The Financial Instability of the Norwegian Economy

Just how the mountain of debt created in Norway is compatible with "financial-" and "economic stability" is a question Norges Bank (Norway's central bank) and the government should have pondered decades ago before they made the citizens of one of the richest countries on earth among the most indebted in the world (e.g. here).

An ever changing money supply, which the central bank ultimately controls, might be able to keep the CPI around 2.5% over time. In a progressing economy, an increase in the money supply (remember money is created as debt) would be necessary to push prices up as economic progress tends to put downward pressure on prices. However, in facilitating debt creation, monetary policy creates a whole other set of problems such as asset bubbles (e.g. housing, the stock market and a range of corporate bonds) and the transfer of purchasing power from savers to borrowers. And, as we all saw for ourselves in 2008, asset bubbles are incompatible with "financial"- and "economic stability".

The monetary policies orchestrated by the central bank and the government of Norway are therefore simply incompatible: you cannot achieve both economic stability and continuous price inflation at the same time and over time. This incompatibility of monetary policy was pointed out generations ago by economists (e.g. F.A. Hayek in Monetary Theory and the Trade Cycle published in 1933) - it's nothing short of financial- and economic instability by design.

Yes, Norges Bank and the government of Norway have certainly managed to create their coveted price inflation (i.e. a reduction in purchasing power), but with it they've fueled a range of asset bubbles while ordinary bank savers are watching with despair a real drop in the purchasing power of their savings (ordinary savings accounts now pay less than 1% interest while the money supply has been expanding more than 5x that rate). Common sense tells us that when extravagance is rewarded and thrift is penalised, something has gone astray and bad things must follow - economic instability.

It remains the faulty goal of most central banks and governments across the world to achieve both of these competing objectives at the same time. Therefore, in order to achieve "economic stability" and an item that ought to be high on any government's agenda, namely sound economic growth, we need to first begin by correcting what lies at the very heart of the problem: unsound and faulty monetary policies.

Related:
Why Norwegian Banks Will Be Bailed Out