegraph:

“The free market makes mistakes, of course, but it fails far less frequently than any alternative way of allocating resources. The only other way is to direct activity centrally – an extreme version of central planning – but that is a recipe for catastrophe. Tragically, while policymakers supposedly understand this, they have spent years undermining the price system, making it less useful and efficient, planting the seeds for one crisis after another. The current market turmoil – which has pushed the FTSE 100 down 22pc from its recent peak, sent yields into a spin and turbocharged gold – is one consequence of all of this. Far from being a manifestation of what the left describes as “neo-liberalism”, it is primarily a failure of statism.”

(emphasis added)

It warms the cockles of our heart to see an author in a fairly mainstream publication coming to such conclusions. Perhaps it is simply a case of it being “darkest before the dawn”. In this context, we want to point readers to a recent speech by Lew Rockwell (“Reasons for Hope”), who remains quite optimistic that liberty is slowly but surely winning out over the scourge of statism.

We believe strongly in human ingenuity and the basic desire of humans to be free, and like Rockwell, we think the State is an expensive and clumsy anachronism that will eventually crumble to dust. So we actually share his optimism, but there is a caveat: we also fear that the ruling classes and their cronies are not going to slink away without first doing a lot more damage.

The recent surge in the gold price is a sign that markets are beginning to lose confidence in central planners – click to enlarge.

Conclusion

Economic science has clearly taken a wrong turn sometime in the 1930s – it has become utterly bereft of common sense and one often gets the impression that it has been regressing rather than progressing. The reason is of course that it is the most politicized branch of science. When physicists debate whether gravitational waves exist, the outcome of their deliberations is not going to influence the distribution of economic and political power. It is obviously different with economics, which over recent decades has mainly served to provide “scientific” fig leaves for statism and interventionism. It is high time this changed.

We have become ever more disgusted by the actions of central bankers in recent years. Their mindless activism, which is based on theories so loopy even a child should be able to refute them, endangers us all. Hence we have ever more frequently resorted to less than polite language when describing these people – they actually deserve it. We often wonder whether someone like Mr. Ingves actually believes his own BS. Can these people really be so dense? We fear the answer is actually yes. So if Mr. Ingves insists on the lunacy of imposing negative rates to “boost inflation”, then we feel free to insist that he deserves the Upper-Class Twit of the Year Award.

Famous Upper-Class Twit of the Year competition in England.

Charts by: StockCharts, Bloomberg, TradingEconomics, St. Louis Federal Reserve Research



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