Interest Rate Policy Exhausted
Although there are indications that Norwegian housing has peaked (OBOS, A Norwegian housing collective reported that May 2017 prices retreated .9%), rate cuts remain unlikely. Norway, even with the lower 2.2% inflation print still runs a -1.7% real interest rate (Inflation – Benchmark rate). Moreover, with the US Federal Reserve leaning towards three rate hikes this year and the ECB taking a step back from stimulus, Norges Bank must be feeling the pressure to remain in step: at least holding rates steady. Norway not only needs low rates to support the housing market but also stimulate exports. However, with rate policy appearing to have run its course, it appears they may have inadvertently found a new tool to “kick the can down the road.”
Exports and the NOK
With oil barely at $50 and the price outlook looking grim: American production looking to hit an all-time high, the country needs to export to fill its’s coffers with precious tax revenue to fund the social welfare system. Lately, The Norwegian government has been tapping the oil fund to cover expenses. However, that created an unintended wealth effect.
When oil tanked, Norway tapped its’s enormous wealth fund, selling assets denominated in foreign currency, to cover the budgetary gaps. Source: Norges Banks and Energy Institute of America.
Norway used to be a net buyer of foreign currency but now they are selling it to buy back NOK to pay local expenses. Source: Norges Bank and The Norwegian Budget Department.
When NBIM liquidates the Norwegian people’s assets (stocks, bonds, real estate) or draws from the cash reserve, all denominated in foreign currency (USD, EUR, JPY, CHF etc.), they must exchange it for Krone (NOK). Because all governmental expenses are in local currency. That creates a temporary NOK shortage, pushing up the exchange rate, countering the need for a weaker currency, which stimulates the export sector – the desired effect.
In 2015, the NOK purchases took off. The country that once ran surpluses without effort suddenly found themselves voraciously dipping into the saving account to expenses. So much so that it created a massive NOK shortage. However, instead of using the strong currency to their advantage, buying capital equipment from abroad to start a new industry, they almost doubled the money supply in early 2015.
Sources: Norwegian Budget, Norges Bank, SSB.no
In effect, the Norwegian Government printed the currency required to fund government expenditures. Once could say that they needed to “buy support” from the masses otherwise risking going the way of Marie Antoinette (in a figurative and metaphorical sense). That move helped them avoid seismic market disruptions, associated with buying the Kroner direct from the public. However, the near-term win-win situation, which maintained the status quo, set off an inflation addiction.
April 2015 Norges Bank must have realized there is not enough Krone to buy and juiced the money supply. However, the trajectory of monetary inflation, after the boost, is forever changed. Source: SSB.no (Norwegian Statistics Bureau) and Norges Bank.
Note that the true definition of inflation is the increase of money supply. Rising prices are not actually inflation but the result of it: the increased money supply trying to find its way to the relatively fixed amount of goods and services. Raising money supply requires that output and productivity rise in lockstep to maintain stable prices.
For example: If there are four eggs of output and two dollars of the money supply, the price of each egg will be 50 cents. If the money supply is increased to three dollars then either price of the four eggs will go up to 75 cents or we need to come up with two more eggs to maintain prices.
Burning through the savings account, printing money, then buying it, and finally entering it into the economy through public spending and handouts is like increasing the money supply without increasing the number of eggs – prices will rise. Neither did Norwegian industrial output no GDP rise at the same rate as the money supply during the same time period.
Gradual Introduction of the Norwegian Peso
Magnifying the past eighteen months, we can see the battle between the exchange rate and money supply. Every time Norges Bank attempts to take back, even a little of what they injected, the Kroner immediately shoots up – not what they want. Then they inject more money to counteract. At the end of each salvo, the money supply ends up higher than before and the highest ever in Norwegian history. Total money supply grew 7.1% year over year in the latest release!
Therefore, expect all prices to keep rising, including housing for a very long time. Moreover, we should expect to see even more of these antics in months and years to come since rate cuts are out of favor. The excess money supply is also setting up the stage for longer-term mortgages, like those in Japan and Sweden. They cannot and will not let housing fall. They will instead pull levers they can at the expense of the currency to maintain status quo.
Norway is in a precarious situation. The government is trying to encourage startups but the good ones keep running away due to the unfriendly small business regulations and taxation.
Even a small business must hire employees according to the same rules as a large corporation, which can afford to have several employees out sick for six months at a time, feeling depressed, triggered or whatever. The bar is pretty low. Doctors hand out these “sykmelding” or sick leaves like mail order universities hand out diplomas. One bad employee can take down a whole business in Norway.
The current leadership, raised on socialism, lack the vision and risk appetite to invest the national savings into a new industry. Instead, they prefer to find ways to buy time until the next election.
Many readers ask: what to do in a situation like this? There is one asset that has been moving up quietly since the major injection but from a relative perspective, remains huge upside potential. (hint, its’ atomic number is 79)