The attempt to save the world from economic crisis may have built up another crisis.
Just before the closure of Norway in March 2020, share prices on the Oslo Stock Exchange collapsed. In a few days, the price fell by more than 30 percent.
Making money in a world shut down by a pandemic seemed pretty hopeless.
But this time, the authorities had the measures ready: Enormous rescue packages were deployed. Interest rates set at zero. Money printing became the solution: The amount of money in Norway increased by NOK 387 billion since before the pandemic.
Everything was done so that the economy would not collapse as a result of the strict measures. And by and large, it has worked as intended. The number of bankruptcies has decreased instead of rising. Most people were left with more money because mortgages became cheaper.
But has the attempt to save the economy only postponed and exacerbated the problems?
What to do with money in a closed economy?
Rescue packages around the world entered an economy where it was not possible to make large investments. People were asked to stay at home and many were closed. With zero interest rates, it was pointless to put the money in the bank.
Thus, the money flowed back to the stock markets, even though companies experienced worse times. Today, the main index on the Oslo Stock Exchange is 20 per cent higher than before the fall in prices in February last year.
Nasdaq har more than doubled since the bottom in March.
Many fear that the stock markets are now significantly overpriced. The share price is high simply because there is a lack of alternative placements of the money.
Has raised historically high debt
Low interest rates caused house prices to rise sharply. The average price of housing throughout the country was up 11 percent from the beginning of 2020 to 2021. In the metropolitan area, growth was even greater.
Also read: Alerts bang for homeowners
And how is this growth financed in a period of zero growth in wages and unemployment?
– High debt burden in households and high house prices pose a significant risk to the Norwegian economy. Inflation in the Norwegian housing market has been high during the pandemic, and Growth in lending to households has increased. Household debt is growing faster than income, and the proportion of households with a high debt ratio has increased in recent years. Many households are vulnerable to a significant increase in interest rates, falling house prices or a reduction in income, said Chief Financial Officer Morten Baltzerse recently.
The domino effect of the times?
Now that society is about to reopen, there are many who have money left over. Demand for both goods and services is skyrocketing, without production in full swing. Then prices increase.
In the United States is the used car market has become completely cocoon. The price of computer equipment has shot to heaven the last six months Worldwide.
Commodity prices are rising sharply. The price of wheat has increased by 20-30 percent in one year. The price of aluminium has increased by 50 percent. Copper even worse.
In the United States goes inflation went to the ceiling. And what do you do when inflation rises? Yes, central banks are raising interest rates. Norges Bank announces four rate hikes next year.
Also read: Interest rate warning: Four withdrawals in one year
– The concern is real
– Are we ahead of right-wing inflation going forward? That theory has a very good basis: What we actually see of inflation here and now, on the commodity side and the commodity input side – and on actual price increases, especially in the United States. We also see it to some extent in inflation expectations, says NHO’s chief economist Øystein Dørum to Nettavisen.
What can happen then worries the chief economist:
– If one accepts the premise of increased inflation over time, higher interest rates to crack inflation are not good in a world where the financial and housing markets have been fired up to an ever-increasing degree by ever lower interest rates. That concern is real. Higher inflation can lead to higher interest rates, which can lead to a fall in asset prices, which can lead to a decline in capital inflows. Typically, higher interest rates go hand in hand with capital flight or capital drought for emerging economies, and a stronger weakening of exchange rates for emerging economies.
The whole point is to slow down the economy – when the economy is going bad
The whole point of higher interest rates is that consumers and businesses need to spend more of their money on paying interest. Then we have less to spend on normal consumption. Reduced demand normally results in lower prices, and thus inflation is brought under control.
The problem is that the dominio effect does not stop there. When you spend less money on restaurants, food, toys, sofas, cars, interiors and so on, the companies that sell these items make less money. At the same time, they also have to pay higher interest rates on their loans.
Companies buy fewer goods from their subcontractors. They have to cut costs. No overtime. Layoffs. Maybe redundancies?
Turns right into the housing market
If you are unsure whether you will have a job in a year, you will not go as hard into the bidding rounds if you are moving. You only buy if you get the new home at a good price.
Falling house prices is not a problem in itself. Whether the home you own is worth 2.4, 10 or 100 million is not important, as long as you are not going to sell.
But if you are no longer able to pay the installments on the increasingly expensive loan, the crisis that triggered the financial crisis arises: You forced to sell the home in a market where no one wants to buy. You have to accept what someone is willing to pay, no matter how low it may be. Suddenly, the mortgage is greater than the value of your house.
When you sell, you are left with debt and no place to live. Someone has to take that bill. It’s either you or the bank.
Banks do not like to lose money. Therefore, they become more reluctant to give loans, for fear of losing money. It makes it harder to buy a new home, it makes it harder to invest. This pushes down house prices even further, and means that companies are unable to grow.
Collapse in the stock market
At the same time, higher interest rates have a different effect: It becomes more profitable to put your money in the bank. It strikes right in the stock market, where “everyone” has placed the money today:
There is little reason to believe that growth in share prices will continue as we have seen over the past year, when interest expenses will be higher and the economy will have to cool down. Bank of Norway believes the Petroleum Fund will earn less in the years to come. Moving the money from shares to the bank will then make sense.
When many people want to go out at the same time, it leads to a fall in the value of the stock market. Those who thought they had shares for 100,000 kroner, may only get 50,000 kroner when they sell. At the same time, it will make it more difficult for companies to raise money (issue).
Enormous risk for Norway’s savings
Even if you do not have shares, it can mean a lot to your everyday life: Norway has an enormous fortune that is invested mainly in shares. The action rule states that we can use 3 percent of this wealth a year in the state budget.
At present, this wealth is estimated at around NOK 11.6 trillion. This is not money we have lying around, but the present value of shares, fixed income securities and real estate. 3 percent of 11.6 trillion, is 348 billion. This is what the state can basically use from the oil fund.
The Petroleum Fund can lose shares, bonds and real estate at the same time. What happens if the oil fund is halved from current record levels, as a result of a collapse in the stock market? Suddenly, Norway does not have NOK 348 billion to spend in the state budget, but NOK 174 billion.
Also read: The government warns: The Petroleum Fund has in practice been used up
The sum is about the same as the state spends on the health care system in Norway. It is also about the same as the state gives to municipalities. That is more than double what is spent on transport. Three times as much as spent on defense.
How would you cut 174 billion from the state budget, at the same time as unemployment skyrockets and the housing market collapses?
– The concern is real
The premise lies in Finanstilsynet’s latest attempt to look into the crystal ball:
– If you go to Finanstilsynet’s fairly recent report, it rests on this. There is higher inflation, higher interest rates abroad and at home, and then the purchasing power of households breaks down. It breaks the housing market, and it breaks the market for commercial real estate. If you believe in such high inflation out there, for so long, then the downside scenario makes sense. In addition, there was a sharp increase in bank losses, says Dørum, who emphasizes that most economists believe that inflation will not continue for long.
When Finanstilsynet presented its report, Morten Balterzen, Director of Financial Supervision, said the following:
– Recently, the prices of important raw materials have risen sharply. There is a report of an increasing lack of input factors, and shipping costs have risen. Capacity barriers in important markets and higher inflation may make it necessary to tighten economic policy faster than expected. Risk premiums can also increase from the current very low level and lead to a sharp fall in the price of shares, bonds and real estate.
He also said that the climate measures themselves will be a significant risk for both companies and banks in the future:
– Climate change and the transition to a low-emission society entail a significant restructuring of the economy, with economic losses in industries and businesses that are negatively affected by the changes. It can also inflict losses on financial institutions. Finanstilsynet expects financial institutions to cover all significant risks, including climate risk, in their risk management systems, says Baltzersen.
How bad do they think it’s going to be? In the next case, we consider how Finanstilsynet fears the next four years may be.
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