"I speak the truth not so much as I would, but as much as I dare:
and I dare a little more as I grow older."
- Michel de
Montaigne
By John Mauldin
I was brought to Stockholm to speak for Swedbank. They
arranged for me to meet a wide variety of local people, as well as to have
dinner with readers. I talked with a number of people who were in positions of
authority during the Swedish credit and debt crisis of the early 1990s. And a
crisis it was. The currency was under attack, as the fundamentals were
negative. This was at the same time that Soros was attacking the British pound.
Interest rates had been rising in Sweden, but the financial environment was
being loosened. This meant that Swedish businesses and consumers could borrow
in foreign currencies that had much lower interest rates, and borrow they did.
The central bank made it very clear that they would protect the value of the
currency, and everyone believed them. Remember, this is a relatively small
country, and basically everyone knows someone who at least knows someone who
was involved with the central bank. The central bank was adamant in its belief
that it could protect the value of the currency, and it raised rates by 500% in
order to do so.
Why such a fetish for a strong currency in a country that was driven by exports? Because their past experience had dictated that not defending the currency was the wrong thing to do. My guests went into detail about Swedish history (which I found fascinating), explaining the thought process at the time. Just as hyperinflation in the 1920s had scarred Weimar Republic Germany, leaving that nation with a visceral reaction to loose monetary policy, the history of Sweden had colored Swedish views as to appropriate monetary actions.
That seems to me the classic problem of generals
always fighting the last war in their planning," I said.
"Precisely," came back the quick answer. To even mention publicly
that "maybe we should allow the currency to float or weaken" invited
late-night phone calls from the leadership, raising the question of the
individual's future participation in polite circles.
Ultimately, of course, the market dictated that the
currency could not be kept at artificially high rates in either Sweden or Great
Britain. The Exchange Rate Mechanism broke down. The Swedish Krona was allowed
to float and overnight dropped 21%. Which meant that the incomes produced in
Sweden to pay the interest on foreign loans dropped 21% in relationship to
interest-rate costs. Property was immediately less valuable in terms of the
currency that had been borrowed to pay for it.
Unemployment soared as a recession hit. The government
deficit rose overnight to 10%, as there were less tax revenue and higher
unemployment costs. Government debt rose, and the bond market wanted higher
interest rates, which of course made the situation worse.
"Let me guess. Most of the larger businesses and
investors saw the crisis coming and protected themselves. The smaller people
and businesses were hurt the most." My hosts (who, even though younger
than I, were at that time were already in responsible positions) had all lived
and suffered through those times. And they all smiled and nodded yes. Well,
they remembered, as they talked among themselves, that there was one large
company that believed the central bank up until the end, and it went bankrupt.
Interestingly, no matter the politics of the persons I
talked with, there was universal disagreement (if not disdain) with how the US
had handled its recent banking crisis.
"We did it much differently and it proved to be
the right way. If a bank wanted government help, the government said 'Sure. No
Problem. Just give us all your private equity.' Shareholders were wiped out in
exchange for government help."
They recalled that bankers did everything they could
not to fall into the gentle hands of the government. But if they did, the
government took the assets and put them into a good-bank and a bad-bank pile.
Typically, the assets that were under water were real estate-related. As an
aside, as the government sold the assets after some time and ended up not
losing on their real estate portfolio, which shows the value of being patient
money in the middle of a crisis.
If we had only had Swedish socialists running our TARP
program.
And speaking of Swedish socialists, if someone tried
to introduce their "solution" to the Swedish equivalent of our Social
Security program in the US, there would be weeping and wailing and gnashing of
teeth in both parties. It would be deemed the end of the world and heartless
cruelty.
Sweden's system is set up as a "pay as you
go" model of social security. What current retirees get is a direct
function of what current employees pay. If during a recession the revenue goes
down, then the social security payments go down. You can actually have a case
where your retirement pension goes down within a given year rather than up, if
the country is in recession. In essence, their social security costs are
indexed to GDP. They can never run a deficit in the program. I suppose they
could raise the tax, but there seems to be little appetite for raising taxes.
There was some clear chafing at being labeled a
socialist nation, which most of us in the US think they are. "We could
teach you a lot about being responsible socialists" was the universal
response. "In many ways, we are less socialist than you."
Going back to the crisis, many remembered reading a report
from a major European group, talking about how Sweden was doomed to years of
depression and endless malaise. Yet within a few years Sweden was again
growing, as those socialists got their government act together, and the country
has never looked back. From a very large debt-to-GDP (I can't recall the exact
number, but was indeed large [and there is no internet on Air France]), it is
now between 30 and 40%, much more like that of an emerging-market nation. It
helped their recovery that they had a strong export sector, which was aided by
a drop in their currency valuation. They now run surpluses everywhere, and
their currency floats. While Europe went into a recession with the credit
crisis and is once again rolling into recession, Sweden has grown, albeit
slowly.
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