By Niels Jensen, Absolute Returns Partners
…they would probably be the best mortgages in the world. Denmark has produced many famous brands over the years, and many of them have become as popular abroad as they are back home; however, arguably the most successful Danish invention of all times has never gained much traction abroad, but that may be about to change. Please welcome the Danish mortgage finance model.
This time is different
Before we go there, some background colour. It is becoming increasingly evident that austerity – at least the extreme variety currently applied in peripheral Europe – is not the way forward. It may please the rating agencies short term, but it is ripping Europe apart, both economically and politically. Furthermore, it doesn’t work. Readers of Rogoff and Reinhart’s masterpiece This Time Is Different shouldn’t be at all surprised. As they point out, once the credit cycle comes to an end and de-leveraging and austerity sets in, the ensuing loss of tax revenue is always underestimated and will lead to default more often than not.
Based on recent evidence from Greece that may be precisely what is happening. About three weeks ago, the Greeks shocked everyone by announcing a state fiscal deficit of €15.5 billion for the first six months of 2011 vs. €12.5 billion during the same period last year. Excuse me, but wasn’t austerity meant to reduce the deficit?
Monetary policy is also not very effective in the current environment. In fact, it is all but impotent when the private sector is deleveraging, as the Americans have recently found out. And to go down the path of public spending as if there were no tomorrow – another policy tool the Americans seem to have fallen in love with – is not the way forward either, although it may ensure some modest growth in the present. We pay a very high price for that growth, though, as we mortgage the future of our children.
Too much debt
Too much debt is the problem in a nutshell as was amply demonstrated in a recent study conducted by the Bank for International Settlements. It is frightening how debt levels have accelerated over the past few decades and nowhere more so than in Europe. The numbers in chart 1 below represent total debt levels, i.e. the sum of sovereign, corporate and household debt, measured as a percentage of GDP. Some countries (e.g. Spain) continue to hide behind the fact that sovereign debt levels are manageable; however, as the Irish have learned the hard way, it is total debt that matters.
Austerity cannot fix this problem. The entire OECD area will suffocate in its own debt long before we can reap the benefits of such soberness. Neither can zero percent interest rates. End of story. The sooner our political leaders realise this, the better. Out-of-the-box thinking is thus required, something which most of our political leaders seem incapable of delivering.
Read the full report here: