Showing posts with label Norway - Politics and Economics. Show all posts
Showing posts with label Norway - Politics and Economics. Show all posts
Wednesday, 7 February 2018
Tuesday, 5 December 2017
Tuesday, 8 November 2016
Thursday, 13 October 2016
The Flight To (Un)Real Assets in Oslo, Norway
This Is What Happens When Authorities Promise Inflation to Eternity and Fire Up Demand With Historic Low Interest Rates & Aggressive Loan Growth: House prices in Oslo are now 92% higher than 10 years ago. During last year alone prices surged 17.9%, a y/y increase last seen in 2007.
As one investor tweeted a few days back: "... natural to compare with ... London and Singapore. No, Oslo is not a world centre for trade. Hello!"
Friday, 30 September 2016
Thursday, 22 September 2016
Countercyclical Capital Buffer Unchanged in Norway
The Norwegian ministry of the financially inept today announced the "countercyclical capital buffer" for banks will remain unchanged at 1.5%,
What a farce. Norwegian banks are seriously undercapitalised and will be unable to deal with the smallest of setbacks without the help of Norges Bank.
Related:
The Ministry of Finance has today decided to keep the level of the countercyclical capital buffer for banks unchanged. This is in line with the advice for Q3/16 from Norges Bank.
Each quarter, The Ministry of Finance shall make a decision on the level of the countercyclical buffer. The Ministry of Finance decided on the 18th June 2015 that banks shall hold a countercyclical buffer of 1,5 percent from the 30th of June 2016.
The purpose of the countercyclical capital buffer is to strengthen the financial soundness of banks and their resilience to loan losses in a future downturn and mitigate the risk that banks will amplify a downturn by reducing their lending. Banks should hold a countercyclical capital buffer when financial imbalances are building up or have built up. In the Norwegian economy, the sustained rise in household indebtedness and a sharp rise in real estate prices in recent years is a sign that financial imbalances have built up. House prices have risen sharply in recent months. High house prices could lead to increased household debt, and makes households more vulnerable.
In a letter from the 21th June 2016 Norges Bank advised the Ministry to keep the countercyclical buffer unchanged. Norges Bank's decision basis is published in the Monetary Policy Report with financial stability assessment 3/16. The Financial Supervisory Authority has stated that the overall development of the real economy and the credit and real estate markets implies some increased risk of financial instability since the last assessment. The Financial Supervisory Authority concurs with Norges Bank’s advice.
Related:
Wednesday, 16 March 2016
The Norwegian Household Debt Disaster
Almost three years ago I wrote an article about how one of the richest countries on earth had turned its citizens into debt slaves. This country was Norway.
Since then, households have taken on substantially more debt than any income growth could ever "justify". The result is, according to data published today by Statistics Norway, that the debt to disposable income ratio for Norwegian households have increased to 232% as of Q4 2015 - the highest ever reported based on data since 2004 (and likely the highest ever) and almost twice as high as it was back then some eleven years ago.
Banks, debtors and myopic politicians can only hope the debt fest continues, keeping the ultra-low interest rate environment in place with it. Meanwhile, savings account depositors see the value of their savings eroding every, single day.
As the "economists" at Norges Bank should know only too well (I don't know this for certain...), policies rewarding the careless (debt-driven housing booms, spending sprees) and penalising the prudent (savers) can only ever end one way - badly. A shame the central bank and current and previous governments will never be held accountable for the financial instability that will finally be revealed for all to see when the house of debt comes crumbling down. All will be blamed on the oil price, you see.
Tuesday, 17 November 2015
Thursday, 12 November 2015
Chart of The Day: How Norges Bank Defaulted on Key Mandate
* Norges Bank is Norway's central bank.
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A short history lesson: After the last remaining link to gold was abandoned in 1971 (and the krone became paper money backed by absolutely nothing, i.e. fiat money), the Norwegian krone's value has collapsed compared to gold due to the tremendous increase in the money supply (the quantity of fiat money) orchestrated by Norges Bank, the government and (absent) regulators ever since.
Monday, 2 November 2015
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).
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
Related:
Why Norwegian Banks Will Be Bailed Out
What Has The Norwegian Central Planning Bureaus Done to Our Currency and Wealth?
In Norwegian: Statsbudsjettet 2015: Statlig Pengemisbruk
Friday, 2 October 2015
Wednesday, 15 April 2015
Why Norwegian Banks Will Be Bailed Out
Yesterday, Norges Bank, the central bank of Norway, published a speech by its deputy governor Jon Nicolaisen titled "Should banks be bailed out?".
In the speech, Nicolaisen discusses among other things why banks are bailed out in addition to discussing various reasons why they should not. At the end of the speech under the heading "What should be done?", he concludes as follows:
So what are the lessons we have drawn?
Banks should not be bailed out, but banks' functions must be bailed out. If not, all economic activity will be affected. We will bail out the small depositors – that is both profitable and fair.
We should not bail out all creditors. If the equity capital in bank is lost, long-term lenders should also bear losses. The new tools that have now been introduced in Europe will ensure that this happens. Norwegian legislation must be updated in line with the new directive. This will improve the pricing of risk in the banking system.
We will not bail out the shareholders. Ultimately, bank owners and management must ensure that banks are run prudently. It is crucial that they are aware of their responsibilities. We cannot regulate banks to death. I am confident that owners and managers of Norwegian banks will act responsibly.
At the same time, banks must be regulated. Capital requirements must be high and we must ensure that banks are solid and well-run. This will reduce the risk of a systemic crisis. This will also give banks' owners a stronger motive to take account of long-term risk. Banks themselves and Finanstilsynet (Financial Supervisory Authority of Norway) have done a good job to ensure a solid Norwegian banking sector, so that the authorities avoid having to bail out banks.
In many ways, the speech is very informative, though the debate about whether banks should be bailed out should be laid dead. Like for any other business, bank losses should not be socialised while profits are not.
The speech however fails to address the underlying problem of why banks frequently run into financial problems in the first place: their ability to lend money into existence. In this respect, he is incorrect when stating that "Banks may be regarded as intermediaries". They are not. A true intermediary would lend out only what others have saved. This is not the case for banks in the world today, including Norwegian banks. Instead, banks create a deposit liability when granting a loan thereby creating new money in the process - this is what is meant by "creating money out of thin air".
Banks privileged ability to create new money is the primary reason the money supply in Norway has surged from less than NOK527 billion in December 1995 to more than NOK1.9 trillion as of February this year - an increase of almost 261% in less than 20 years!
These very deposits created out of nothing can again be used to extend further loans. This is perhaps what Nicolaisen had in mind when suggesting banks "may be regarded as intermediaries". Again, a true financial intermediary don't create new money when lending what others have saved. There is a big difference between the two, a difference also bankers regularly fail to see or to understand if they do see it. According to numbers today released by Statistics Norway, banks in the country now finance 87.5% of their customer loans (which excludes financial institutions) with these kinds of deposits.
If we add the deposits from and loans to financial institutions, the ratio increases to 90.5% as of February. The two ratios demonstrate that the majority of the loans issued by banks are financed with the very deposits the banks themselves created in the first place. It works like a gigantic Ponzi scheme as new loans are largely financed by deposits created from nothing at an earlier stage. However, it's much more sinister as it affects all and not just the hopeful speculators taking part (aware or not) in a Ponzi scheme.
What about equity financing? The painful truth is that it is largely nonexistent as a source of bank financing in Norway. In the U.S., banks finance around 10.8% of their total assets with equity capital, an extremely low percentage compared to non-bank businesses. For Norwegian banks, this figure is currently an eye-opening 6.9%!
As the market values of bank assets fluctuate with time and as bank liabilities are largely fixed (as deposits, i.e. cash liabilities, make up more than 70% of total liabilities), banks' equity capital could be wiped out if the value of assets drop by just 6.9%. Such a drop should not be viewed as an unlikely scenario. On this note, we should acknowledge that house prices can go down as well. "Financial stability is one of Norges Bank's primary objectives in its efforts to ensure economic stability" according to its website. Then why in the world doesn't it do anything about the shamefully low equity financing for Norwegian banks, the very source of "systemic risk" combined with banks ability to create money out of thin air? A marginal "capital buffer" will not do the trick. Nor will an equity to total assets ratio similar to that in the U.S. do the trick.
In conclusion, the bank bailout debate continues unabated despite the 2008 banking crisis in the U.S. and Europe. The debate continues because the fundamental causes of bank instability, and with it economic instability, namely banks ability to create money out of thin air and low equity capital financing made possible through Norges Bank as the lender of last resort, are not being addressed other than paying lip service to marginally higher capital ratios. Nicolaisen's speech is therefore largely irrelevant as, given the poor state of Norwegian banks, Norges Bank will provide liquidity to the banks again next time around just as it did in 2008 and 2009. This per definition constitutes a bailout.
"Central banks have traditionally acted as lender of last resort (LLR). This means that when liquidity demands cannot be met from other sources, the central bank can provide extraordinary liquidity to individual banks or the wider banking system."
Meanwhile, Norwegian banks continue to fuel further "imbalances" and "systemic risk" as the money printing presses are running hot...
...creating the very vicious cycle Norges Bank and regulators are supposed to protect the country against. What an irony.
With such reckless monetary expansion orchestrated by Norges Bank and blessed by the Norwegian government, vastly outpacing the amount of gold dug up, there is little wonder the Norwegian Krone (the local currency) has lost more than 97% of its value against gold since 1971.
For more on Norwegian banks also see:
Friday, 30 January 2015
The Dark Side of "Norway's Golden Age"
Household debt has increased more than NOK 1.978 trillion, or 271%, since December 1999...
...while the Norwegian krone has lost more 76% of its purchasing power against gold during the same period.
And while the overall tax burden remains as high as ever in Norway, the government managed to run a fiscal surplus for the mainland economy (which excludes oil and gas) only twice during the last 15 years (2000 and barely in 2007, the deficit will be record high in 2014).
A golden age for the oil and gas industry? Yes. A golden age for government spending, bureaucrats and public employees and the private companies servicing them? Yes, absolutely. As for everyone else, what they thought was a golden age was little more than a debt fest fueled by easy money policies. And all parties ultimately need to be paid for.
Related:
What Has The Norwegian Central Planning Bureaus Done to Our Currency and Wealth?
Norwegian Debt Slaves and the Bloated Norwegian Government
Monday, 12 January 2015
Norwegian Banks: Increased Lending and Weaker Balance Sheets
One of the single biggest economic risks facing most societies are weak bank balance sheets. This risk arises from two main sources. Firstly, banks have an explicit guarantee from the central bank to receive financial help when they run into liquidity problems. Banks receive this aid primarily through loans granted by the central bank and the central bank buying government securities owned by the banks. This is how the central bank acts as "a lender of last resort" and it makes banks act considerably less prudent than they would have without (moral hazard). Secondly, banks are not only allowed to create money out of thin air, but also allowed to finance their operations with the very deposits (money) they create when issuing loans to customers. These two sources combined results in banks operating with an extraordinary level of gearing compared to non-bank companies.
Any government interested in achieving the coveted goal of "financial stability" must seek to correct the current flaws in the banking system if it wants to achieve this goal. If it doesn't, any talk of achieving financial stability should be considered nothing more than paying lip service to the issue.
According to the latest data published by Statistics Norway, Norwegian banks continue to operate with very fragile balance sheets. The chart below, showing funding sources in percent of total assets, illustrates only too well the inherent risk in banks' balance sheets. Note how equity (7.1% of the total as of November) makes up by far the smallest funding source for the banks while the very deposits banks are supposed to keep safe on behalf of customers makes up the single largest source of funding (46.8% as of November).
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| Source: Statistics Norway. Period covered: November 2009 to November 2014. |
The table below highlights additional weaknesses related to solidity and liquidity and how the current ratios compare to the averages since May 2009 (data not published prior to this).
As deposits owned by customers and financial institutions are a liability for banks, it's alarming that banks currently only hold a minuscule 1.9% of cash against them. Adding certificates and bonds to cash, which banks can sell to the central bank in exchange for cash during financial turmoil, the ratio increases to 20.8%. This ratio has deteriorated during the last few years and is as of November the lowest ever reported based on data since May 2009.
Equally alarming is that equity (assets minus liabilities) for banks overall makes up only 10.7% of total deposits. Though this ratio has steadily improved since May 2009 when it was 7.8%, it remains exceedingly low. To put this in perspective: if all bank assets and liabilities were liquidated and settled at book value, Norwegian banks would be able to pay back only 10.7% of all deposits.
Though bank equity in percent of total assets has improved since 2009, it remains extremely low. Worse yet, it has gotten worse during the last couple of months and currently stands at 7.1%. That certain "risk-weighted" ratios may argue that Norwegian banks are relatively solid should be dismissed without further ado based on the extremely low equity to total asset ratio. Any company or bank operating with a gearing of almost 14.2 times (1/7.1%) should be viewed as a very risky venture indeed.
But instead of requiring banks to become substantially more financially solid, the much-favoured easy money policies continue in Norway. Bank lending to customers increased 7.6% on last year in November, the highest year on year growth reported based on data since May 2009.
Norges Bank, the country's central bank, is doing what it can to make these easy money policies possible. Last month it lowered the key policy rate 25 basis points to 1.25%, the lowest ever based on data since 1991. Interest rates on mortgages and other loans follow suit as usual, making a range of projects seem profitable and keeping mortgages more affordable than otherwise would be the case. The easy money policies will likely continue to be pushed as far as possible and until reality comes homes to roost and the whole house of cards collapses once again as it always must in the end.
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.
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.
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| 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.
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).
Related:
Norway's Biggest Bank Poses Serious Threat To Financial Stability
Rate Decision: Norges Bank Decides to Further Support the Norwegian Debt Fest
Monday, 15 December 2014
Norwegian Bank Balance Sheets: The Great Source for Financial Instability
Statistics Norway recently published the aggregate balance sheet for banks operating in the country. As usual, it makes for bleak readings for anyone concerned about sound and sustainable economic growth and financial stability.
Despite much focus on weak bank balance sheets in the aftermath of the 2008 financial crisis, bank balance sheets in Norway (and other countries) remain highly leveraged and are to a preposterous extent financed by the very deposits they are supposed to keep safe.
Related articles:
Despite much focus on weak bank balance sheets in the aftermath of the 2008 financial crisis, bank balance sheets in Norway (and other countries) remain highly leveraged and are to a preposterous extent financed by the very deposits they are supposed to keep safe.
It is not unusual for banks to finance a high proportion of their assets with depositors' money. This is simply a feature a fractional reserve banking. In fact, this very measure was more than a percentage point higher for U.S. banks as of October.
Against these deposit liabilities of Norwegian banks, cash plus certificates and bonds cover currently only 22%. For U.S. banks, this ratio stood at more than 48% in October.
Against these deposit liabilities of Norwegian banks, cash plus certificates and bonds cover currently only 22%. For U.S. banks, this ratio stood at more than 48% in October.
Furthermore, while any semi-prudent run non-bank large business would typically finance perhaps something like 30% of its balance sheet with equity, banks are very different. Currently, Norwegian banks are financed by a minuscule 7.1% in equity, significantly lower than the 10.75% for U.S. banks in October.
Herein lies a great source of risk to the Norwegian economy: Norwegian banks are so poorly capitalised it does not take much imagination to see banks run into financial problems.
But banks will endure as Norges Bank will promptly act to prop up bank balance sheets with taxpayer money during the course of financial crisis. That is why banks are able to be so poorly capitalised and hence take on so much risk which, after all, is the primary reason for financial crisis in the first place. If the Norwegian government and Norges Bank (the central bank) are actually concerned about "financial stability" then requiring banks to substantially increase equity capital is the only natural starting point.
But banks will endure as Norges Bank will promptly act to prop up bank balance sheets with taxpayer money during the course of financial crisis. That is why banks are able to be so poorly capitalised and hence take on so much risk which, after all, is the primary reason for financial crisis in the first place. If the Norwegian government and Norges Bank (the central bank) are actually concerned about "financial stability" then requiring banks to substantially increase equity capital is the only natural starting point.
Related articles:
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