Sweden's Great Depression

0:00Sweden's Great Depression. This is a paper that I'm co-authoring with Ola Nivander, who is a fellow of the Swedish Mises Institute. He has done all the hard work really, so I take no credit. I take credit only for the mistakes. So what he did was look at some of the causes of the depression that Sweden had in the early 90s. And we are kind of expanding on his thesis when he studied under Huerta de Soto in Madrid. So this paper is really an extension of that master's thesis. So, very brief history of Sweden.

0:49We have the golden years, 400 years with free banking, free markets, hardly any regulations, low taxes and so forth. obviously there was a lot of economic growth during that period this took Sweden from being one of Europe's poorest countries to one of Europe's wealthiest countries in less than a hundred years and we have a decline period twenty years of well let's call it excessive statism and then there is the depression that followed for three years and then There's the New Sweden rising like the phoenix out of the welfare state's ashes, in a sense. So what we're going to do in this paper then, is really look at only this decline period and see whether that actually explains the depression that came afterwards.

1:48So during this period, Sweden went from being the fourth richest in the world, according to the OECD standard measure, the GDP per capita, to the 16th in 95, in only 25 years. Now the next measure is probably of more interest to many of you, the tax-finance to private sector ratio, and that's the number of people who are financed either through being hired in the public sector or being on unemployment or having retired with public retirement. And the private sector, of course, the productive sector. In 1970, there were three people in the private sector to every one who was publicly financed or tax financed.

2:37In 1990, it was quite the opposite. So you had one and a half tax financed individuals for each individual in the private sector. So obviously things can go down the tubes pretty quickly. So the periods of interest for this paper is really what I mentioned before, the decline and then the depression. Now if we divide this period into sub-periods, if you like, what we really have is fifteen years of radically expanding welfare state along with economic decline. And they seem to go hand in hand for some strange reason.

3:23And then we have five years of a credit-induced boom, on which followed depression. And I will give you the background, which is this welfare state expansion, to give you just a sort of picture of what Sweden was like. And we'll quickly go through what actually, where the boom came from, what were the causes of this credit expansion and can we really use the Austrian business cycle theory to understand what happened to Sweden. And then there's the depression and I'm just going to very quickly tell you what actually happened then. I'm not sure if you're actually, if you're aware of Sweden's depression or not, but alright.

4:11So what happened in the 70s? Like I showed before, there was the golden period, 1870 to 1970, with hardly any regulation or at least not the first half of that period. And then Sweden was not part of the world wars at all, which of course helped with production and everything, because we could just sit back for a few years and then sell our stuff to all the bombed countries. It helps. It really helps in terms of growth. So you can cover your expenses for welfare programs and things like that if the rest of the world is at war and you are not. But we had, suddenly in 1970, we had a lot of regulation on labor.

5:00One of the examples is the last in first out rule that any company could only, if they If they had to fire someone, first of all that was difficult, but if they had to fire someone, they had to fire the one who was last hired and so forth. So seniority meant you were really safe in your employment. Now taxes were increased a lot. In the 70s, by the end of the 70s, we would have a marginal tax rate for any low-income earner at a little bit above 70%. It's much lower now. I mean, some even had marginal tax rates of above 100%, which you could think is not that very nice.

5:48There's the Swedish children's fiction author, Astrid Lindgren, the author of Pippi Longstocking and things like that, she had a marginal tax rate of 102%, I think, something like that, and she was a social democrat, well, she was Swedish, so kind of synonymous, but she was actually pissed off by this, so she wrote a little story about a troll or something like that, meant to symbolize the government with its excessive taxes. During this period, we also had a lot of price inflation. Now, obviously, this combination has a bad effect on the economy as a whole.

6:41Now, in order to get away with this, the Swedish government tried to devaluate, that is just lower the value politically of the currency as compared to other currencies. Now in 1976, it happened with 3%. Sweden was then part of the Bretton Woods system. The government then wanted to do another 6% in 1977. But that was declined, which meant, of course, the politicians find a way out. So they left the Bretton Woods system rather than doing something else. So there was a devaluation of the Krona twice in 1977, first by 6% then by 10%.

7:27And it lasted another four years and it was devaluated by another 10% and then the following year by another 16%. So there is not much left of the Swedish currency after the early 80s. Now all of this of course meant that there was in the Swedish market a shift towards capital gains over actual work, right, and productive work. The price inflation, of course you could have deductions for your interest costs on taxes, which of course meant that overall a lot of people investing in capital, they saw no taxes or even negative taxes on their investments, which was a good deal for some, I mean, if you saw through the system.

8:20So if we look at the national debt then, which is one of these things that also tie into this, you can see that it was around 20 to 30% here through the 60s and up to the mid 70s, and suddenly increases to 70% and then to almost 80%. almost 80% of that. So obviously the government was expanding, even though they were jacking up taxes a lot, they still had to borrow money. I'm sure U.S. Americans know something about this, even though you are a little behind. All right, so if you look at what this actually meant, then in terms of interest payments on the national debt, You can see here this is during the 80s or most of it.

9:10We have the interest payments as part of government expenditures and as part of government revenues. You can see that here in 84, 85 the payment was 29% of government revenues. Now this 29% is equal to the total social security spending and just the increase that that year is equal to all the health care and law enforcement in the country. So obviously that national debt was a problem. In this situation, of course, the secondary debt markets were underdeveloped, there was a lot of regulation on private banks, and private banks were forced basically to hoard government debt.

10:01And at this period, the government was trying to, let's just skip that, alright so in 1985, the story as most people tell it is that in 1985, suddenly everybody started embracing neo-liberal ideals and there was deregulation and that caused the crisis. Well obviously that is not really true. They were deteriorating government finances for 15 years up to this point and the deregulation was simply a way for government to be able to get more access to credit in the market to cover all their deficits.

10:46Now they started with a fixed exchange rate in order to assure investors that things were actually going smoothly even though they had done all these devaluations throughout the in the 70s and in the early 80s. And as you can see, after this, the loans to non-financial businesses by private banks went up just a little bit, 117% in four years. This is during the credit expansion period. So what we do in the paper is, and that was just a warm-up, so this is the real paper, so if you could just start the time now. All right, so what we look at is four levels really of what could affect the money, monetary causes of this depression.

11:40And it turns out, first of all, that no one has really done any study on the monetary causes of this depression. They've all looked at ideology and things like that. And what we find is that there's really a lot going on on this level, the central bank. It might come as a surprise to you, but that's where all the action takes place. So I'll just skip this a little bit because I'm running out of time, even though you reset the clock, right? All right, so this is the balance sheet of the Swedish central bank, the Riksbank. And there are some very interesting things going on here. Of course, there are numbers, so as Austrians, we don't really understand what is going on, but so let me tell you a little bit here.

12:33Now the government debt was assumed by the central bank, and as you can see here, it went from 65 billion to 88 billion in one year, which is quite a drastic increase. Also there's an increase the next year, but this is really just because of changes in accounting standards, so they were forced to write up the value of the government debt. So this is not a real increase. So the real increase is actually between 85 and 86. Now also, with this deregulation, the central bank offered a lot of advances to the private banks so that they could actually cover all the credits given to the private sector.

13:23So as you can see here, it went from 2.4 billion to 17 billion and then 28 billion almost in three years. Quite drastic increase right there. Now, what does this look like within the banking sector from the eyes of a banker? Well, this is one confession, I guess. A CEO of a major Swedish bank saying that in a deregulated banking system, the extension of credit is always at the core of the banking profession. And he says that extending credit was really not difficult at all. That's what you do. And there are no risks involved basically, so they all did it. And it was an illusion, they realized afterwards, but everybody was doing it, so why not?

14:11Now the effect of all this credit expansion, of course, on the market was the salaries went up 9% annually, between 84 and 91. Productivity, on the other hand, went up only 1.5%. And we saw a lot of increase in... If you want to go into your Q&A period... Yeah, I have like two or three slides left. Right, I'll just finish this quickly. There was a lot of investment done in productive assets. So commercial property, this number is from Stockholm. It went up 160% in four years, which is kind of drastic. So we look at the effect on what happened in capital markets and capital in an Austrian sense.

14:59So it's productive goods, producers' goods. And as we can see during this boom here, it went up quite a lot. So the spending on intermediate goods went up by 28% from this credit expansion. And as we can see here, which is the relative spending in intermediate stages, went up exactly during the credit expansion, just like we would foresee using the Austrian and Business Cycle Theory. So the economy was getting more capital intensive. Structure of production was getting more future oriented. And there was no additional savings. Everything is actually explained by this increased credit.

15:44And this is my last slide. After this, suddenly there is a depression. Obviously, we need to look into why did it turn at exactly this point. But that it turned what the reasons were for the turn is something that we know using ABCD, right? But the government abdicates. There's a new government after the general elections. And then they're trying to save the fixed exchange rate, jacking up the interest rate to 500%. It didn't work. It was not enough, obviously. So they had to let it go. And the corona immediately sank by 35%, despite the devaluations just a decade earlier. So what we have here is really a very, very nice case, it seems like.

16:32I mean, it's still a work in progress. Illustrating the Austrian business cycle theory, the causes of the boom, the boom, and the depression that follows, even though Sweden is a working socialism, of course. And that's the paper so far. Thank you very much.