Graph reveals political scandal in Norway
My friend Gregard Mikkelborg produces some amazing graphs. He sent me this one yesterday.
Take a close look at it and read my comments below if you want to understand its significance.
The short version of my comment is the following:
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The Norwegian pension fund squanders its capital and indirectly drives up price inflation in Norway. This is the opposite of what the politicians and economists told us that they wanted to achieve by establishing the fund. We were most likely gaslighted.
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For thousands of years, rulers used to save in gold
The reason was that gold is hard to dig out of the ground, so its inflation rate is low, less than 2% on average per year.
This means that gold has stored value better than any other assets over time.
When society’s productivity goes up, for instance due to population growth and innovation, this in fact causes gold to increase in value as time goes by.
Furthermore, gold doesn’t go bankrupt.
Companies, on the other hand, rarely persist very long, so investing in stocks always involves a great deal of risk.
Lending out savings to companies at an interest, or giving companies access to savings as equity, must result in a profit that compensates for the risk.
This is very hard to achieve in a competitive market, and it’s a whole lot of trust involved in this game.
For this reason, when kings and emperors invested instead of saving in gold, they preferred investing in companies that they at the same time gave a protected status, typically with exclusive rights to trade with the colonies.
The East Indian Company is a good example of this.
Jackpot!
In the 1960s huge oil and gas reserves were discovered on the Norwegian continental shelf.
When these enormously valuable resources much later started to pay off, Norwegian politicians didn't at all like the idea of saving in gold.
They wanted to take risk instead.
They wanted to turn a profit.
You see, our politicians despised gold.
That’s probably why they in 2004 let Norges Bank, which is our central bank, sell all of Norway's gold reserves.
Turning Norway into a gargantuan hedge fund
Our politicians decided to establish an investment fund owned by the state.
The fund is named “The Norwegian Government Pension Fund Global.”
The fund’s official objective is to ensure:
"responsible and long-term management of revenue from Norway’s oil and gas resources, so that this wealth benefits both current and future generations."
When oil and gas companies pay taxes to Norway, the revenue is slushed into the fund.
Today it has almost USD 1.5 T of investment capital at its disposal.
This makes it the largest Sovereign Wealth Fund in the world.
Gaslighting on steroids
Before the fund was established, the politicians and their economists communicated their reasoning to the Norwegian people.
They argued that allowing the fund to invest in Norway would cause "overheating" of our economy.
And they said that this "overheating" would result in high price inflation in Norway.
However, the effect of investing capital is that it causes productivity gains, provided that it is invested wisely.
Productivity gains make it cheaper to create products and services.
When it becomes cheaper to produce goods and services, prices for the end users go down.
By other words - investing the capital in Norway instead of abroad would have provided us with the invaluable gift of price deflation, not price inflation.
This wasn’t at all included in the analysis and deliberations that were fed to the Norwegian people.
It was an exercise in gaslighting.
And it made it easy for the politicians to decide that the fund should invest in foreign, publicly traded bonds and stocks.
The last few years it has also been allowed to make some investment in foreign real estate.
The effect of giving away capital
What our politicians effectively do, is that they supply multinational corporations and foreign governments with capital in the form of loans and equity.
This increases the productivity of foreign corporations and other nations.
One of the effects is that it makes foreign corporations able to outcompete Norwegian companies.
At the same time, higher productivity abroad gives foreigners the benefit of relatively lower prices.
Perverse incentives
Our politicians are allowed to spend the fund’s expected net returns.
This is called "the budgetary rule."
Right now, they expect that the fund shall turn a net return of 3%.
Therefore, the government reallocates 3% of the fund back to the public budget.
It spends the money on all kinds of crazy projects in Norway.
In recent years, this has become an important driver for ESG friendly investments, so-called sustainable investment.
This drives all kinds of spending on “green” and “climate change” initiatives.
The result is, of course, an immensely harmful level of rent seeking activity.
Scandals are layered upon scandals.
The latest example is the government’s subsidization of Freyr, a company that promised to turn Norway into a leading battery producing nation.
While the company hasn’t been able to produce a single battery so far, a good portion of the subsidies have worked their way into the board members’ pockets and made the owners rich.
What’s even worse is that the budgetary rule incentivizes politicians to allow the Norwegian krone (NOK) to weaken.
And surprise - surprise, the NOK has performed absurdly bad over the last years.
For instance, compared with 2008 you must today pay twice as much NOK for USD.
The rapid debasement means that Norway imports inflation from other countries.
This comes on top of the relative price increases that we get from reallocating capital from our own country to foreign corporations and other countries.
Was it worth it?
Was it still wise to take the capital out of Norway and let the fund invest it abroad?
The answer is a resounding NO.
Measured in USD, the fund has had an average gross return on the capital of 6.2 % per year since the fund’s inception in 1998.
In comparison, the gold price measured in USD has increased on average 7.7 % per year.
By other words, the fund’s average return on its capital per year by investing in bonds and stocks abroad is 24 % below what it would have been if our government had saved in gold, as rulers used to do in the past.
(7.7 / 6.2 = 1.24)
Conclusion
Our politicians have given us a “Quintuple whammy, as operating the fund :
1. Squanders the nation’s savings
2. Subsidizes multinational corporations
3. Drives up other nation’s competitiveness
4. Allows the value of our currency to drop like a stone
5. Causes price inflation in Norway
Many Norwegians no doubt trust politicians too much.
They believe it’s mainly foreign politicians that lie.
This is incorrect.
You see, Norwegian politicians are excellent liars.
And not only that.
As other politicians, they do the exact opposite of what they tell us that they will do, and at an enormously high cost to its citizens.
And they do it squarely for their own benefit.
Solution
In my opinion, there is only one solution to this problem.
We must take the fund and the income from oil and gas out of the hands of our politicians.
The revenue and the capital should instead be given to the people.
If we continue with the current system, the politicians will squander it all, shrink the private sector into something totally insignificant and pull it further down into misery.
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You may also want to check out the books I’ve made together with my partner, graphic designer wiz Mattis Storhaug on UNDOQO’s website.
Finally - a big brotherly hug goes to my favorite goldbug Gregard Mikkelborg for sending me this amazing graph.
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