Analyzing the Crisis in Iceland: Can It Happen Here? 11 comments
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In previous articles for Seeking Alpha, I've compared the crisis with the Argentinian peso in 2001/2002 with the current situation surrounding the US dollar, and postulated that the US would follow down the Argentinian path.
The current situation in Iceland also fits the bill of a currency crisis (also referred to as an inflationary depression). To illustrate this point, let's compare the factors leading up to the crisis in the Icelandic krona with the conditions of the US macroeconomy:
- Like the US, Iceland de-regulated much of its banking sector in the '90s.
- Like the US, Iceland then proceeded to target low interest rates. This resulted in a large amount of borrowing and spending, which resulted in a credit-based boom.
- In both countries, de-regulation allowed for greater securitization -- meaning the loans that enabled this credit-based boom were re-packaged and sold to debt buyers all over the world. This resulted in a scenario where much of Iceland's wealth was owned by foreigners.
- Like the US, Iceland also experienced the contraction forecasted by the Austrian business cycle theory, which we recently discussed.
- In both countries, this resulted in a deflationary spiral: significant declines in equities markets, bank failures, and contracting GDP.
To learn more about the factors leading up to the Icelandic currency crisis, I recommend this article from CNN.
Now in Iceland, like in Argentina, the true breaking point came when its central bank became insolvent. The result was a complete lack of confidence in Iceland's ability to repay; essentially, Iceland had defaulted. The result has been a run on the Icelandic krona, which has lost half its value in just a few months time.
Government Response
Or should I say, there has been a partial run on the Icelandic krona -- for the government has put currency controls in place, after raising interest rates. Citizens of Iceland will find it difficult to legally exchange their krona for a foreign currency unless they are travelling.
Proposed solutions include integrating Iceland into the Eurozone, which would help stabilize Iceland, continue international trade, and help ensure that lenders are repaid, argue its proponents.
Social Response
Icelanders have united in protest against the government, in much the same way Argentinians did after their currency crisis. Thus far in the United States, criticism and dissatisfaction with the government handling of this crisis have risen significantly, though street protests remain at relatively low levels.
Market Response
The collapse of the Icelandic krona is the biggest event, as it devalues all assets denominated in the krona. A key difference between the US dollar and all other currencies, though, is that the US dollar is the world reserve currency. It will be interesting to see if Iceland enters the Eurozone as a solution to this crisis; if so, it paves the way for the creation of a world currency to be proposed as the solution to a crisis in the US dollar.
Disclosure: I am short the US dollar.
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This article has 11 comments:
If Iceland want to solve their economic problems, all they need to do is to expand the aluminum processing facility that - I think - they have constructed, and maybe import a few hundred people to work in it.
Professor Ferdinand E. Banks
They did built that aluminium facility and foreign workers, canadians mainly from Québec, are in place to learn icelandics.
But will Aluminium be enough? the markets are not quite going upward.
Could the US dollar, being in a Krona in a near future. Some even see default in next summer.
Ciao.
On Dec 07 10:47 AM Fred Banks wrote:
> Going into the Eurozone is not a solution for Iceland, nor for any
> civilized country. Sweden went into the Eurozone because the parasites
> in the Swedish government were hot to travel and rub elbows with
> the parasites in Brussels. As it happens, it is the worst decision
> made by a Swedish government in modern times.
>
> If Iceland want to solve their economic problems, all they need to
> do is to expand the aluminum processing facility that - I think -
> they have constructed, and maybe import a few hundred people to work
> in it.
>
> Professor Ferdinand E. Banks
When Iceland gets a cold the rest of the world catches the next plane to Tahiti, I'm afraid, and doesn't even bother to sniffle.
Personally, I will ignore multiple inanities and personal slurs but after you cross my limits, you are fair game. I will go out of my way to follow your every post and, if possible, discredit anything you have to say on any subject. If the subject matter is out of my regular purview, I will Wikipedia it until I learn enough about it to be able to comment. I have a little program which allows instant Wiki access even as I write a post. It is especially useful on the fly.
Take care Mr. Banks, you are a regular fount of knowledge which I appreciate even if I may agree to disagree occasionally.
you do have a theory, you fundament it very good.
but, as someone stated above, comparing iceland and US, is just a huge gap.
more than a gap, is a trip from earth to another galaxy.
your own article states something that goes against of what you fear; when you say "the US dollar is the world currency reserve"
and it is, this is a fact.
I rather believe in US than in EURO , look at their growth, look at their birth/death rates,
its unsustainable.
in 50 years, they wont have consumers. simply because, nobody wants to have kids anymore . it goes beyond economics 101
its easier to believe yuan, chinese currency will become world reserve, than EURO.
or probably.. the joke of the year "the amero" - hahaha, oh boy.. =]
you do have a theory, you fundament it very good.
but, as someone stated above, comparing iceland and US, is just a huge gap.
more than a gap, is a trip from earth to another galaxy.
your own article states something that goes against of what you fear; when you say "the US dollar is the world currency reserve"
and it is, this is a fact.
I rather believe in US than in EURO , look at their growth, look at their birth/death rates,
its unsustainable.
in 50 years, they wont have consumers. simply because, nobody wants to have kids anymore . it goes beyond economics 101
its easier to believe yuan, chinese currency will become world reserve, than EURO.
or probably.. the joke of the year "the amero" - hahaha, oh boy.. =]
At say $2000 an ounce and next July 4???
On a side note, it would be deeply ironic to see Americans protesting if our government became bankrupt and our currency was devalued. We're a democracy. We did this to ourselves when we voted for deregulation, the Iraq quagmire, bailouts, big govt with low taxes, no balanced budget requirements, unfunded entitlements, etc. What are you going to do, protest your own votes?! OK, here's your sign!