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Scandinavian Struggles: Why So Dismal in Denmark?

Paul Krugman: Who knew that Denmark was doing so badly? The likely culprit is a very high level of household debt.

I’m going to be visiting Scandinavia soon, so I’m doing preliminary homework – and for those who, like me, haven’t been following the region closely, there have been some surprising developments. See the chart on this page on real gross domestic product, with the United States included to give some sense of comparison.

A couple of years ago Sweden was widely considered a role model, with the best economic recovery in the advanced world. Now, not so much, thanks to slowing growth – perhaps because of the central bank’s bubblephobia. Meanwhile, who knew that Denmark was doing so badly? I don’t think that too much blame can be placed on the country’s peg to the euro; this would have been a drag if Denmark had entered the crisis with its currency overvalued, but it doesn’t look as though this was the case.

Instead, the likely culprit is a very high level of household debt. Interesting stuff, and very much worth looking at for further evidence on the nature of our problems.

Tardy Taper Thoughts

A quick note on the old news of the Federal Reserve’s mini-tapering. As many have noted, it looks as if the Fed has managed to pull the trick off this time – slowing the rate at which it purchases long-term assets, while simultaneously conveying the message that this did not signal a general hawkish turn; that short-term rates would remain at zero for a long time. But why exactly is the Fed eager to start exiting the quantitative easing business, even as it clearly remains concerned that the economy is too weak?

The official statement was uninformative. What one hears is that a fair number of people at the Fed are worried that quantitative easing is feeding speculative bubbles, as investors search for yield that really isn’t there. But surely that’s a feature of cheap money in general; the same argument could be used in favor of raising short-term interest rates despite a weak economy and low inflation.

In fact, that’s exactly what has been happening in Sweden, where the fear of bubbles has been used to justify monetary tightening. The point is that the dilemma that supposedly explains the Fed’s attempt to give with one hand what it took away with the other really has nothing to do with the form of monetary policy, and everything to do with the pretty clear evidence that the natural rate of interest is negative.

So why the Fed’s twist? My guess is that it’s ultimately political: that the ever-growing balance sheet is causing problems with Congress. Republicans hate easy money in general, but a Fed balance sheet of FOUR TRILLION DOLLARS (Dr. Evil voice) offers an exceptionally easy target. And since the Fed does seem to have pulled this one off, I guess this particular act of political self-defense was O.K.