Saturday, September 15, 2012

Is Norway Different?

Norway truly is in a different economic situation than most of the other developed countries. It is in no risk of defaulting on its debt, nor does it have any big, under-financed future liabilities in the form of pensions or healthcare liabilities. Its prosperity seems to be secured for decades to come. This is of course solely thanks to the oil under the seabed within Norwegian waters.

But does the (most likely) secured future make economic cycles, and so economic downturns, less likely or less severe? I don't find any reason to believe so. If we look at the reasons behind economic expansions, and at their extreme, economic bubbles, there is nothing suggesting that the laws of economic cycles would not apply to economies that have high starting level of wealth. Surely, the bottom of the cycle is relatively high, but so would be the top of the cycle. When looking at the current state of affairs in Norway, one could even argue that the conditions could hardly be better for irrational exuberance forming and leading to an economic bubble:

  • high level of confidence in a bright future, flirting with complacency
  • record low interest rates
  • overall easy access to credit, with Norway seen as one of the few safe havens
  • fairly long history of rapid house price appreciation with its wealth effect, sustained even in the current weak global environment ("It seems nothing can go wrong for us!")

These are all points that I will have a more closer look at in the coming posts, but at the moment I just note that one of the points is somewhat an outlier and worries me enormously: namely the record low interest rates.

I will conclude that Norway is different but that fact does not make it immune to the follies of human nature in the form of over-confidence, complacency or living beyond one's means - which applies to both poor and rich.

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