There is something negative in the state of Denmark

Denmark’s central bank governor pledged to face down speculators testing its currency peg to the euro, saying he would do “whatever it takes” to defend it.

Lars Rohde told the Financial Times that Nationalbank could “go on forever” defending the peg, after lowering interest rates four times in three weeks to a global record low of minus 0.75 per cent. It has also swelled its balance sheet to a record size by printing krone in an attempt to weaken the Danish currency.

“The main message is that we are ready to do whatever it takes to defend the peg. We have unlimited access to Danish krone and we have no restrictions on our balance sheet,” he said, in his first public comments since the recent quadruple rate cuts.

The FT article is here, here is Bloomberg coverage.  I would bet against them, in any case this will be a neat test case for our judgments of Switzerland.  The Danish government also has stopped selling bonds to help maintain the peg; Lord Polonius comments on that policy.  The Danes have announced a true precommitment, in a way the Swiss never did, now let’s see what happens.  Defense of the peg is in fact their only official monetary policy target, and the central bank head claims it is supported by all segments of Danish society.

Denmark, of course, has not yet joined the euro, or wanted to.  Meanwhile, Crown Princess Mary of Denmark just turned forty-three.


I'd like to take the other side of your bet. If you have pocket aces (here, a central bank with unlimited krones and apparently unlimited political capital) you should signal that strength to the table so that others fold. If someone doesn't fold, keep raising the bet until they fold from the pain or meet you on the river with a suboptimal hand.

Your poker analogy is flawed (primarily, because if you have a strong hand, you DON'T want everyone else to fold - you want everyone else to put chips into the pot so you can win them with you strong hand).

It seems to me that in the case of the Danish bank, their goal is be prosperous... and if someone's going to keep giving them money (even if that money is Euros) for something that they can produce for basically free (the Krone) then that seems like a good situation for them.

What happens in the reverse situation, when the purchasers end up with a whole lot of Krone that they don't want? Will that cause problems?

Pocket aces are strong, but they are not so strong you want everyone staying in (there is no hand that strong in hold em). You see this all the time in low stakes limit games -- everyone stays in for the flop and your aces get beat by someone's J4 unsuited that they stayed in with because you couldn't scare them off preflop.

Ideally you'd like one or two players to meet your strong preflop raise, with cards like AK or QQ. Far less opportunity to get bingoed.

"I would bet against them." ...would sound a lot more convincing if you said "I have bet against them."

For a number of reasons, I don't actively trade anything...

And these reasons outweigh credibility gained by demonstrating the courage of your convictions?

So you aren't Paul Kangas' straw investor.

What? You don't like having to put disclosure statements in all your blog posts and research papers?


What does Scott Sumner say? Let's be frank, it will work. As a great American noted, "Never pick a fight with people who buy ink by the barrel."

But you can pick a fight with a central bank, and you should... when the peg is in the other direction.

at the end of the day, pocket aces is just one measly pair.

But if the central bank is drawing pocket aces every time, the rest of the table is going to get crushed, no matter how they play.

...not if you keep having fresh money join the game every hand. That's the problem. There are far too many hedge funds out there that think: 'They've held on for three years, there's no way they can hold on for three years and a month!'

Then, shortly after HF1 leaves the game, HF2 comes in and says: 'They've held on for three years and a month, there's no way they can hold on for three years and two months!'

...all the way down...

Interesting experiment, but if they don't success they'll just make the Swiss look brilliant.

Uh, how do I sign up for the negative interest rates? -0.75% right? One way to maintain their peg (e.g. keep the kronor low) would be to lend me kronor very very long term at a fixed -0.75%, and I *promise* to go buy as many Euros and Dollars as I can with it, for the rest of my life.

The real question is, can they hold down the value of their currency versus the Euro without stepping into the hyperinflation twilight zone - the one where they mail a large batch of Kronors to everybody on Earth....

What's the use of these pegs?

I'm wondering the same thing...if you are saying you are permanently pegged to the Euro, you are basically adopting the Euro.

I guess you can change your mind easier than Greece can.

Usually you do it to signal that you're not going to suddenly devalue/inflate your currency through poor monetary management, but Denmark's a rich country with good governance. Maybe it's just for stability purposes due to high trade flows.

When your economy is tied to exports to a single country/currency union, then letting your currency float up can have serious real effects on your industry. It's the reason China never let their currency go up against the dollar.

It can also help if there's tourism: Imagine a Spain out of the Euro. Euro starts to devalue, and for some reason the Spanish Peseta doesn't. Suddenly, vacations in Spain become more expensive than vacations in Italy. If the competition vs Italy is important enough for the health of the economy, Spain would have to devalue when the Euro devalues. So a peg like this is a promise of devaluation.

The Danish establishment wanted the Euro, the public wanted to keep the Crown. The compromise was to have the Euro and call it the Crown.

AB, From your previous comments I'm guessing your are Swedish, or at least Nordic.

Is this a general pattern, that while the English-speaking press tends to name the currencies in their actual language, the natives when speaking English like to translate it into "crown"? You are not the first person I've spotted doing this.

I was once talking to a German friend of mine, and we were discussing WWII, and he said something about "the Third...Empire." He hesitated at the word "Empire," not sure what to call it in English. I understood the meaning and didn't bother explaining that we use the word "reich," in that context.

The Danes are the happiest people on earth! Or so it is said. Also, too, the highest taxed (individual income tax rates for the average person). Now their currency is too strong. What's up with that?

They also work the fewest hours in the world after Germans and Norwegians, and have a right to beer at work . It's tough being a Dane.

Enoch Powell once remarked that no Finance Minister who renounces devaluation [and so likewise revaluation] is really lying, because everyone knows he's just saying what he has to say, and so no one is misled.

You can renounce devaluation honestly. Let your currency float.

The Danes have an escape hatch that the Swiss did not have, they can join the euro whenever they wish. Thus the Danish central bank can pocket huge profits from European speculators for as long as they wish, and then if their balance sheet gets uncomfortable they can join the euro at the drop of a hat. There are very few countries in such an enviable position. (Even so, I think the peg is a bad idea--they should let their currency float, as the Swedes do).

Joining the Euro is wildly unpopular.

It's hard imagine a situation where that happens. It would be if things were truly on the brink of a complete catastrophe.

Joining the Euro is wildly unpopular yet pegging to the Euro is wildly popular?

Breaking a peg is easy. Leaving a currency zone is not.

Crazy as it sounds, yes.

I realize there is a law that every commentator on anything about Denmark has to quote Hamlet I.iv, but maybe in commitment to free speech and solidarity with the Danish cartoonists, you should refuse to follow it and see what happens.

Denmark doesn't have a lot of shelf space in global culture, let them have that...

Lego's have a lot of shelf space.

Since there is a lego starwars etc, it's time we had a lego Hamlet.

Princess Mary suggests there is great deal to be said for imports as well as non-assortative mating. Say what you will about European royalty, but give them credit for reaching beyond their borders. Queen Maxima of the Netherlands another fine example of the beauty of international markets.

As someone that has experienced a couple of Danish currency crisis (the real sort, with sky high interest rates and economic crash), I am floored by your (fictive) bet Tyler.

Do you really for one minute think Nationalbank Head Lars Rohde or any Danish Politician would give up a peg with 30years credibility paid for by several severe crises in order to ... not getting negative interest rates on Danish mortgage loans !?!?!?

It is not like Denmark has a problem of excess demand and inflation. I have heard noone here asking for revaluation. None. Danes do not suffer from the peculiar ordo-liberal fondness of shining objects of value and fear of inflation that seems to haunt the Germans and Swiss. On the contrary,

The chances of the peg being given up is near zero. Meanwhile you are paying me and other Danes 1% per year for the privilege of holding our non-remarkable currency which is by the way by no measure overvalued. And you are betting against unlimited reserves.

Good luck with your trade.


Just as you have evaluated your strong predictions and views about the Euro crisis in 2012 and 2013.

While Valgreen definitely makes some very good point, and with his background we should not expect anything less, I find couple of points still unanswered.

Denmark's current account surplus. It has to be recycled somehow. In effect it is a sign that the nation is saving too much - i.e. citizens living poorer than they could. It is also a sign that krone is a tad undervalued against the EUR, probably by 10%.

While being in a position similar to Germany or Switzerland (earlier) sounds like fun and "free money from the printing press", it was awkward for both of them. Both countries ended up placing their external surpluses in crappy assets, and turning into deflation.

The currency crises that Valgreen refers probably are the ERM crisis of 1992 and the latest eurocrisis. Neither would have happened if Denmark would have pegged its currency. What exactly was gained by fixing the exchange rate remains vague and unmeasured. In fact, the sky-high interest rates of the early nineties presented a huge cost to the economy.

I think it would be prudent to say that Denmark suffers from unusually high menu costs - labour market pricing and plenty of other stuff has been developed around the peg, and nobody is presenting proper economic arguments for why the peg exists in the first place, or why it has to be maintained.

In effect, pegging the rate gives monetary policy to the ECB under the trilemma. For a small open economy giving up policy for free does not make much sense to me. Perhaps it should be admitted that mainly political reasons are behind the peg.

If Denmark really, really wanted to peg its currency, it would join the euro. This halfway house suggests that the willingness to "go the distance" is not there. Why?

there are historical reasons for the peg. denmark had great economic problems in the 70ies and the early 80ies. In order to counter inflation, high interrest and support trade, the currency in 1982 was pegged to the DM and since 2000 to the €. We have a large trade and a large trade surplus compared to the GDP, and if the krone was revaluated, it would cause loss of export and increasing unemployment. The costs would clearly be bigger than the advantages.
Actually we earn money on the run. If this goes on for another month I will be able to get a 30 year fixed rate mortgage for a 1,5% rate. So just keep on.
Another reason for not caving in is that most peoble here feels that our economic policy must not be dictated by speculatiors. So both the political establishment and the population at large is backing up behind the national bank.

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