JasonC

The Reykjavik Scenario (or How Interest Rates Can't Control Monetary Inflation)

Did anyone hold a gun to currency speculator's heads and force them to buy Krona, even as the money supply expanded?

Nope, just a bubble like any other, caused by trend followers all making the same bet and thinking they can all be right, as long as it keeps going.

No government policy can outlaw the stupidity of free men. If enough people act stupidly enough on a big enough scale, they can wreck things. Duh.

The assets that secure the debts issued by Iceland banks are the assets they purchased abroad with the funds lent to them. If those assets are worth less than the nominal value of the debts, whoppie doo, they are all the creditors own because they are all the creditors can own. If that makes Krona worth a bit less, tough toenails.

But if the Iceland authorities now put rates high enough, they will kill the inflation stone cold dead, just as happened in the US in 1982. All it requires is the political will to be fair to capital, foreign or domestic.

To avoid distressed sales of the foreign assets owned by the banks at the worst time for it, the IMF can loan to the government, which can use the proceeds to pay off foreign creditors. As markets recover and foreign assets continue to earn out, they are realized and used to retire the debt to the IMF.

None of the past actions or losses are going to matter much at all, in any of it. Only their forward policies will.

Money isn't magical or exotic or dangerous, and it isn't the only real asset with others being fake. It is merely one narrow asset among many others. And right now there is a manic demand for it. Selling long dates claims at fire sale prices to get money when the money is yielding nothing and useless, is insane. But leveraged debtors have been forced to it, and others are mimicking them in monkey-see, monkey-do trend following fashion, instead of sensibly taking the other side and collecting all the long dated claims.

The fever will break, and everyone who used the occasion to sell everything to get into money, will have given away their future wealth to those who made the opposite call.

Rate Cuts? What About Inflation?

The article writer is stark raving mad. This is deflation on an epic scale. Demand for money is not a constant, and right now it is infinity. That is why all future claims are being discounted to zero value, and only something liquid tomorrow has any. The time horizon of the entire civilization has shrunk to a matter of weeks. And this fool is worried about inflation! If authorities pull out all the stops, the price level might only fall by half. If they don't, try 10-fold.