When it comes to the map of the world, most Americans are myopic.
This is particularly true about our Scandinavian ally and trading partner Norway.
We know it’s snowy. They have something called fjords, and they like fish. We may have some inkling that a fellow named Leif Erikson was the first European to reach western shores nearly 500 years before Columbus. But we’re not sure whether that’s fact or fiction.
Others among our clan only turn their attention towards Norway when they wonder how Brett Favre could give up Green Bay to become a Viking.
Very quietly, when no one was looking, Norway became one of the wealthiest countries in the world. Currently, it has the largest reserve per capita of any nation. In August, Norway’s sovereign wealth fund announced that it owned approximately 1 percent of all the publicly-traded stocks in the world.
Norway is the world’s fifth largest oil exporter and has vast natural gas reserves. Following the ongoing financial crisis of 2007-2009, bankers have deemed the Norwegian krone to be one of the most solid currencies on the planet.
Certain Sign of Profound Change
In a sign that the recovery may finally be taking hold, Norway has become the first major economy to raise its key interest rates. Although Australia did the same earlier this month, the action taken overnight by Oslo-based Norges Bank – Norway’s version of the Fed – is seen as far more significant.
While Norway has twice rejected membership in the European Union, it maintains close economic ties with neighbors to the south and east. Most economists see the actions taken by the Norwegians as being a harbinger for other central banks including the ECB (European Central Bank).
Vast energy reserves and a stimulus package equal to approximately 4.7 percent of its GDP helped quickly elevate the Norwegian economy out of recession by the end of the second quarter. At 2.7 percent, Norway’s jobless rate is the lowest in Europe.
With recovery well in hand, Oslo is concerning itself with the threat of inflation and the fiscal dangers associated with the formation of another asset bubble. Although the quarter point boost in its overnight deposit rates is not dramatic, it is being viewed as an icebreaker for other central banks, and as a hint of steeper increases to come.
Greenspan’s Day Is Gone
Compared to the U.S., where the Fed’s quantitative easing program has kept interest rates near zero to stimulate borrowing, Norway’s rate through the end of the year will average about 1.75 percent. Analysts at Oslo’s central bank expect a net economic growth loss of 1.25 percent for the year, but are forecasting a 2.75 percent expansion in the economy through 2010. As a result, Norges Bank is projecting its key interest rate to be 2.25 percent next year and with additional growth, anticipates an escalation to 4.25 percent by 2012.
Norway’s early rate actions are being seen as a significant rejection of the laissez faire philosophy that dominated global fiscal policy during Alan Greenspan’s multi-year reign as Chairman of the U.S. Federal Reserve Bank.
From his vantage point as head of the world’s most important central bank, Greenspan advocated a hands-off approach to asset prices during the U.S. expansion that lasted six years, until December 2007. He said it was easier to clean up the mess of a bust than to spot bubbles, and that monetary policy was too blunt to deflate them.
“There is no evidence that it works other than in computer models,” he said in a January 2008 interview about the idea that central banks should raise rates to pop asset bubbles. He noted that the stock market merely leveled off when the Fed doubled rates to 6 percent in 1994-95 and then resumed its climb.
This new approach, taken first by Australia’s central bank and now by Norway, may herald a new era in which central banks pay more attention to asset prices when setting monetary policy and devising regulation, broadening their focus from inflation only.
On a separate note, it may also explain why so many institutional currency traders lately have been unwinding their dollar positions in favor of the Norwegian krone and Australian dollar.
It has become increasingly evident that as the world emerges from the worst economic downturn in 70 years, central banks have grown very wary about the rapid re-invigoration of property and equity prices. Their anxiety has pushed several central bankers to begin focusing their policy efforts on restraining asset prices in the hope of avoiding another recurrence of the last two economic cycles, when low interest rates and lax regulation helped generate the boom and then bust in technology stocks and housing markets.
Although current Fed Chair Ben Bernanke has not yet added his voice to this chorus of Valkyries, with the recent actions taken by Norway’s central bank, many expect him to join the Viking hoard.
John Cohn is a senior partner in the Globe West Financial Group, based in West Los Angeles. He may be contacted at www.globewestfinancial.com
