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I was brought to Stockholm to speak for Swedbank. They arranged for me to meet a wide variety of local people, as well as to have dinner with readers. I talked with a number of people who were in positions of authority during the Swedish credit and debt crisis of the early 1990s. And a crisis it was. The currency was under attack, as the fundamentals were negative. This was at the same time that Soros was attacking the British pound. Interest rates had been rising in Sweden, but the financial environment was being loosened. This meant that Swedish businesses and consumers could borrow in foreign currencies that had much lower interest rates, and borrow they did. The central bank made it very clear that they would protect the value of the currency, and everyone believed them. Remember, this is a relatively small country, and basically everyone knows someone who at least knows someone who was involved with the central bank. The central bank was adamant in its belief that it could protect the value of the currency, and it raised rates by 500% in order to do so.

Why such a fetish for a strong currency in a country that was driven by exports? Because their past experience had dictated that not defending the currency was the wrong thing to do. My guests went into detail about Swedish history (which I found fascinating), explaining the thought process at the time. Just as hyperinflation in the 1920s had scarred Weimar Republic Germany, leaving that nation with a visceral reaction to loose monetary policy, the history of Sweden had colored Swedish views as to appropriate monetary actions.

That seems to me the classic problem of generals always fighting the last war in their planning,” I said. “Precisely,” came back the quick answer. To even mention publicly that “maybe we should allow the currency to float or weaken” invited late-night phone calls from the leadership, raising the question of the individual’s future participation in polite circles.

Ultimately, of course, the market dictated that the currency could not be kept at artificially high rates in either Sweden or Great Britain. The Exchange Rate Mechanism broke down. The Swedish Krona was allowed to float and overnight dropped 21%. Which meant that the incomes produced in Sweden to pay the interest on foreign loans dropped 21% in relationship to interest-rate costs. Property was immediately less valuable in terms of the currency that had been borrowed to pay for it.

Unemployment soared as a recession hit. The government deficit rose overnight to 10%, as there were less tax revenue and higher unemployment costs. Government debt rose, and the bond market wanted higher interest rates, which of course made the situation worse.

“Let me guess. Most of the larger businesses and investors saw the crisis coming and protected themselves. The smaller people and businesses were hurt the most.” My hosts (who, even though younger than I, were at that time were already in responsible positions) had all lived and suffered through those times. And they all smiled and nodded yes. Well, they remembered, as they talked among themselves, that there was one large company that believed the central bank up until the end, and it went bankrupt.

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