Pity Them: Sweden Relents To Krugman

We have clearly entered unchartered financial and economic terrain, a sentiment that applies so broadly as to lose almost all meaning. In fact, the world has strayed off the beaten path for so long ‘we’ have little memory of what ‘normal’ actually feels and looks like. The latest figment toward that direction is the growing errors of orthodoxy as it relates to Europe. Sweden’s central bank, Riksbank, seems to now be setting its monetary policy via Paul Krugman’s criticism.
The ‘problem’ for Sweden is the same problem for Europe, as the two are inseparably tangled in economics and even finance. Such reality contradicts orthodox economics, and thus all their prescriptive measures, that depends on a closed system approach – that Sweden in general, and Riksbank in particular, can set its own course in a vacuum.
As is well-known, economists detest ‘deflation’ as the worst economic condition, and only partly because of their distrust of common folk. As it is, Sweden has seen consumer prices fall in 16 of the past 24 months (we could be so lucky). Riksbank began to raise its benchmark repo rates four years ago to stem the flow of ‘capital’ into its housing sector. And small wonder that they were so concerned about a housing bubble given that ‘money’ came out of a Europe then in desperate trouble seeking shelter from the euro.
Since the Swedish central bank stopped its rate hike program in 2011, consumer prices have fallen in what these orthodox economists are seeing as correlation and causation.
Stefan Ingves, the Riksbank’s governor, has come under pressure from the likes of economist Paul Krugman for lifting rates in 2010 and 2011 to counter what Sweden’s central bank saw as a risk of a housing bubble. Mr Krugman called that policy ‘sadomonetarism’, as unemployment remained above the historical average and inflation was weakening.
Is it likely that ‘deflation’ in Sweden is a Swedish problem alone, of its own interest rate policy?

This post was published at David Stockmans Contra Corner on October 28, 2014.