Economics and and personal finance are in the news each and every day now and have been for some time. Swedes are generally interested in personal finances, because of the hype around stock markets and the freedom money creates. Now, though, the focus is on debts, the increase in energy prices, the inflation and what those entail for the population in general, and (almost always) the houseowner specifically.
Too late for this discussion, I say. Before I delve into specifics I want to explain that I’m no economist, so please forgive my mistakes regarding (faltering) terminology.
Backtracking a bit
In October 2008, the debt of the Swedish population was almost 2.500 million Swedish crowns/kronor (about €250 million at today’s currency rate). This year the debt will circumspect more than 5.300 million Swedish crowns/kronor, an increase of 114 % over 14 years.
Right now, the debt quota is 188 % of the disposable income.
Looking at the general pay increase during the this time period: nominal pay is about 40 % (if we count on 2,2 % increase this year). If we count real income, it’s a meagre 21 % (22,5 % if we say it’s an average increase of the years between 2008-2022).
That does not look good. A discrepancy of more than 90 %. Remember that this increase in debts has occured even during two financial crisis. The financial crisis of 2008 hit Sweden that autumn, but the Swedes managed to take even more loans during the “bad years” of 2008-2010; and the Corona pandemic, which hit certain sectors quite bad. Still, the loans increased.
New houseowners are also increasing their debt quota, to an average 327 % of their income now. Another part, also increasing, is comprised of unsecured loans. They increased during the pandemic, and are lonas taken for general consumtion, such as TV’s, sofas and cars.
What about assets?
Some say that the assets of the Swedish people have increased over time. That is true. But much of those assets are fictional, locked into expected yields. If I want to sell my house now, I could earn lots of money. But if more people can’t pay their bills properly, lots of people will try to sell their cars or their houses and they will not gain as much as they wanted, because the value has dropped. They cannot be free from debts. The debts are real, more tangible, and will linger for years, if not decades. No bank will willingly pay a person’s debt. People will be forced to keep paying for things they don’t own. And if enough people are in dire need of money, assets will lose value. Rather quickly too. Look at Ireland, the US or Iceland in 2007-2010, or Sweden in the 1990’s.
So, my take is that to keep saying things are okay and people’s debt quota has decreased is a fictional argument. Expected yield is fictional, debts are not.
What’s helping us push into a real financial crisis are the debts of the municipalities. Their debts have also increased over the years due to derelict buildings (schools and health care buildings from the 1960’s and 1970’s). If just a few tens of thousands loose their jobs this autumn and winter, or if tens of thousands of houseowners must stop consuming, others will loose their jobs. That means more stress on the economy of the municiplaity, which will have to get rid of employs = more unemployed, more people unable to consume and/or pay their debts. The spiral is very real then. Another economic factor to consider is how inflation affects the costs of pensions, now increasing rapidly.
The Swedish solution: debts as a living
2008-2010 we borrowed money, increased our debts, as a solution to a crisis. The then government made it easy to receive money for redecorating or rebuilding your house often. People did that. They rebuilt their homes, took more loans on their houses, and rebuilt some more. Expected yield in action.
In 2020-2022 we have done the same thing over again. I can’t find the survey, but people had the opportunity to apply for a period of exemption from amortization, and many people used this period to buy things, not to save money for paying incoming mortgages.
We have (and are living) lived far beyond our assets, as if we can do this forever. We should have paid our debts instead of buying annual trips, houses, boats, TV’s, cars.
The second most indebted people in the European union are the Swedes, followed by the Dutch. The Danish are in the lead with a whooping §60.000 each. The same populations have the highest debt quota as well. Ironically they constitute three of the four members of the “Frugal Four” in the EU (Finland being the fourth country), the four countries not really willing to lend money to countries with a high national debt, causing anger in southern Europe during the pandemic.
There’s plenty of other factors here, like the crazy housing market in Sweden, the craze for quick money through stocks or gambling, the lack of savings among Swedish househoulds. But I stop here.
Free fall for months
For years my belief has been that the debts in themselves are enough to create a financial crisis when the interest rate increases. That has occured this year and will continue. Incremental steps are enough of a tipping point, because the debts are so large. The municipalities must pay many more millions for simple, really cheap, loans (seen historically, 2 % interest rate is not much) and need to lay off staff. Citizens must choose between food on one hand and a Netflix subscription and tickets to the cinema on the other every month. That times tens of thousands of people leave even more people without jobs, which means less money for the municipalities in tax income and more expenses in social care. And so we spiral downwards. From my perspective, we were like a block of ice on a roof come undone from the rest of the ice sheet last autumn. Then Russia attacked Ukraine and the ice block gained speed. Inflation increased, energy prices and fuel prices soared during the summer and it gained even more speed. Now we’ve fallen off the roof in free fall. Central banks keep raising interest rates, inflation is not down.
Perhaps we land in February, perhaps in April. Compared to 2008 and the pandemic, this is going to hurt for real.