The engineering industry began to doubt the quality of their order books. Prices for oil, gas, aluminium and ferro-alloys fell, as did freight rates. The fragility of the Norwegian krone was illustrated when investors fled the currencies of small countries, and the krone weakened considerably. When speculators withdrew, daily fluctuations increased and hedging against exchange rate volatility became more expensive. On Christmas Eve, the krone fell to its lowest level in ten years. We are now in the deepest downturn in OECD countries in the postwar period. The US economy may already have shrunk by around 2½ per cent since the crisis erupted in September. Output has fallen at the same rate in many European countries, and perhaps by twice that rate in Japan and Korea. For a long period there were hopes that growth in China and other emerging market economies would hold up. But they are also now severely affected by the crisis. Output is also contracting in Norway, but so far probably somewhat less so than abroad. What is happening now is more than a normal fluctuation in the business cycle. The world is facing a crisis of confidence, with faltering faith in the future and a loss of confidence in banks, counterparties and contractual partners. The authorities have taken extraordinary action, as in a state of emergency, deploying a wide range of established and new policy instruments.
In the small community of Polden, in the Hamsun trilogy August, far away from large capital markets, the inhabitants live impoverished lives, subsisting on a little fishing and agriculture. But the community changes when wealth arrives in the form of a herring windfall. August says: “… you’re not to plant anything you can eat near your door. It doesn’t look right. I’ve got something better to put there – bushes, garden shrubs.” 9 Farming is abandoned, and then, a few years later, the herring disappears. The Norwegian government has not followed August’s advice, but has spread its wealth. It is partly invested in ownership interests in Norwegian companies, partly in infrastructure, partly in oil and gas and partly in equities and bonds abroad. When there are prospects of markedly slower growth, as is the case now, the value of all government assets falls. This also applies to buildings, roads, the power supply and other infrastructure where the government does not concern itself with regular valuations. Investments abroad by the Government Pension Fund – Global are also spread between equities and bonds from all over the world. The equity portion is now being increased from 40 to 60 per cent. A long-term investor receives extra compensation because the value of equities fluctuates considerably. Many are now incurring losses on equities and corporate bonds. This experience will result in higher required returns in the future. Under the Fund’s strategy, more equities will be bought when equity prices fall and fewer when they rise.