Economists are disingenuous about Sweden’s interest rate slump
An economic slump or recession is considered a bad thing by economists. They point to Sweden and blame Sweden for raising its interest and causing a recession. “Bad Sweden, Bad Sweden”. But those economists are being short-sighted. They do not mention that Sweden is now doing much better than the rest of Europe. They have surpassed the rest of Europe. Is it possible that there was a good side to the recession? God forbid…
There is a sense that there is waste in the economy, but it is difficult to know exactly where. An economic slump tends to clean out inefficiencies in the economy and ultimately increase productivity. But which companies will be affected as inefficiencies get washed out is hard to predict.
Good economic medicine seeks to clean out the waste in a safe and measured way. The key would be to not rapidly hike the Fed rate. The key would be to tighten in a measured way. In the end, the economy will respond better… The Fed seems determined to raise the Fed rate just a little and they are receiving lots of criticism. But if the Fed wants to clean out some inefficiencies by lifting the Fed rate a little, would they just come out and say it? Probably not…
Yet look at Sweden after their apparent mistake of raising the interest rate. They are doing better than the rest… I look at the healthier growth afterward and I recognize the medicine of the slump to heal socially inefficient units in the economy.
If people think that the US economy is so fragile that a measured rise in the interest rate would trigger a big socially catastrophic recession, then economists are being too afraid of taking a good and measured medicine. It reminds me of a child who doesn’t want to take the medicine because of the taste. Yet many medicines are effective because of the bad taste. One example is bitters to improve digestion.
Economic slumps are a healthy part of the business cycle. They occur best in a measured way through policy. And realize, that economic sicknesses can develop if policy goes to extraordinary lengths to avoid a slump.
Inhaling gives you oxygen. Oxygen is good. OK… so just keep inhaling. Don’t ever exhale. Try inhaling without exhaling. It is foolish in the long run. Exhaling allows us to expel unneeded substances and create space for another healthy inhale. That is how a recession works in the business cycle.
If monetary policy acts in a measured way to control an economic slump, the economy will grow much better through time… like inhaling and exhaling.
So the next time you hear an economist point to Sweden and criticize their raising of the interest rate which caused an economic slump, remember that Sweden bounced back healthier than the rest of Europe. Think about the good medicine that a measured tightening of monetary policy can have. Realize that the economist is being short-sighted or disingenuous. Then don’t be afraid if the Fed raises the interest rate in a carefully measured way. It is good medicine. The economy will be better off in the long run.
Some day China will have to take its medicine too… They have massive social inefficiencies in their economy that keep piling up.
EL wants a recession in the US. He wants the Fed to trigger the recession. He points to Sweden as an example of the ‘good” things that happen when a country goes through a recession. EL thinks it is good to put companies out of business.
A great deal has been written about Sweden’s increase of interest rates in 2011. The conclusion is that Sweden made a huge policy blunder.
Some articles:
Bloomberg quote:
One person who objected to the monetary tightening was Lars E.O. Svensson, who quit the Riksbank’s six-member board last year. He now says Sweden shows that raising rates prematurely can leave an economy in worse shape than before.
“The lessons are obvious to other central banks,” he said in a telephone interview yesterday.
http://www.bloomberg.com/news/articles/2014-10-16/yellen-gets-swedish-lessons-from-most-important-economic-data
Krugman has many posts on the Swedish mistake. He refers to this as “Sadomonetarist”
http://krugman.blogs.nytimes.com/2014/07/05/swedish-sadomonetarist-setback/?_r=0
http://www.nytimes.com/2014/04/21/opinion/krugman-sweden-turns-japanese.html
Fidelity calls it a “Blunder”
http://www.fidelity.com.au/insights-centre/investment-articles/swedens-economic-blunder/
Bloomberg:
“How Sweden Joined Central Banking’s Hall of Shame”
http://www.bloomberg.com/news/articles/2014-10-28/how-sweden-joined-central-banking-s-hall-of-shame
Business insider:
“The Riksbank has since been forced into an embarrassing u-turn.”
http://www.businessinsider.com/sweden-just-slashed-interest-rates-to-zero-2014-10
The FT had this to say:
“Sweden has done an experiment the whole world is interested in,” Mr Odendahl says. “What should we do when monetary policy should be accommodative but there are financial risks? The Swedish lesson is that tightening policy prematurely isn’t the answer.”
http://www.ft.com/intl/cms/s/0/638e830a-6e68-11e4-bffb-00144feabdc0.html#axzz3pXT8y8UJ
EL there are hundreds of other links – do some research. They all say the same thing – What Sweden did was a big mistake.
And EL wants to make the same mistake for the USA.
I don’t buy the “if it tastes bad, then it is good for me” line of reasoning. There is a lot more going on in Sweden than just interest rates. Sweden has a serious safety net and fiscal stimulus.
You talk about a sense of there being waste or inefficiency in the Swedish economy, but you are awfully vague. What kind of inefficiency? Was the N% interest rate so low that certain business practices were ended when the rate went to N+D%? What were these?
Lately I’ve been leaning towards the Fed raising interest rates. It would increase retiree incomes, and the banking system is so wedged that bank credit is barely available anyway. Larger businesses increasingly rely on the bond market, informal credit mechanisms and private financing. Individuals and mom and pop businesses rely on various types of loan sharks and pay interest at rates completely decoupled from the Fed rate.
Kaleberg,
The point is that a slump tastes bad but has good benefits. It is like a medicine. Productivity tends to rise only during and after a slump. Why would it happen that way? What about a slump unblocks productivity increases?
But would a slump solve all the problems? No.
Wages are not boosted. Taxes may be lowered even more for the rich and politically powerful. However, as pro,ductivity is released, the econoomy will be healthier. People eventually have to fight for the value of labor.
Sweden does a good job valuing labor.
El, could we say the present negative articles are much like the ones’ written when Sweden tighten banking controls, when the USA was loosening banking controls. We have history to prove who did the right thing for their country.
BKrasting,
I do not want a recession. Listen close to what I write. I am talking about a measured dosis of tightening.
Tibetan doctors say that everything can be a medicine if given in the correct dosage. Tightening can be a medicine if given in the right dosage without putting the US in a recession.