Although the US may fare better than Europe, its economy is heading towards the “fiscal cliff”. Similar to Europe, it is also necessary for the US to make significant cut in expenditures in the medium to long term in order to regain fiscal balance and discipline. The situation in Japan is even more worrying. Public debt in Japan has now exceeded 200% of GDP, excluding civil service pension and other contingent liabilities. Currently, the market is not concerned about Japan’s repayment ability as it is believed that the Japanese government will continue to address the ever-increasing deficits by maintaining an exceptionally low interest rate environment. However, it is worth noting that the market was treating the European countries in the same way until recently. Once market sentiment changes, the situation can take a sharp turn and it would be very difficult to arrest a deteriorating trend. In addition to the pain brought about by deleveraging, I would also like to talk about the different forms of “quantitative easing” implemented by the various central banks. Why did these economies implement “quantitative easing”? If we agree that the root cause of the global financial crisis is excessive leveraging, then the only solution would be deleveraging. However, in reality, the process of deleveraging is just too painful.
This would translate into an acceleration of wage and price inflation and unstable conditions in the foreign exchange market. The Petroleum Fund is designed to channel the revenues resulting from an increase in the oil price to the Fund for investment abroad, in order to prevent an increase in oil prices from influencing the budget. The increased revenues would thus not have an impact on the domestic economy, but be invested abroad through the Petroleum Fund. The current account balance and government budget surplus show that Norwegian consumption has adjusted to petroleum wealth by increasing net imports and by maintaining a budget deficit excluding petroleum revenues. At the same time some of the wealth is saved abroad to redistribute income between generations. This means that there has already been a gradual resource reallocation from the exposed to the sheltered sector. As long as consumption is fairly well adjusted to the expected level of the petroleum wealth, there may not be a need for substantial exchange rate movements in the near future to achieve further adjustment. 5. Stability of the Norwegian krone  Let us turn to the stability of the krone. People in the banking industry often suggest that the krone is a petro currency fluctuating widely with the price of oil. Is this the case, or has stabilisation policy been successful in Norway so far? Looking at the data, we note that the krone exchange rate has been fairly stable over time. Since 1986 the authorities have focused on stability of the krone exchange rate.