Exciting news for those who read Danish or Simplified Chinese! 😊
The Danish edition of my book was released this week, and this blog post is all about it. Also this, I learned that the book will be translated into Simplified Chinese for the Mainland China market!
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Here’s the abstract of today’s analysis:
My new book – the Danish version of How Low Interest Rates Change the World – is out (link)! Compared with the international edition that was released in spring, it includes an entirely new section (four chapters) on how low interest rates have affected Denmark, and how this compares with the impact of low global interest rates on the world economy. Many developments are similar, but there are also important differences. One of them, in fact, relates to The Ugly Duckling by H. C. Andersen – and it’s a story that other countries could learn from.
The international version of How Low Interest Rates Change the World, published earlier this year, is a fact-based book filled with figures and tables that underpin its arguments (link). It documents how four decades of falling global interest rates – from 1980 to 2020 – made the world more indebted, more expensive in terms of housing and stocks, more unequal, and more prone to financial risk-taking. It also explains why global interest rates fell, and what the future may hold.
Being Danish, I thought it would be interesting to see how one particular country – Denmark – has been influenced by this long decline in interest rates. What are the similarities and differences compared with global developments?
I contacted a Danish publisher, who fortunately was keen to release a Danish edition – for which I am grateful. The book is out now (link).
Those of you familiar with How Low Interest Rates Change the World will know that it consists of four parts: Part I: Falling rates, Part II, Consequences of falling and low interest rates, Part III: What caused the four-decade fall in interest rates, and Part IV: What does the future hold?
To this Danish edition, I have added four new related chapters:
- Falling interest rates in Denmark.
- Consequences of low interest rates in Denmark?
- Why did Danish interest rates fall?
- What might the future hold for Danish interest rates?
As always with projects like this, it took longer and required more work than I initially imagined. But it has been an interesting and rewarding process, and I’ve learned a great deal. I hope those of you who read Danish will find it engaging as well. For readers who don’t, and for Danish readers as well, here is a brief overview of some of the main points.
Denmark: A fully integrated small open economy
Denmark is a small open economy, fully integrated into global capital markets. This means that, overall, many of the global trends also apply to Denmark.
As in global markets, Danish interest rates fell steadily from 1980 to 2020, reaching historically low levels before the pandemic. The key structural factors behind this decline – longer life expectancy, slower population growth, and lower economic growth – also apply to Denmark.
Figure 1 shows the development in yields on global government bonds (an average across 17 advanced economies) alongside the yield on Danish government bonds from 1980 to 2023.
Figure 1. Yields on long-term government bonds, 1980–2023. Average across 17 advanced economies (global yield) and Danish yields. Source: FRED of St. Louis Fed and J.Rangvid.
As you can see, Danish yields have largely followed global yields throughout this period. Like elsewhere, the decline in nominal Danish yields reflects both lower real yields and falling inflation.
With rates dropping from around 20% in 1980 to negative levels in 2020, households and firms took advantage by borrowing more. Household and corporate debt increased, house prices rose, inequality widened, and financial risk-taking intensified – all trends familiar from other countries.
As some of you may recall, I chaired the Danish government’s Financial Crisis Committee after the global financial crisis. One of our conclusions was that the pre-crisis housing bubble in Denmark was driven by falling interest rates, similar to how falling interest rates in other countries drove their housing bubbles, highlighting how lower rates can fuel risk-taking.
Unique Danish developments
While many of these patterns mirror international developments, Denmark also stands out in several ways – one of which is particularly interesting for an international audience.
Today, Denmark is seen as a safe haven on global debt markets. Public debt is low, credit ratings are high, and interest rates are lower than in many other countries. This is visible in Figure 1, where Danish yields have been below global averages since the global financial crisis of 2008. The 10-year Danish yield was even negative before the pandemic – a historic and rather surreal situation. Investors were, in effect, paying the Danish government for the privilege of lending it money.
However, it was not always so. In the 1970s, Denmark’s situation was closer to that of the Greek debt drama a decade ago.
This turnaround is remarkable – a story of transformation from financial pariah to market darling. Symbolically, it resembles Andersen’s The Ugly Duckling: something that began as “ugly” but became something beautiful – though not without hardship along the way.
The Ugly Duckling
Look again at Figure 1. I mentioned that Danish interest rates were even lower than global yields just before the pandemic. Yet, on the left-hand side of the figure, you can see that in 1980, Danish interest rates were considerably higher than already elevated global yields.
While global yields peaked around 14% in the early 1980s, Danish yields exceeded 20%. So, although global rates fell dramatically from 1980 to 2020, the decline in Danish rates was even steeper. Denmark moved from paying some of the highest borrowing costs among advanced economies to effectively being paid to borrow – as yields turned negative.
How did such a transformation occur?
A key factor was Denmark’s journey with public debt. Figure 2 compares public debt-to-GDP ratios across advanced economies with that of Denmark.
Figure 2. Public debt in relation to GDP, 1950–2022. Average across 17 advanced economies (global) and in Denmark. Source: IMF Global Debt Database, Jordà-Schularick-Taylor Macrohistory Database, and J.Rangvid.
During the 1950s and 1960s, Denmark followed the international trend of reducing debt. But after the 1970s, the picture changed dramatically.
In the 1970s, Denmark accumulated a vast amount of public debt – comparable, in relative terms, to Greece’s debt surge in the late 2000s. In the mid-1970s, Danish public debt was close to zero. By 1983, it had soared to 70% of GDP – an increase of seventy percentage points. In Greece, public debt was around 100% of GDP in 2007. In 2011, it was at 170%, i.e., also an increase of seventy percentage points.
The then Danish finance minister captured the situation memorably: “Some make it sound as if we’re driving on the edge of the cliff. We’re not, but we’re heading toward it — and we can see it.” The situation was indeed unsustainable.
A new government took office in 1982 with a clear goal of stabilising the economy. It fixed the exchange rate, pegging the krone to the German mark to end the cycle of frequent devaluations. It also introduced major economic reforms, including the so-called Potato Cure (Kartoffelkuren) and a tax reform designed to discourage borrowing and encourage saving. Compulsory pension contributions were also introduced – another stabilising factor, as I discuss in a recent analysis (link).
The impact is visible in Figure 2. Danish public debt has declined steadily since the early 1990s. Today, Denmark enjoys one of the lowest public debt levels in the developed world – and correspondingly low interest rates. As The Economist recently noted, Denmark is part of “four blocs stand out for their relative probity (link).” But it was not always so.
Lessons
The main lesson is that a country can reduce its debt without resorting to sovereign default or high inflation. Sensible, credible reforms can achieve both debt reduction and economic stability. Denmark’s experience demonstrates this vividly.
Today, Denmark is a wealthy country that has managed to lower its public debt while becoming more prosperous. Back in the 1980s, economists wrote academic papers about such successful stabilisations (link).
The book
The book is written in a clear, accessible style, supported by data, figures, and tables – a fact-based book, making it suitable for a broad audience.
I am delighted that so many people have found the book both interesting and relevant – thank you all of you who have commented on the book.
Major Danish newspapers have covered its release, with several placing it on their front pages (link, link, link). I also had the opportunity to discuss the topic on national television (see after eight minutes here: link).
Conclusion
We often celebrate low rates for making borrowing cheaper. But my book explores the other side of the story: low rates fuel debt accumulation and may even “change the world” if interest rates fall significantly and for prolonged periods. People borrow more – often to buy property or financial assets – pushing up prices and widening inequality, since financial assets are mainly owned by the already wealthy.
These dynamics are global – and they play out in Denmark as well, as discussed in both the international (link) and Danish (link) editions of my book.
The new Danish edition – that has just been released – compares developments in Denmark with those in other countries (link). Many patterns are similar, but there are also striking differences – particularly with respect to public finances. While some countries, such as France, the UK, and the US, are facing serious fiscal challenges, Denmark today stands out as a safe haven. However, it wasn’t always this way; it took major reforms to make the economy sustainable—lessons other countries might heed.
