Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.
Sweden survived the recession better than most countries, and now the economists try to explain why (also known as predicting the past). Here are excerpts from an article in the Curious Capitalist blog.
STOCKHOLM — Almost every developed nation in the world was walloped by the financial crisis, their economies paralyzed, their prospects for the future muddied. And then there’s Sweden, the rock star of the recovery.
[. . . ]
The overarching lesson the Swedes offer is this: . . .
1. Keep your fiscal house in order when times are good, so you will have more room to maneuver when things are bad. In 2007, before the recession, the U.S. government had a budget deficit equivalent to 3 percent of its economy, as did Britain. Sweden, meanwhile, had a 3.6 percent surplus.
So when the recession hit, that surplus gave its government a cushion in the downturn and it didn’t run up the huge debts that in other advanced nations have now created the risk of a future crisis.
Sweden is Monetarily Sovereign. Surpluses do not provide a cushion to a nation with the unlimited ability to create money. Surpluses only destroy money. But there is an important point here. I often have pointed out that surpluses lead to depressions (See: Introduction) So how did Sweden not only survive its surpluses, but thrive. The answer: A positive current account balance.
If you go to list of countries and territories by current account balance, based on the International Monetary Fund data for 2007 you will see that little Sweden had a $21 billion positive balance, while the U.S. had a $561 negative balance.
When money flows into a nation, that nation can destroy money (aka “run a surplus”) and still grow. When money flows out of a nation, that nation must create money (aka “run a deficit”) in order to grow.
2. Fiscal stimulus can be more effective when it is automatic. Sweden didn’t do much in terms of special, one-off efforts to spend money to combat the downturn. There was some extra infrastructure spending and a well-timed cut to income tax rates, but the most basic response to the government was to do what the nation’s social welfare system — lavish by American standards — always does: Provide income, health care and other services to people who are unemployed.
Yes, these are the very things the Tea (formerly Republican) Party objects to. These oh-so-patritic folks do not believe needy people should be rewarded for “indolence,” nor should the sick receive special help, just for being sick. The Tea/Republican Party’s cold-hearted ignorance has worsened and lengthened everyone’s pain from the recession.
In the United States, the battle over whether to use government spending to cushion the blow of the downturn became a divisive one. Whether to try to stabilize the economy became one more battle in the longer term war over the proper role of government.
And because the $800 billion fiscal stimulus that Congress and the Obama administration enacted in early 2009 consisted mostly of special, one-time programs, it took months for many of them to begin pumping money into the economy, thus kicking in months or even years after the economy had collapsed, and the spending expired without regard to whether the need remained.
Exactly correct. The smartest stimulus we did was the first one – those $500 checks sent directly to taxpayers. Perfect. Give people money, and they will spend or save it. Either way, the economy is stimulated. At the time I said it was too little, too late, and that proved correct. Had the government sent $5,000 rather than $500, the recession would have ended. The unfounded fear of debt (federal money creation) trumped concern about the real recession.
3. Use monetary policy aggressively. The Federal Reserve has won both plaudits and criticism for responding aggressively to the financial crisis, pumping money into the financial system in epic fashion. But by one key measure, the Swedish central bank was even more aggressive.
Like the Fed, the Riksbank lowered its target short-term interest rate nearly to zero. But it also expanded the size of its balance sheet more than the Fed did relative to the size of its economy, flooding the financial system with even more cash during the height of the crisis.
In summer 2009, the Riksbank had assets on its balance sheet equivalent to more than 25 percent of the nation’s gross domestic product. For the Fed, that level never got much over 15 percent.
Fortunately for the Swedish, they do not suffer from the Tea/Republican Party’s erroneous views.
The Scandinavian nation of Sweden has accomplished what the United States, Britain and Japan can only dream of: Growing rapidly, creating jobs and gaining a competitive edge. The banks are lending, the housing market booming. The budget is balanced.
Should have read, “Despite the balanced budget.”
4. Keep the value of your currency flexible. Sweden has declined to adopt the euro currency, and in hindsight that looks wise. The changing value of the Swedish krona was a helpful buffer against the economic downdraft of the past few years.
In the depths of the financial crisis, the krona fell in value against both the dollar and the euro, as global investors sought the safety of putting their money in the most widely circulated currencies. That helped make Swedish exporters more competitive at a time when global demand was collapsing, working as a sort of pressure valve.
And now that the Swedish economy is looking up, the free-floating nature of the Swedish krona could hold a different advantage: Neighbor Finland, which also is experiencing solid economic growth, uses the euro. With other parts of Europe in deeper economic distress, it could face inflation, because the European Central Bank sets policy based on the whole of the 17 nation currency zone. By contrast, Sweden’s monetary policy is based only on Swedish economic conditions.
While most of Europe committed financial suicide by adopting the euro, Sweden kept the single most valuable asset any nation can have: Monetary Sovereignty.
There is a lesson here for the United States as well: Maybe being the global reserve currency isn’t all it’s cracked up to be. During the crisis, the value of the dollar skyrocketed as world investors sought a safe place to put their cash.
That put American exporters at a distinct disadvantage in the global marketplace at the very moment the economy was at its weakest.
I long have told doubting debt-hawks that being the world’s reserve currency was not an advantage, but actually was meaningless. As the author states, under some circumstances, it even can be a disadvantage.
5. Bankers will always make blunders; just make sure they don’t doom the economy. Swedish banks didn’t make it through the 2008 crisis without major losses. To the contrary, they had lent heavily in the Baltic nations of Lithuania, Latvia and Estonia, which suffered an economic collapse.
Swedish financial officials don’t point to any single magic bullet in their regulatory approach. Rather, the Swedish banking system seems to have held up okay because the pain of the early 1990s was severe enough as to scar both bank executives and regulators, leaving them with little temptation to go into risky real estate lending in the mid-2000s, even when the rest of the world was doing just that.
In other words, although bank bailouts might be necessary to save an economy, it’s also important that bankers not be so cushioned from the consequences of their unwise decisions as to go straight back to the old ways as soon as it’s over. They need to at least have their mouths burned.
Actually, it’s the old-time economists who should have their mouths burned, for it was their ignorance that has led to the every-five-year recessions and the slow recovery. The facts sit right before their eyes, but these respected folks refuse to learn – and the world suffers.
The author of the article attributes Sweden’s success to “keeping the fiscal house in order,” i.e. to running a surplus. Nothing could be further from the truth. Sweden survives the same way Germany survives (though the former is Monetarily Sovereign and the later is monetarily non-sovereign). It survives by having money come in from outside its borders.
In short, a growing economy requires a growing supply of money. The key is not whether that money comes from government deficit spending or from a positive current account. The key is money growth, whatever the source — and not listening to the debt hawks. They are leech doctors, who apply leeches to bleed an anemic patient.
Rodger Malcolm Mitchell
No nation can tax itself into prosperity, nor grow without money growth. It’s been 40 years since the U.S. became Monetary Sovereign, , and neither Congress, nor the President, nor the Fed, nor the vast majority of economists and economics bloggers, nor the preponderance of the media, nor the most famous educational institutions, nor the Nobel committee, nor the International Monetary Fund have yet acquired even the slightest notion of what that means.
Remember that the next time you’re tempted to ask a teenager, “What were you thinking?” He’s liable to respond, “Pretty much what your generation was thinking when it ruined my future.”