A. I just discovered that the Centraal Bureau voor de Statistiek (CBS)of the Netherlands has constructed a monthly ‘Coincident Cyclical Indicator’ for the interbellum (1922-1939). Interesting, as the Netherlands were the last country to leave the gold standard. For this very reason, it should have worked like magic. Did it? Ehm, yes (graph) . This is not evidence in favour of or against the gold standard. But it is strong evidence of the incredible power of governments to restrain demand by ill-conceived ‘sound money’ policies.
Graph 1. A coincident cyclical indicator for the Netherlands.
B. Did the Dutch learn anything from this? Yes, they did – but then they forgot again. And we’re therefore making a comparable mistake all over again. We’re drowning in money – but we do not want to invest it. According to the same CBS, at the moment
I. The surplus of the current account of the Netherlands is, not counting tiny Luxembourg, as a % of GDP the highest of the entire Eurozone (look here, graph 10.2) and is expected to reach a whopping 9% quite soon.
II. But according to De Nederlandsche Bank (DNB, the central bank) and the government low aggregate domestic spending has to be solved by increasing exports. Do we really want a 15% of GDP surplus?
III. At the same time, in 2012 financial wealth of Dutch households increased with about 13%, or 127 billions, to 1.1 trillion Euro in 2012. By far the larger part of this amount of money (roughly two times GDP) consists of pension savings.
IV. Real pensions are cut, however, as DNB is fighting tooth and claw to disable pension funds to increase pensions in line with price increases, among other ways by forcing them to use artificial low interest rates to calculate future reserves (remember: Dutch pension reserves are on a per capita basis the highest of the world). The total decrease of real pensions is as far as I know 6,2%. And counting.
V. This contributed, together with the decline of real wages of about 1% and a decline of employment, to a decline of real disposable income of households with 3,2% in 2012, the fifth consecutive years with a decline of real income of households. As the number of households still increases, income per households decreases even faster that total income.
VI. This of course led to a decline of consumption, of over 1% in 2012. Latest data: in the first quarter of 2013 car sales declined with 30%.
VII.Not surprisingly, the rate of increase of unemployment in the Netherlands is, after Cyprus, the second fastest of the Eurozone (last three months).
VIII. For a long time, pensions funds invested the money in all kinds of existing financial assets and not in the real economy which was fine as households increased mortgage lending with about 30 to 40 billion a year, which caused the flow of trade to continue.
IX. At this time, however, net mortgage lending is about zero which, as the pension funds, afraid of DNB, still do not like to invest in the real economy means that the flow of trade is decreasing.
X. The housing market particularly hard hit. Real prices (including sales tax) are down with about 25%, but the amount of sales is down to which means that turnover has fallen with over fifty percent. Which means that ‘liquidity’ of houses, already low, has plunged. Many houses are hardly financial assets at all, anymore.
XI. We can easily afford a 3% raise in wages for three consecutive years (wage increases in the Netherlands have one of the lowest of the entire Eurozone during the last two years). This would solve such a lot of problems, including the amount of doubtful loans of Dutch banks which is rapidly increasing. But we don’t.
The point: just like sticking to the gold standard until the bitter end this is not necessary at all. There is no whopping deficit on the current account. Pensions are funded. Companies can pay higher wages. Interest rates on government debt are at a historical low. Companies have (on average) loads of cash. The pension funds have about two times GDP of reserves – but just do not want to invest it. A lack of investment which will burden future generations with inadequate levels of physical and human capital.