Albert Edwards is back.
And in his latest missive, he’s bringing FT‘s Katie “Because Lines” Martin along for the ride in an effort to lampoon the Riksbank for its inability to deliver on repeated promises of rate hikes.
You’ll recall that on Tuesday, the Riksbank removed the easing bias from their guidance. They offset that with a warning about how important it is that the krona not appreciate too rapidly.
This is reflective of the fact that Sweden’s monetary policy is effectively beholden to Mario Draghi.
That’s been readily apparent for years and it’s a dynamic that effectively forced the Riksbank to push further and further into the accommodative policy Twilight Zone in order to ensure the ECB’s own push into monetary insanity didn’t end up creating a situation where there was constant upward pressure on the krona which would have undercut Sweden’s efforts to engineer higher inflation.
Of course the push into NIRP created a giant housing bubble in Sweden and perhaps the most amusing part of the whole dovish Riksbank story involves everyone’s favorite economist Paul Krugman who famously branded Sweden’s central bankers a bunch of “sadomonetarists” in a truly cartoonish 2014 blog post.
I’ll leave it to you to peruse the backstory on that at your leisure, but the bottom line is that the Riksbank ended up doing exactly what Krugman wanted them to do (reversing course on what Paul thought were ill-advised rate hikes) and plunging down the easing rabbit hole from which there ultimately ended up being no return by virtue of the fact that Riksbank policy is effectively dictated by the ECB.
“When you are next to an elephant, you have to be careful,” Riksbank Governor Stefan Ingves told Bloomberg in an interview.
Basically, they were forced to ease by the ECB and now they’re going to be likewise forced to tighten, and the problem there is that the forced easing created a massive housing bubble which will now be forcibly burst.
Thanks, Mr. Draghi. And an extra special thanks to Mr. Krugman.
Here’s Bloomberg again:
The independence of the Swedish central bank stops at the border.
The lack of wiggle room was laid bare on Tuesday, when Riksbank policy makers followed their bigger counterparts in Frankfurt in laying the groundwork for higher interest rates. The lock-step move shows how limited choices are for small, open economies to steer their own monetary policy, especially when rates are far below the zero bound, as in Sweden’s case.
Nordea Bank AB’s head of strategy, Mikael Sarwe, dubbed the decision “Dependence Day.”
Eliminating the so-called easing bias “acknowledged the dependency between Riksbank policy and the global trend in monetary policy,” he said.
The mortgage market is “overheating” and highly indebted households need to start preparing for when rates start going up again, Ingves said.
The truth is that the man once dubbed a “sadomonetarist” by Paul Krugman for keeping rates too high didn’t have a choice.
As Danske Bank A/S wrote in a note ahead of Tuesday’s announcement, keeping the easing bias would have made the Riksbank stand out “in a very dovish way vis-a-vis other central banks,” with potentially “brutal” consequences for the krona.
Having been forced to follow the ECB down the easing path, the Riksbank is expecting much of the same during the tightening phase.
So yeah, they’re fucked.
Coming full circle, Albert Edwards’ latest piece isn’t solely about the Riksbank, but it does play prominently as an example of a central bank that has supposedly “lost credibility” and given that, it’s important to know the backstory.
Of course the backstory is also tragically hilarious as you probably surmised from everything said above and as you’ll quickly realize if you dig further into the whole Krugman calling them “sadomonetarists” bit.
Without further ado, here are some excerpts from Edwards’ latest which is, as always, worth reading in full if you can get your hands on it.
On the 20th anniversary of the start of the Asian crisis it is certainly clear to me that the mess we are now in is a linear progression of the monetary madness that followed the 1997 Asian bust. Each and every subsequent economic and financial hiatus has been a direct result of excessively loose monetary policy to clear up the previous mess. The current perilous state of the global financial system is evident to anyone who scrapes at the cheap veneer of normality. I was cheered last week when the BIS called out the current conjuncture. They were one of the few institutions in the mid-2000s to accurately predict the impending financial crisis – and they fear another crisis is close.
It took only a few days after my last weekly, which focused on the likely loss of independence for central banks in the next recession, for them to come out swinging. It only took a subtle change of rhetoric to prompt a mini-taper tantrum. It seems increasingly clear the Fed, the ECB and even the Bank of England (BoE) wish to get on with their tightening cycles, however far behind the curve they might now be.
Meanwhile we are forced to watch the embarrassing spectacle of central bankers measuring the ‘success’ of their forward guidance by the subsequent lack of market volatility. Seeing the ECB spokesperson scurrying around to soothe upset markets in the wake of Draghi’s speech shows the tail is surely still wagging the dog.
While we rail about the Fed having lost credibility in not delivering the rate hikes it has consistently promised, it is a mere amateur compared to the uber-dovish Swedish Central Bank, the Riksbank. But what does the chart below of their broken tightening promises remind you of? Don’t those projections look like spikes?
What about a hedgehog?
Indeed it is a hedgehog or, as the FT’s Katie Martin suggests, a Rikshog.
In many ways the Fed and the Swedish Riksbank are very similar in failing to deliver promised rate hikes. But in terms of dovishness over the last few years the Riksbank takes the global award by some very long way. Of the major central banks, the Riksbank tries hardest to ensure that inflation does not undershoot its 2% target. But a combination of aggressive QE and -0.5% interest rates has not just resulted in a very robust economy, but a totally overheated and out of control housing bubble – one which makes Australian and Canada house price bubbles look merely pedestrian!
There’s (a lot) more in the full note, but as you can probably imagine, Albert doesn’t think this is going to end well.
Oh, and here’s Katie one more time…