Swedish Cashless Negative Rate Ponzi Real Estate Society-Still a Good Investment

 This article was first published by me on Talkmarkets: http://www.talkmarkets.com/content/global-markets/swedish-cashless-negative-rate-ponzi-real-estate-society-still-a-good-investment?post=80375

What could possibly go wrong in a cashless, negative interest rate, ponzi real estate society? We can use Sweden as a potential example since Sweden is closest to a cashless society. Is this a conspiracy by the elite? Finance economist Kevin Erdmann says the economy and real estate are randomly determined. See his quote at the end of this article.

It seems that not much has gone wrong in Sweden, except that household debt is out of control. Real estate is massively overvalued, but there has not been a crash.

Well, that is what economists want, the management of bubbles to limit crashes. Negative interest rates will give the government a tool for making money available in the society, and for getting people to spend money.

Author: Oskar Anlend
  Negative rates may, the economists hope, force people to spend more and save less, or just lose the money to the banks. Of course, people could start saving more to make up for the negative rates. That would cause a decrease in economic activity and would befuddle the economists.

What happens with negative rates and bank reserves is that banks are then charged interest on the excess reserves they store at the central bank, rather than receiving payments on those reserves as is currently happening in the USA.

So, that negative rate to park money with central banks should motivate the banks to lend, the economists say. They want to make money rather than pay the central banks to hold their money. So, they lend, and lend and lend. And household debt goes through the roof. And Sweden is a nation that gives children money until they are 16. Wages are generous as well.

To see how Sweden's negative rates and the stipends and good wages are working, we can see that Stockholm is more expensive than San Francisco. A city with beautiful weather, great economic power, Silicon Valley, and expensive real estate is still cheaper than Stockholm! Stockholm had bidding wars and the prices are continuing to soar.

Certainly, negative rates could likely keep this massive stockholm bubble, from crashing. But again, household debt is through the roof. You know that Sweden is trying to keep house prices stable without a crash. That is a balancing act.

But Sweden has interest only loans, no money down loans, etc. 70 percent of Swedes have interest only loans! And they are not just interest only loans. They are perpetual loans.

A perpetual loan is one in which the down payment is made, the principle required to be paid is about 25 percent and the rest is paying interest on the loan to infinity or when the house is sold, whichever comes first.

This type of loan has a ponzi feel to it. The banks make money on the down payments and since they create money when they lend it, they make the interest back on the money they create and for all practical purposes they own most of the house equity. And house prices soar to the moon.

This must be quite alarming to Swedish leaders who think about this stuff. Can you imagine a housing crash in Sweden, with people walking away from perpetual loans while existing within a cashless society? Some people are obviously aware of the scenarios, and are hiding money in the microwave while they still can. You could see part of the Swedish population bumped off the digital payment grid, if their good credit is shattered.

The government is so concerned, that it is going to require Swedish households to pay more on their mortgages so principle is reduced. That could end badly though intentions are good. 

Scott Sumner says that negative rates on bank reserves, negative IOR, are always expansionary. 

So, the negative rates force banks to lend, increasing the money supply. But I am thinking that if the Swedes see people getting hurt paying down principle in the manic housing bubble that exists, that they may stop borrowing over time and start saving and cutting household debt, fearing a crash of the housing bubble.

As for bank accounts, Sweden is not charging retail customers negative rates for bank accounts at this time. Jesper Rangvid said that people would accept no greater than a 10 percent interest rate tax. So, maybe the experiment with negative rates sans going to cashless could work within that range. But once you get close to the negative10 percent bound, trouble will come to this economic system and serious decisions will have to be made.

One solution to avoid negative rates and possible cashless society that involves infrastructure rather than monetary measures, is to simply finance various actions in the real economies of the world, while getting the central banks to buy the resulting bonds and holding them to maturity. It is worth a try in the US at least, because the monetary neglect of American society is very obvious. 

The Riksbank could do this as well, maybe by giving loan assistance to pay down the principle to those who fall behind on their mortgages. But how high can house prices go? To infinity? We need to watch the Swedish housing market carefully.

One other issue with negative rates is that, yes, there is bond hoarding now, but the market is weaker with negative rates. If you buy a bond with a positive rate, it makes sense to hold on to it til maturity if you cannot get the price you want. But if you buy a bond with a negative rate, and price declines, then holding to maturity could guarantee a loss. So, there could end up being a herd mentality to get out of bonds even while the price appreciates once the bonds fall to negative rates. at work in the sovereign bond markets when rates go negative and stay there for some time.

Of course, negative IOR is not the same as negative rates on bonds, but there appears to be a relentless move toward negative rates on bonds over time as well.

One thing may come true about Sweden, it could become unlivable for those who are bounced from the digital payment system because they screwed up a bubble mortgage. Any nation contemplating a cashless society like Sweden is becoming, needs to consider the consequences for any bubbles that could be allowed to crash.

I don't know if the Swedish housing bubble was a conspiracy by the banks, but you wonder when 70 percent of the borrowers have interest only loans, many of which are perpetual. We need to remember our housing bubble and crash. I sent this email to blogger Kevin Erdmann who is in a circle of economists who try to prove that events are random and not conspiratorial:

As far as the [USA] housing bubble and crash is concerned, you have to admit that if lending dried up, it probably was caused by the destruction of the securitization market. People probably stopped accepting the toxic MBSs [which flooded the money markets with bad collateral], and some also stayed on the books of the banks, and that created interbank lending fears. 

Had securitization continued, lending would have continued. Question is, why did investors decide to stop taking the MBSs off the books of the banks?

Also, in the beginning of the bubble, securitization was key, and fraudulent distribution of these bogus MBSs by Henry Paulson and others was a scam, IMO. Now we do know that in Feb, 2004, Alan Greenspan said you could get a "better deal" with an adjustable mortgage. IMO he was in on the scam and central to it. Right after that Paulson was able to pass billions of dollars of dangerous MBSs...I know for a fact that one variable in the formulas, Gaussian formulas, was that all mortgages could not go bad at once. Of course, that was a lie because in Japan, that happened. They all went bad at the same time.


Kevin, who agrees with me on many issues, has a different take on this USA crash and on conspiracy in general:
You seem to see the economy as the conscious product of some powerful economic elite.  I see the economy as the emergent result of millions of largely ignorant participants (including myself) pushing values to equilibria which we can only vaguely comprehend.
But one has to admit that there is something conspiratorial going on in the very nature of toxic real estate lending, even if the USA crash was just a screw up:

1. You default on a loan, and as Kevin has said, the Fed caused massive defaults in the housing crash by tight money, the bank takes the house back. Did the Fed just screw up or was it a conspiracy to get the homes back for the banks?
2. You pay perpetually and the house belongs to the bank.
3. The bank runs into trouble and the perpetual loan is called in.



I wonder how that "conspiracy" to distribute toxicity will pay off for the banks and citizens in interest only, soon to be cashless Sweden, going forward. Don't ever think, citizens of Sweden, that a perpetual loan can never be called in!

For investors, while there may not be a housing crash imminent, due to a strong business climate,  watch the housing market in Sweden closely as you put money into a potentially lucrative stock market.

Disclaimer, I am not an investment counselor or attorney. This is not professional investment advice.


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