Sweden experiments, subverting economic tradition

In today’s connected world the flow of money and ideas has become nearly instantaneous, and the globalized societies are dominating the poor and slow to adapt, largely through superior information resources. Since 2008, the fear of increasingly abstracted markets has receded, and the world has entered a new era of economics informed by the growing availability of consumer data.

At the forefront of experimentation is Sweden, who since June have had a negative interest rate at the national Sveriges Riksbank, which serves essentially as their Federal Reserve. What this means in the immediate sense is that banks which borrow from the government at this negative repo rate, are pressured to lower their own interest rates, leading to lenders – anyone who saves their money – to see it slowly drain away while borrowers will ultimately pay back less than what they had originally been given.

According to the Riksbank’s monetary policy report published in July, just after the decision to move past the ominous “Zero Lower Bound” that has frightened economists since the Keynesian revolution, the name of the game is inflation. Sweden is one of the few members of the European Union that maintains its own currency, and in the last year the Krona has appreciated greatly relative to the Euro, which has been in a downward spiral for some time. The aim of the negative repo rate is expansionist, lowering the value of the Krona will make exports cheaper and imports more expensive. While the rest of the world is engaging in currency war, Sweden is maintaining their neutral status and seemingly acting as a sponge for the massively inflated tears of their neighbors.

The most recent monetary policy report, published on Oct. 28, indicates that they are not certain that this was as good of an idea as they thought. While the report from July says they expected to raise the interest rate back above the ZLB by the end of 2016, the report from October indicates uncertainty about the direction of inflation due to “the unexpectedly large migration flows into Sweden,” which will impact the labor supply and employment, and also expresses that “it is uncertain how the expansionary monetary policy conducted by the Riksbank and the ECB will affect the relationship between the krona and the euro.”

Despite this uncertainty, the Riksbank, the name for which is rather humorously close to “risk-bank” in English, “is ready to act” in the event that they fail to raise inflation to their target rate of 2 percent. At the same time, if inflation rises above their mark the October report states “this need not involve monetary policy being made less expansionary.”

Amidst this experiment of disbelief in the liquidity trap, the Swedes have been trying their hand at old school quantitative easing, buying up their own government bonds, infusing the economy with more money. In the Sveriges Riksbank working paper series 310, the authors “find that quantitative easing can be welfare improving even at the zero lower bound.” They suggest that as a temporary move, QE that involves buying private debt rather than government debt – as the Fed performed bailing out the shadow banks by buying bad mortgages – provides liquidity to actors in the economy who are unsatisfied when the nominal interest rate is zero, when held cash does not lose value.

This is particularly interesting as Sweden has been phasing out cash for years, and the macroeconomics class I took at BC really pushed the new camp in the federal deficit conversation, “deficit owls,” who see debt not as an obligation to provide value back to lenders, but as an imaginary number that we can ignore by simply printing more money. It’s flawed logic in such simple terms, but as Sweden moves forward through this coming year there is a lot to be learned about these new theories in practice.