All hope abandon, ye who enter here.
Dante Alighieri, Inferno – Canto III

Preface

I had this article ready, 90% of it at least, two weeks ago, but I waited to publish it after this melancholic electoral theatre was over.

I can’t understand all the hue for this meaningless political circus. I don’t know if you are aware of the fact that, in the current state of things (Sweden belonging to EU), it doesn’t really matter what you voted, your official government is not in Stockholm but in Brussels and you haven’t the slightest control over it.
The Swedish officious government (the one in Stockholm) executes what the EU (the official government) orders them to do, no questions.
The last blink of hope I had for the Swedish population has been definitely wiped out by the results of the vote. It is sadly funny that they managed to vote again the same political entities which have been destroying their private wealth for a decade (at least).

It is like a woman asking to marry the man who abducted and mistreated her for years.

How could this happen?
Simple and cruel political theory (read S. P. Huntington, American Politics: The Promise of Disharmony’, 1983). Modern political systems are based on the population ignorance: give the people something else to think and keep them out of important matters, while the financial and industrial lobbies make their policies through the lamb-like politicians.

Why the Swedish system is falling apart.

The first answer that I could think of (it is not just me thinking of that but I have no problem expressing it), immigrants. They are one variable contributing to the problem and I would lie if I say otherwise. For a weakened economic and social system (like the Swedish one) they are and will be a problem (read to the end before drawing conclusions).

Over the last 5 years about 600,000 immigrants landed on the Swedish land, in a country with a population of 10 million inhabitants this is a significant number. In proportion is like if Italy would have received 3.6 million during the same period of time.

What happened to those immigrants?
The Swedish government managed somehow to find them a place in the society, some got a job in the industry sector, some other in health care and social assistance services. According to the official statistics, the Swedish economy seemed to have benefited from this supplementary labour force, GDP has grown at 3.3% against the average of the EU of less than 2%.

Very well, right? Not at all since the reality of the Swedish economy is a different story.

In the least populated areas of the country (90% of the territory) more and more hospitals and local clinics are being closed down. Elders and women suffer the most from these policies, to the point that public authorities are giving advice on how to give birth inside a car since the nearest nursery is probably 100 km away. Moreover, more and more Swedish mothers cannot get assistance from a nursery and are sent somewhere else because all the remaining facilities are stuffed with people, including immigrants.

In the last 5 five years, right in coincidence with the mass immigration, the waiting lists in the health care sector have literally exploded. Today the number of Swedish people that have to wait for more than 3 months to receive medical assistance is three times higher than it was 5 years ago.

The so called Swedish system, a welfare system assisting a citizen through its entire life, is falling apart, a mere shadow of what it was some 30 years ago.

If this Swedish system worked properly the unemployment rate would be close to 0 while today is at 7%, two times higher than the nation ruled by that very bad man named Trump, 3.9% is the unemployment in US today.

Swedish people have serious housing problems, it is very difficult to find an apartment unless you are prepared to pay ridiculous high prices. This is only in part caused by the immigrants who have occupied many apartments leaving too few for the local population.

The real causes of the housing crisis lay somewhere else: from the central bank keeping the cost of money close to 0, hence incentivising real estate deals at increasingly higher prices, to the central government non-existent social housing policy and criminal fiscal policy.

Why is Sweden collapsing?

The immigration is a relative minor problem and it wouldn’t be a problem at all if not for the existence of THE real cause of the collapse: the central government budget policies.

Economic policy, that’s the real tragedy that is slowly turning Sweden into poverty.

For the last five years the Swedish government has been running an economic policy aimed to reduce or eliminate the government deficit. This is mainly achieved in two ways: a tax increase and/or a spending cut.
Tax raise and spending cut both provide a positive inflow to the government balance hence the deficit decreases.

Just few examples to understand what I am referring to.
A tax increase is straightforward to understand: higher income taxes, property taxes, higher VAT, higher costs of public services, etc…
A spending reduction is more indirect but produces the same effects: cut on social assistance services, lower retirement wages, and lower investment in public infrastructure, closing of medical clinics, and so on.

Before going on discussing the reasons why such economic policy is wrong and potentially dangerous we need to make clear two important points:

1. The government deficit corresponds to the private sector financial surplus.
2. Sweden is a sovereign country with a sovereign currency.

What do these statements mean in practice? A lot, everything.

The government deficit is not the population debt (as they want us to believe) but it is instead its financial wealth.
The Swedish crown is a sovereign currency, more than that, it is the best currency you can get, a fiat one.

Now, to explain why it is like this I need to go into some basic of macroeconomics, just don’t panic I will explain in the easiest possible way.
Remember that the basics of macroeconomics are easier than you think, they are just treated overly difficultly by the main stream so that people can’t understand them.

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Let’s start with some terms and definitions.

Deficit: when spending exceeds income.
Surplus: the contrary of deficit, income is greater than spending.

Example:
If the government has a tax revenue of 90 and a spending of 100, it is running a deficit of 10;
If a household earns 100 a month and spends 80, it is having a surplus of 20.

We can identify 3 actors or sectors forming the economic system: public sector, private sector and foreign sector.
The public sector includes the central government and all the other local governmental entities.
The private sector includes households and companies.
Any public and private entity outside the domestic space forms the foreign sector. I will leave the foreign sector out for the time being since it is not relevant for the coming explanations, but it will come in handy later.

The public and private sector form the domestic economic system or domestic sector.

Example: We are reasoning around Sweden.
The Swedish government is the public sector while your family is (part of) the private sector. A company in Germany is the foreign sector.

Public plus private sector constitute the domestic Swedish sector. And if you add to the domestic Swedish sector the rest of the world you get the entire planet Earth.

The figure above gives you an idea of the 3 sectors. See the grey arrows going between the public and private sector? Those represent financial wealth, money.

The arrow going up (from private to public) represents money that is transferred from your family to the government, when you pay taxes for instance.
The arrow going down (from public to private) represents money that is transferred from the government to your family, when you receive a tax refund for instance.

Other examples of outflows, i.e. money going from private to public sector:
Property tax, VAT paid every time you buy something, tuition fees and fines.

Other examples of inflows, i.e. money going from public to private sector:
Retirement wage, unemployment subsidy, parental leave contribution, any tax deduction.

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Now we need to introduce money.

Where is money created? We have seen that money is transferred between private and public sector and vice-versa, but who creates it?
There is only ONE actor that can create money and it is the central government, thus the public sector.

Hold on a second, you are thinking about bank money right?
Money created by the Swedish government is a fiat type money (like US dollar or UK pound).
The characteristic fiat is extremely important and it implies that the Swedish crown is a floating non-convertible currency. This means that you cannot exchange your crowns for other currencies or commodities (gold) at a fixed exchange rate. The Central Bank lets the exchange rate floats.
I know what you are thinking and the answer is NO, there is no gold ingots backing the Swedish crown.
Danish crown for instance, is not fiat since it is pegged to the Euro. The states included in the Euro zone are not fiat-state since they cannot issue the Euros.

Take another look at the graph above and imagine to be at day zero of your economic system. Which arrow appears first?
The one going up? Impossible, the private sector cannot send any money to the government since it hasn’t received any yet (well, you could try printing money at home but I am not sure it is fully legal).
The one going down? Of course, the government is the monopolist of money and the only actor able to create it.

A legitimate doubt may have arisen in your mind: banks can create money too.
Banks create money things, IOU convertible to government money. Banks money lay one step below state money.

Bank money are private financial IOUs, money things, and contrary to government’s IOUs, they are convertible to money.
So, it is not correct to say that commercial banks create money, they create money things (bank money, one step below money).

Check this link for a full explanation of the money creation process: Money and Money Things

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We can now introduce government spending and economic policies.

What is the difference between public and private sector spending?

The private sector spends out of income. If your family earns 100 per month, you will ponder your expenses based on that amount; 100 is your limit, if you wish to spend more you will need to borrow money and generate an indebtedness.
The public sector is in a complete different situation, remember, it is the sole manufacturer of money. It doesn’t need any income when it wants to spend, it simply creates money out of thin air. In practice is the government spending process that creates money.

An important causal relation.
Government spending comes always before taxation. The government spending creates money in the private sector and then afterwards it can eventually claim some of this money back in tax payment.
It means that taxes cannot finance government spending, it is logically and technically impossible.

How can you pay a 10 crown tax if you have never received any Swedish crown.

I present 3 examples of economic policies, these are the only possible scenarios that can occur when excluding the foreign sector.
I separate each scenario in 2 stages, the first one when the government spending occurs and the second one when taxation occurs (remember that taxation precedes spending).

We start from the optimal policy, the government deficit.

Stage 1:

1. government spends money into the system
2. the government goes into deficit
3. the private sector gets the money and goes in surplus.

Example: the government buys a new school bus for 100 kr from a private company. The public balance is short 100 kr (deficit) while the private company increases its wealth by 100 kr (surplus).

Stage 2:

1. government claims only part of the money it had spent
2. the government remains in deficit
3. the private sector stays in surplus
4. the private sector accumulates net wealth (net saving)

Example continues: end of the year the government imposes an income tax to the private sector of 20 kr. The company pays the tax and it is left with 80 kr (surplus) while the government remains in deficit (80 kr).

The public deficit allows the company to accumulate a net wealth of 80 kr.

The government takes the wrong direction and decides to balance its budget, this is the case of a bad policy.

Stage 1 (same as before):

1. government spends money into the system
2. the government goes into deficit
3. the private sector gets the money and goes in surplus.

Stage 2:

1. government claims all the money it had spent
2. the government balances its budget
3. the private sector gets nothing

Example continues: end of the year the government imposes an income tax to the private sector of 100 kr, i.e. the same amount it had previously spent (it wants to budget after all). The company pays the tax and it is left with 0 kr while the government obtains the balanced budget.

The public budget policy left the private sector with no wealth left so no accumulation occurs. Basically the private company worked for free.

Things gets worst, the government loses its mind, probably under the influence of the EU, and decides to go for the worst possible scenario a balance surplus.

Stage 1 (same as before):

1. government spends money into the system
2. the government goes into deficit
3. the private sector gets the money and goes in surplus.

Stage 2:

1. government claims more money than it had spent
2. the government goes into surplus
3. the private sector needs to either borrow or dissave in order to pay taxes
4. the private sector goes into deficit
5. the private sector accumulates debt (wealth destruction)

Example continues: end of the year the government imposes an income tax to the private sector of 120 kr, i.e. more than it had previously spent (it wants to achieve a surplus). The company must pay the tax of 120 kr but it only received 100 kr, so it uses the 100 it already has and borrows the remaining 20.

The public budget policy is in surplus while the private sector is in deficit. Basically the private company has to pay for the work it has done (this is slavery).

Check this link for a full explanation of the sovereign government spending and taxation: Sovereign Government and Fiscal Policy

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The Swedish government is currently running (it has been doing it for long time) a budget/surplus policy, and believe it or not, it is destroying private sector wealth and impoverishing the population.

The clearest result we can observe of these policies is the growing indebtedness level of private companies and households. Is this surprising? Not at all, with such high taxes like we have in Sweden, you are forced to go into debt in order to maintain a certain level of consumption, and consumption has to stay up to if you don’t want a real crisis to explode.

Social insecurity is another serious effect we are observing now, think about how the health care system is functioning today compared to 10 years ago.

The brief macro introduction is finished, in the rest of the article I will go into more details and explain why the budget/surplus is so harmful for the domestic economy.

Before you continue, make sure you have assimilated the following concepts:

1. The government is the only entity that can create money
2. The government does not needs taxes to finance its spending
3. Public deficit is the private sector net wealth
4. Public surplus is destructive for the domestic economy

I dealt with the macroeconomics theory at a very and basic level, if you wish to deepen your knowledge and maybe clarify any concerns, you can refer to the following page: Heterodox Macroeconomics

Here you can find more detailed explanations about everything I introduced above: the economic system, government spending, taxation and money creation.

Why is the Swedish economic policy affecting the economic system so badly?

The macro scenarios explained above should give you a first idea of why, as long as the government runs a tight fiscal policy, households and firms will keep accumulating debt.

An increasing indebtedness level in the private sector is a very destabilising factor. The public sector, being the sole issuer of money, has no budget constraints and can run a persistent deficit without encountering any solvency issues (take a look at USA or Japan).

The private sector is in a completely different position though, an increasing debt ratio will eventually grow unsustainable to the point that households and firms will start to either cut spending/investment or default on their obligations (remember the sub-prime crisis of 2008).

At this point the crisis from real can get financial, when financial institutions have to deal with an increasing number of non-performing loans, and in the worst case, credit losses (basically the problem that is strangling southern Europe).

This last paragraph may feel heavy to digest, let me try to clarify with an example.

Let’s consider a micro system composed of: a household, a company, a bank and the government.

Scenario 1:

the government is running a budget deficit, by identity the private sector is running a surplus (see above).

• The household can consume and save part of the money for future needs.
• Since the household consumption is stable the profitability of the company is also stable.
• Neither the household nor the company have financial problems hence the non-performing loan of the bank is very low (zero in this case).

Scenario 2:

the government decides to surplus its balance, by identity the private sector goes in deficit.

• The household is not able any more to maintain the previous level of consumption and saving, it decides to cut spending (consume less).
• Since the household consumption decreases the revenues of the company also decreases, profitability is compromised.
• The company have now financial problems and there is a risk of defaulting on its obligation putting the bank in a stress condition.

What is preventing the Swedish economy to collapse? Why are we still afloat?

The foreign sector.

Export is a survival element for countries whose government runs tight fiscal policy (look at the Euro zone, Germany is a good example).

We have seen that when the government balances its budget (or goes plus) the private sector gets nothing (or minus). The money inflow coming from the export supplies the private sector with the extra financial wealth missing from the government.

The export works as a support to the private sector balance, preventing households and companies from getting into financial stress.

Sweden is a sad example of this, the tight fiscal policy of the last years has drained a lot of wealth from the private sector. Without the inflows coming from the export the private sector would have collapsed (look at the graph below – Sweden sectoral balances).

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The figure below shows what is probably the most important graph you will ever encounter in your macroeconomics experience.

It is a graphical representation of the three sectors system that I have introduced above with a new entry, the foreign sector.

I produced the graphs with the data available from the Swedish central statistics bureau (Statistiska Central Bureau).

This graph is interpreted in the following way:

Each coloured bar represents the balance of a sector as percentage of GDP; the higher the bar the higher is the balance.

The red bar is the public balance, if it is below zero we have a deficit.

The green bar is the private balance, if it is above zero we have a surplus or a positive financial wealth.

The blue bar is the foreign sector balance, you need to see it from a foreign country perspective. If it is below 0 the rest of the world is in deficit against Sweden thus Swedish export is greater than import.

You can see that this graph has a peculiar characteristic, it is a mirror, and it shouldn’t surprise you since we know that the government deficit equals the private sector net wealth plus/minus the foreign sector (here you have the empirical proof of what I introduced above).

If you sum the bars for each year you will notice that the sum is exactly 0.

In Sweden the private sector economy has been regularly attacked over the last decade. You can clearly see that every time the government deficit decreases the private sector loses.

Check the period from 1996 till 2000 for instance, red bars get smaller and so do the green ones.

From 1996 until today the Swedish governments are applying tight fiscal policies which are producing significant negative effects on the private sector. Not surprisingly the debt-to-income ratio of Swedish households is steady increasing from 1996.

The graph below shows the variation of the debt-to-income (black line) in relation to the government deficit (red line). Interesting to notice how well, in the most recent years, the debt variation follows the government deficit, decreasing deficit and increasing debt ratio (check the two lines from 2011 until today).

Another interesting graph is presented below, the relation between disposable income and government balance. Here the correlation of the two series is even more evident the the previous graph and it enforces the important relation between government and private sector balance. We can clearly observe how disposable income reacts in opposite direction to changes in the government balance: a decrease in the government deficit generates a decrease in the private sector disposable income.

The Swedish foreign sector is constantly in deficit hence export exceeds import (check the blue bars). Without the wealth inflow coming from the rest of the world Swedish households and firms would be in serious economic distress.

Let me show how the export is so crucial today for Sweden (refer to the graph above,  Sweden Sectoral Balances). In 2014 the government balance was in deficit and private sector in significant surplus (look at the green bar). In 2015 the government is more or less in balance before going surplus in 2016 and 2017. The private sector suffers, look again at the green bars, they get smaller and smaller. Without the foreign sector deficit, guess who will be in deep financial problems: households and firms.

Another example on how export is keeping us alive.

Check the periods 2003-2004, the government goes from deficit in 2003 to surplus in 2004. We should legitimately expect the private balance to shrink but instead it increases. How is that possible? The export, the foreign deficit increases from 2003 to 2004 compensating the private sector of the wealth loss generated from the public surplus.

This is unfortunately not the case in the recent years, the declining export sector is not able to provide the extra financial inflow to the private sector.

The graph proves another important as well as worrisome evidence of the last 3 years, the Swedish government is maintaining a tight fiscal policy while the export sector is shrinking.

This is a straight way to destroy a country, tighten the fiscal policy and leave the private sector net wealth in the hand of the rest of the world fiscal policy.

We can further analyse the Swedish sectoral balances by dividing the private domestic sector into: financial, corporate, household. This may help to understand which sub-sector is performing better or worse, at aggregate level.

In the plot below the domestic private sector has been sliced into financial (yellow), non-financial firms (dark green) and household (light green). It is interesting to notice how households are still in surplus while non-financial firms are in deficit.

This is the situation of today’s Swedish economy, fragile and potentially at risk of collapsing: high private indebtedness, decreasing disposable income, stressed financial sector and (worst of all) tight fiscal policy.

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What factors can actually trigger the collapse?

1. A persistent surplus budget from the central government, for the all the reasons I have explained above.
2. Another deeper factor, often overseen, is the extra pressure put on the financial system. The financial regulation in place today creates excessive negative pressures on banks profitability, this in turn affects negatively the private non-financial sector and indirectly the banks’ balance sheet. I can say that financial regulation today is creating more instability than stability (this is what I call the conservatism trap). A very fragile financial environment like the one we live today (this is not only the case for Sweden but for all Europe) would require financial regulators to have the appropriate knowledge of the critical linkage between financial and real economy, and this is definitely not the case for Sweden.
3. A significant decrease of the export sector, not so unlikely given the rotten economy of the rest of Europe (Sweden’s biggest export market).

Do I see any hope for the future of this country?

Honestly, almost none, because of the same 3 factors listed above.

1. Change of the government economic policies: this is the root of the problem but people seem to entirely ignore this, the results of the latest elections just prove it. Large majority of the population seems completely unaware of this situation and, even worst, they believe the current economic policy is right. So for instance they still believe that the government needs taxes to finance its spending or that if it lower taxes it will be forced to cut spending and they keep abusing the absurd term “tax money”.
2. Implement a financial regulation aim to guarantee stability for both the financial and foremost the real sector. Unfortunately we are oppressed by the Swedish FSA on one side and by the European Banking Authority on the other, hence no hope there.
3. Keep export at a steady level: it can work but it is not beneficial at all for the domestic economy for two reasons; first, export is essentially a real cost for the economy and not a benefit (I said in real terms not nominal); second, you constrain the domestic economy to the fiscal policy of foreign countries, hence something completely out of your control.

Pessimistic conclusion

Do consider 2, 3 or 4 times before having children, think in what country and society they will be growing up, but above all be prepared to a scenario where you don’t have enough financial resources for sustaining your family.
If you already have children you may consider sending them abroad as soon as they are mature enough (outside EU please).
Otherwise sit down and wait for something to happen, as long as there is coffee and Netflix you should do just fine.