Sweden’s vanishing debt feeds urgent calls for a spending boom

27 Mar, 2019 at 17:37 | Posted in Economics | 15 Comments

Sweden now has so little debt that many are starting to wonder why the government isn’t spending a lot more …

The biggest Scandinavian economy, which relies on global trade for about half its output, is slowing down. But the government has so far appeared reluctant to use its fiscal leeway to fight that trend. That’s drawn criticism from analysts, with some even referring to the government’s penny pinching as a form of “insanity.”

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Swedish government debt is at its lowest in 40 years and falling. According to the National Financial Management Authority, debt will sink below 35 percent of gross domestic product this year and breach 30 percent in 2021. At that point, the government will be required by law to explain to parliament why debt is so low.

Amanda Billner & Rafaela Lindeberg / Bloomberg

Yes indeed — the government’s penny pinching is insane.

Today there seems to be a rather widespread consensus of public debt being acceptable as long as it doesn’t increase too much and too fast. If the public debt-GDP ratio becomes higher than X % the likelihood of debt crisis and/or lower growth increases.

But in discussing within which margins public debt is feasible, the focus, however, is solely on the upper limit of indebtedness, and very few ask the question if maybe there is also a problem if public debt becomes too low.

The government’s ability to conduct an ‘optimal’ public debt policy may be negatively affected if public debt becomes too small. To guarantee a well-functioning secondary market in bonds it is essential that the government has access to a functioning market. If turnover and liquidity in the secondary market become too small, increased volatility and uncertainty will, in the long run, lead to an increase in borrowing costs. Ultimately there’s even a risk that market makers would disappear, leaving bond market trading to be operated solely through brokered deals. As a kind of precautionary measure against this eventuality, it may be argued – especially in times of financial turmoil and crises — that it is necessary to increase government borrowing and debt to ensure – in a longer run – good borrowing preparedness and a sustained (government) bond market.

No matter how much confidence you have in the policies pursued by authorities nowadays, it cannot turn bad austerity policies into good job creating policies. Austerity measures and overzealous and simple-minded fixation on monetary measures and inflation ​are not what it takes to get our limping economies out of their present-day limbo. austerity22They simply do not get us out of the ‘magneto trouble’ — and neither does budget deficit discussions where economists and politicians seem to think that cutting government budgets would help us out of recessions and slumps. In a situation where monetary policies have​ become more and more decrepit, the solution is not fiscal austerity, but fiscal expansion!

We are not going to get out of the present economic doldrums as long as we continue to be obsessed with the insane idea that austerity is the universal medicine. When an economy is already hanging on the ropes, you can’t just cut government spendings. Cutting government expenditures reduces aggregate demand. Lower aggregate demand means lower tax revenues. Lower tax revenues mean​ increased deficits — and calls for even more austerity. And so on, and so on …

15 Comments

  1. The idea in the Bloomberg article, namely that public spending should increase because government debt is low, is nonsense. Public (and/or private) spending should be increased if unemployment is higher than it might be. Full stop. End of. If government debt is ZERO, that makes no difference to the latter point.

    “Very few ask the question if maybe there is also a problem if public debt becomes too low.” Well actually it is fairly widely accepted I MMT circles that the optimum amount of government debt is zero. That is, there is no good reason to pay anyone interest just for holding government / central bank liabilities. Both Warren Mosler and I have published articles on that topic. See respectively:

    Click to access WP37-MoslerForstater.pdf

    http://scholarpublishing.org/index.php/ASSRJ/article/view/5640

    • This is why I consider current iterations of MMT rank and dangerous nonsense — allowing of course that not everyone currently or historically associated with MMT have subscribed to the zero sovereign debt thesis.
      .
      A highly liquid Sovereign debt market creates a benchmark yield curve and provides a stabilizing hedge for the banking and payments system. This should not be controversial. Paying a modest nominal interest rate offsets a modest inflation rate.

      A country like Sweden with a smallish economy and high trade dependency may need to have other policy tools in reserve, but a central bank managing the liquidity of a sizeable marketable national debt is still key to keeping the country’s own currency.

      • Why do we need a government provided “benchmark yield curve”: i.e. a government provided indication as to what interest rates will do in the future? Do we need an artificial government provided futures market in steel, corn, aluminium, etc?

        “Paying a modest nominal interest rate offsets a modest inflation rate.” Yes, of course govts & central banks can offset excess inflation with artificial interest rate hikes, and I’ve no objection to that tool being used in emergencies. But I don’t see the point of taxpayers being PERMANENTLY burdened with having to pay interest to those who want to hoard base money.

        “a central bank managing the liquidity of a sizeable marketable national debt is still key to keeping the country’s own currency.” Given that there is little difference between base money and low interest yielding govt debt, as pointed out by Martin Wolf, I fail to see why debt is a superior tool for stabilising a country’s currency to zero interest yielding base money.

        • You cannot understand a solution, if you refuse to even see the problem it solves.
          .
          Money is a solution to problems posed by uncertainty over time. It enables us to calculate the value of plans and to make deals that bridge out of the moment and into an uncertain future. Money enables hedging and insurance and enables firms and households to engage the banking system for maturity transformation.
          .
          I do not think hoarding currency is any substitute for deep trading in sovereign debt issues of varying duration in creating and valuing liquidity thru time.
          .
          For a country like Sweden, that is coming increasingly close to doing away with currency altogether, I have no idea what money even means. I do suspect that if I knew much more about the details of the present case, I might have some analysis, but I don’t.
          .
          Is there a lot of (private) Euro debt or bank deposits in Sweden? (Euro deposits among the Greek upper classes was a factor in the politics of the Greek crises.)

          • You might consider that money is primarily a tool created by the government to provision itself and to record debts. And after that you can look at secondary functions it might also be used for. Like attempting to solve problems posed by uncertainty over time and all the other things you mention. But consider those to be secondary functions. Nice to have, and sometimes important, for sure. That’s how I look at it.
            Money in Sweden, whether it is in cash form or not, will do just fine so long as the Swedish government can levy and enforce taxes in whatever form that money takes.

            • In the comic books i read as a kid, a staple narrative is the “origin story”, how the superhero got his powers. Monetary theorists — some of them at least — put great stock in origin stories. They argue over how money got started.
              .
              It can be a way to initiate a pedagogy of money, a way to start from simple elements and build a narrative. I do not object in principle. But, the story of money is a very, very long one; with many twists and turns; the many and frequent reforms are themselves features of money. In modern times, no monetary regime has last more than a two or three generations. One thing you can be sure of is that money will not be OK for long. It never has been in the past. The origin story has to be told again and again, money re-invented again and again.
              .
              Taxes can matter. Getting to a fiat currency with no inherent value and subject to administrative management by a central bank acting on a common, public interest — that took a long time to establish however tenuously.
              .
              I honestly cannot tell if MMT is a smart demolition of neoclassical myth-making and ignorance or the iconoclasm of stupid zealots who aim to destroy what they refuse to understand. Most days, it seems like both.

  2. Sweden’s federal debt is a private sector asset. How much of the asset belongs to the people is the important question?

  3. Two points: When the Swedish Government acts funny compared to others it might be a preparation for a redistribution-crisis like 1990-4.
    And while the government’s debt of Sweden is small, the debts of the Swedish households is big ( https://www.privataaffarer.se/articles/2018/05/23/rb-hushallens-skuldkvot-nu-185-drygt-205-inkl-brf-skuld/ ): It’s probably only if the debts of the households is taken over by the government, the banks and other investors can bee sure to get the money.

    • Banks should be insured against private defaults, if they know how to take advantage of financial tools such as credit default swaps, collateral loan obligations, etc. You securitize a lot of loans and ensure payouts for the top tranches; the equity tranches are for speculators or those hedging in other ways. Banks are going to get money no matter what; defaults are insured. In a crisis, why wouldn’t central banks act as insurer of last resort, when the Fed proved it worked in 2008?

      • How an economic crises is created, administered and wound up seems to make a difference as to who will be winners. An example is the winners on the crisis in Greece, which seems to mostly be German banks. And the crisis in Latvia was very profitable for banks in Sweden. But there is of course no question as to who the losers will be. The result of the Swedish crisis 1990 (-4) makes that very clear.https://ekonomistas.files.wordpress.com/2015/10/image1.png

        • Banks could have won in Greece without forcing austerity too, if the banks had properly insured and hedged Greek debt. The ECB could have acted as insurer of last resort if insurance could not pay. If the banks did not properly hedge Greek debt, then they got bailed out. In the future, Greece might on its own develop financial hedging instruments to sell to banks that self-hedge its own debt …

          • I do not know much about it, but the ECB actually does have a plan to introduce an derivative instrument for European banks to hold in place of the “risk-less” sovereign debt introduction of the Euro abolished.

            • Yes. Finance, backstopped by public insurance (via money creation), can lead us into more just times. Shiller has written about the democritization of finance. I’d like to see public banks, ideally the Fed but also perhaps state and local public banks if the Fed is too slow, develop derivatives to fill government coffers without needing taxes. Government should hold finance challenges so individuals could submit proposals …

  4. “If turnover and liquidity in the secondary market become too small, increased volatility and uncertainty will, in the long run, lead to an increase in borrowing costs. Ultimately there’s even a risk that market makers would disappear, leaving bond market trading to be operated solely through brokered deals. As a kind of precautionary measure against this eventuality, it may be argued – especially in times of financial turmoil and crises — that it is necessary to increase government borrowing and debt to ensure – in a longer run – good borrowing preparedness and a sustained (government) bond market.”
    .
    Pretty good understanding, but there is another way to deal with panic-induced market-maker disappearance: central banks sell panic insurance upfront, as shares in a suitably countercyclical derivative index. Banks can thus hedge panics beforehand and, in a panic, when shares in the countercyclical index spike, then sell those shares as needed to replace funding lost due to market-maker (dealer) panic.
    .
    Then use the proceeds of the panic insurance to fund a basic income …

  5. The “Austerity” budget is none existant in Sweden and you know it. The borrowing by corporations and private citizen is enormous. Sweden is a country that is drowning in debt, the budget debt may be small but every other debt out there in Sweden is enormous. This includes debt by municipals which is terrible.


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