Earlier this year, Riksbank Deputy Governor Per Jansson expressed his displeasure with comments made in April of last year by everyone’s favorite Nobel laureate Paul Krugman. The dispute revolves around Sweden’s decision in 2010 to raise rates, a move Krugman says turned the country into a Japan-style deflationary deathtrap. To wit, from Krugman’s blog:

"In 2010 Sweden’s economy was doing much better than those of most other advanced countries. But unemployment was still high, and inflation was low. Nonetheless, the Riksbank — Sweden’s equivalent of the Federal Reserve — decided to start raising interest rates." "There was some dissent within the Riksbank over this decision. Lars Svensson, a deputy governor at the time — and a former Princeton colleague of mine — vociferously opposed the rate hikes. Mr. Svensson, one of the world’s leading experts on Japanese-style deflationary traps, warned that raising interest rates in a still-depressed economy put Sweden at risk of a similar outcome. But he found himself isolated, and left the Riksbank in 2013." "Sure enough, Swedish unemployment stopped falling soon after the rate hikes began. Deflation took a little longer, but it eventually arrived. The rock star of the recovery has turned itself into Japan."

Krugman went on to accuse the Riksbank of being a bunch of job-hating heretics who don’t believe that printing mountains of fiat currency solves economic problems and who are motivated by an overwhelming desire to perpetuate global inequality by enriching creditors at the expense of impoverished debtors. They are, Krugman said, sadomonetarists.

For his part, Per Jansson wasn’t particularly pleased with Krugman’s assessment, suggesting that he “write fewer articles and have more of a look at the data and then come back again.”

“I don’t know why he does that; it’s a mystery and it doesn’t make him come across as a guy who is very well informed,” Jansson added.

Why did Sweden start raising rates in 2010? Well, as we noted in March, “the bank’s actions were not indicative of an institution suffering from some psychotic desire to drive up unemployment and inflict pain upon the masses, they were in fact based on ‘normal things’ like inflation and a housing bubble and the fact that the rate of household credit expansion was running some 50% ahead of overall economic growth.”

In any event, Krugman needn’t have been concerned, because as you can see from the following, and as discussed here on Sunday evening, Sweden not only stopped hiking, but in fact plunged headlong into NIRPdom.

So one would think, if Krugman is correct, that cutting rates by 235 bps since 2011 all the way down to -0.35% would have things humming along nicely in terms of “healthy” inflation. Only, that’s not what’s happened. This is:

Meanwhile, the housing bubble and household credit expansion issues the Riksbank was so concerned about have predictably gotten far worse thanks to record low rates. To wit, from Bloomberg:

The worsening housing shortage -- exacerbated by record immigration -- and surging house prices reveal that deeper financial instability risks lie ahead. The combination of already too-high household debt and negative rates "may ultimately be very costly for the economy,'" the central bank said last week in its monetary policy report.

And as we saw earlier this month when the Riksbank remained on hold ahead of Mario Draghi, keeping a lid on krona strength (i.e. fighting to ensure that inflation doesn't crater) may turn out to be increasingly difficult going forward with the ECB widely expected to expand PSPP, meaning that ironically, once everyone goes full Keynes, it makes it ever more difficult for anyone to realize the benefits because one country's easing simply negates another's, necessitating still more easing by the first country, and around we go. Case in point, from Riksbank Governor Stefan Ingves: "...any rapid strengthening of krona would pose risk to inflation rise [so] Riksbank won’t be passive if ECB makes big changes in its policy."

Worse still, not only is Sweden bumping up against diminishing returns in its easing efforts, but as we discussed at length in July, for a time things had actually begun to move in the wrong direction, as investors fretted about the lack of market depth created by the Riksbank's QE program. “The financial conditions -- the currency and the bond yields -- are moving in the wrong direction,” Roger Josefsson, chief economist at Danske Bank A/S told Bloomberg. So in other words, even as risks associated with NIRP (e.g. excessive debt buildup and a worsening housing bubble) have materalized, some of expected benefits (e.g. rising inflation) have not, which certainly begs the question if the risk/reward profile associated with NIRP and expanded QE is still attractive.

Of course it's not all bad. Unemployment has fallen dramatically and GDP data from previous quarters was revised up in what Goldman called a "non-neglible way" on Friday.

But the question one has to ask here is this: what, ultimately, has ZIRP and then NIRP and QE actually done for Sweden? The effect on inflation has clearly been muted (the Riksbank's protestations aside) and the effect on the housing market has been to inflate what looks like a rather formidable bubble. Meanwhile, the global currency wars mean the upward pressure on the krona is likely to persist no matter what the Riksbank does. If we assume that GDP and unemployment would have, at least to some extent, improved on their own, one could quite plausibly make the argument that all Sweden has done with monetary policy since 2010 is embed an enormous amount of risk into the economy without getting much back.

Of course when that rather inconvenient suggestion is made, central bankers in the new normal almost always blame lawmakers or regulators or someone other than themselves and Sweden is apparently no different. Here, for instance, is what the bank had to say earlier this month:

"Low interest rates contribute to the trends of rising house prices and increasing indebtedness in the Swedish household sector continuing. Current debt levels already pose a substantial risk to the Swedish economy. It is thus essential that the Riksdag (the Swedish parliament), the Government and other authorities implement measures to reduce this risk. If no measures are taken, this, in combination with the low level of interest rates, will further increase the risks, which may ultimately be very costly for the economy."

As for Ingves, well, he's not optimistic (via FT):

Sweden’s central bank governor has warned that new crisis-busting tools policymakers are embracing around the world to counter asset bubbles and other financial dangers are susceptible to political inaction and turf wars. Stefan Ingves, governor of the Riksbank, said so-called macroprudential policies — such as capital requirements and leverage limits — had so far failed in Sweden where house prices and personal debt levels have soared to record levels. “Macroprudential, particularly if markets are going up, up, up is about saying ‘no’. Apparently that’s hard to do,” Mr Ingves said.

One could easily say the same thing about the Riksbank although, to be fair, the central bank would also be in control of macroprudential policy making if it had its way, but that doesn't exonerate NIRP. That is, we might replace one word from the quote above and get this: "sound money, particularly if markets are going up, up, up is about saying 'no' but apparently that's hard for central bankers to do." At least one banker in Stockholm agrees:

“To have such a low interest rate at the same time as Sweden has rather good economic growth and rapid increases in house prices — it seems crazy,” said one senior banker.

But Ingves has his story and he's sticking to it: “We deal with inflation, we keep an eye on the exchange rate, we do our best to reach our inflation target. But that means that somebody else has to deal with the problem we have in our housing market."

On that note, we'll close with the following from Lars Jonung, professor emeritus at Lund University, who told newspaper Dagens Nyheter the following:

“[The Riksbank] have lowered rates too much, absolutely. It creates meaningful financial risks and increases household debt. The danger is that it bursts just as it did in the US and Iceland.”

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Bonus: As Krugman said last week in the Japanese context, countries "need to reach a point where everyone believes that they have pulled out of deflation. And then if that can be believed, then they may be able to stay out of trouble thereafter".

Do you "believe" in "hockeynesian" success stories? The Riksbank apparently does...