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View Diary: Election Time in Iceland: A Zombie Constitution To The Left, Pirates Sailing To The Right (68 comments)

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  •  It's easy to talk about ho:w wonderful a country (4+ / 0-)

    like Iceland having its own currency is when you don't have to live with what that means.  I hear people overseas saying stuff like.  "Yeay, Iceland collapsed its currency".  Do you know what that means, having your currency be half its value, in a country where the overwhelming majority of goods are imported and most homes were indexed to foreign currencies?  It means that at the same time, while home prices and salaries are falling, your principle owed doubles, your savings half, and the price of imported goods (most goods) shoots way up.  What fun.  And FYI, the exchange rate hasn't increased an iota since then.

    I'm not saying necessarily that it was a bad idea - I'm just saying, it's not the wonderful panacea people on DK like to paint it as.

    And want to know what else it means to have a low-circulation weak currency?  Here's what inflation is like here, historically.  And because of that, hey, you know how interest rates in the US (if you haven't ruined your credit history) are, what, 4% right now for a 30 year fixed?  Here in Iceland it's 7.6% for a 30 year with only 5 fixed.  You know how big of a difference that is in interest owed?

    People here aren't talking about changing currencies for giggles.  There's serious downsides to being on a weak currency.

    •  The only reason it's easy to talk about (0+ / 0-)

      is because the only other alternative would have been the Euro and Iceland has fared far better than countries like Ireland or the Baltics (which had a peg). Yes the devaluation hurts, but it at least spreads the pain around a lot more evenly rather than forcing large blocks of the country out of work and into poverty.

      Of course it wasn't a panacea, but the alternative of either having been on the Euro, or actually bailing out Icesave/other institutions and then having to deal with the sour economy the way Ireland has is a recipe for irreparable damage. If the country hadn't devalued and let the banks default, it would have made our Great Depression look like a walk in the park which is why the Euro countries are screwed when Germany continues its imperialistic financial policy. Greece isn't going to reach its 2008 level of output for a generation at this rate while Iceland's economy has recovered far more rapidly than any of the Baltics. In the long run Iceland is going to have come out far ahead of the other European countries that had credit bubbles.

      I don't know what other people on DK say about Iceland; this is mainly from having an economics background and reading people whose specialty is international economics like Paul Krugman among others.

      •  First, (4+ / 0-)

        No, the Icesave case was not like Ireland's situation: do we really need to get into that also?

        Secondly, the euro hasn't collapsed in the same way as the króna, anything like it.  You want to come here and tell people who had their principle owed on their house double that they're so lucky that they weren't on the euro?

        We collapsed so much deeper and earlier than everyone else that it'd be practically impossible for us to not be recovering faster, barring general incompetence.

        Our unemployment rate is traditionally in the 1-3% range.  So yes, by Icelandic standards, our unemployment rate has been extremely high.  It only looks low by the standards of other nations (and people often distort further it by providing seasonally-unadjusted numbers during peak employment times)

        That said, I don't think we've been mismanaged through the crisis (at least, in general).  I think the right decisions have, for the most part, been made.  But the simple fact is, it's both wrong to play down how much a currency collapse sucks for regular people, or to overplay the recovery.  Both of which seem very popular to do on this site.

        And I'll close this point by pointing out that the ISK collapsed to half its value during the crisis.  Nearly half a decade later, the ISK is worth... still half its former value.

        •  Of course currency collapse sucks (1+ / 0-)
          Recommended by:
          Stephen Wolf

          but the alternative would have sucked much more. The shock to the Icelandic economy was such that the pain was going to be considerable in any case. I'm not an economist, but here is basically how I understand it:

          1. Peripheral countries in Europe were subject to a boom, largely driven by financial markets, that led to salaries and prices going up much faster in those countries than in Europe's core economies.

          2. Financial collapse. The peripheral countries now have salaries that are way to high to be able compete.

          3. The salaries must come down, in one of two ways. Either you a) devalue your currency, or b) you suffer a long, deep depression that forces salaries down. There is unfortunately no option in which the average Icelander does not lose a big chunk of his or her purchasing power.

          However, while option a) is very painful, b) is extremely painful (just ask Greece).

          In fact, Iceland's experience shows quite clearly the difference. At this link, for instance, you can see how Iceland's unemployment increased much less than Ireland's or Estonia's, and started to come down much earlier (and no, Iceland's bust did not start earlier that other countries). Also, here, you can see how the percentage slump in Iceland's GDP is much smaller than in Ireland, Estonia or Latvia. And this is in spite of the fact that the financial shock to Iceland's economy was much greater than in those other countries.

          I'm not trying to minimize the pain Iceland has gone through. But it could have been much worse. What Iceland did was courageous in that it refused to bail out the banks and let them go under in spite of enormous international pressure. But had Iceland not had its own currency, it would not have mattered.

          "A government that robs Peter to pay Paul can always depend on the support of Paul." - George Bernard Shaw

          by Drobin on Mon Apr 15, 2013 at 03:47:41 PM PDT

          [ Parent ]

          •  Krugman (0+ / 0-)

            I should dig up the link where Krugman admitted he didn't know much about the Icelandic economy.  And its obvious, every time he talks about it.  

            I have no clue where that graph comes from, because Iceland's unemployment rate doesn't look like that.  It looks like this.  Perhaps that's seasonally adjusted?  At the very least it's mislabeled.

            Iceland's unemployment rate is about three times that which it was before the crisis.  Ireland's is about 3.5 times what it was before the crisis, and their crisis began later and slower.  Sooo... what is this supposed to be proving, exactly?  And the Estonia inclusion makes Iceland look pretty poor.  And since when was "Ireland supposed to be an example"?  From who?  Certainly not the IMF.  

            So wages were "unusually high" here before?  So who was overpaying fishermen?  Who was overpaying sheep ranchers?  Who was overpaying aluminum smelter workers?  Yeah, bank bosses and investors were way overpaid, but so your solution to that is to double most people's principle and slash their savings and buying power?  And we're supposed to consider that a progressive solution?

            Krugman loves the lies of omission, posting whatever graphs and data makes Iceland looks good and leaving out what doesn't.  Hey, when was the last time that Krugman mentioned the IMF's latest conclusion that to ever lift capital controls, Iceland is basically going to have to go through another round of nailing creditors again (and the consequences that entails)?  When has he mentioned that the IMF forecasts for Iceland for several years from now are lower than their forecast for Ireland, relative to respective pre-crash GDP figures?  

            Oh, and the graph you're looking for is GDP per capita, not raw GDP.

            Here's another one for you, seasonally-adjusted volume of GDP indices.  Note also the volatility of the Icelandic economy.

            Hey, let's look at mortgage comparisons, here, here, here - so much healthier fundamentals, right?

            Should I really even get started on the Icelandic capital controls and their distorting influence on the economy?  Or the Housing Financing Fund timebomb?

            But no, Krugman has a story he wants to tell, so don't expect any of that from him.

        •  Also, to adress a couple of your specific points (2+ / 0-)
          Recommended by:
          Stephen Wolf, Englishlefty

          For those who don't know--it was quite popular in Iceland during the financial boom to take out mortgages in Euros. This is why many people in Iceland now find themselves owing twice as much on their house as they did just a few years ago.

          In my mind, this is not different from how many people in the US was snookered into taking on interest-only adjustable rate mortgages which then blew up in their face, causing them to lose their homes. In both cases, risky financial products were sold to regular people who had no idea of what they were getting into. A symptom of the finance bubble, I guess. But that's another discussion.

          To address you other point, it is true that the ISK has lost almost 50% of its value. This is permament. It will not come back. The reason it lost so much is that this is roughly the amount by which Iceland became overpriced during the boom.

          Had the króna been pegged to the euro, everyone's salary would have had to go down by 50% instead. That is not possible without a major depression, with unemployment levels in the 20%-30% range for an extended period of time.

          This is in fact what Greece is going through right now. They have the euro, so devaluation is not an option. As a result, their unemployment is approaching 30%. Meanwhile, they have managed to have a total deflation of about 12%, which means they still have a very long way to go. This is happening while the Greek government simultaneously is forced to dismantle the social safety net so most people have nothing to fall back on. The great depression was a picnic in comparison. Greece will likely come out of this a third world country.

          This could have been Iceland. Really. Of course it would have been better had the bust never happened. But given that it did, Iceland is coming out of it in much better shape and sooner than almost anyone predicted, and having its own currency is a big reason for this.

          "A government that robs Peter to pay Paul can always depend on the support of Paul." - George Bernard Shaw

          by Drobin on Mon Apr 15, 2013 at 04:16:00 PM PDT

          [ Parent ]

        •  I only brought up Icesave because it was (0+ / 0-)

          emblematic of the capital inflows that were characteristic of every single crisis country without fail. Every single one that went into crisis after the 2008 meltdown was a country that had run a longstanding current account surplus and Iceland or even the USA were no different. I'm not all that familiar with the particulars other than that a lot of the money was owed to foreign creditors and the Icelandic government didn't think it was worth en-debting itself to them through a bailout the way Ireland did to German/Dutch/British-etc. banks with its bailout. That's why I brought it up.

          And additionally, yes I realize devaluation is horrendous if you have a lot of debt denominated in a foreign currency as do economists like Krugman et al. It's just that it's far better to have debts in a foreign currency and a job that's going to over time (in this case a long time sadly) pay more than it is to be in the situation of a much higher proportion of the Irish/Spanish/Baltics who have debts in the denomination of a currency your country can't control and lose your job and see all of your friends/family lose their jobs in the way that many if Greece, Ireland, Spain, the Baltics, and the European Periphery did.

          Don't get me wrong, I seriously do empathize with the plight of those in Iceland and I think it's horrible that the EU and the US (and to a lesser extent Japan) didn't do more to help mitigate the crisis, but what the Icelandic government did was absolutely the best response given the limited options available. What else were they possibly going to do that wouldn't hurt more in the long term? I totally think that those who were wealthy in all of those countries should have payed more to help those who weren't, but that just sadly wasn't an option.

          The true fault lies with those in the United States and Germany and similar surplus countries who where the proponents of policies that helped the elite and only the elite and that's a very hard proposition to stick to, even if it is one that you and I both agree to. Those were the people who thought that unlimited capitalism, i.e. unlimited power of investment, was the way to go, and the fact that bubbles can come and pop proves otherwise.

          •  No, Icesave was not like that (0+ / 0-)

            Icesave accounts were private accounts, mainly small dollar private reirement accounts and municipal funds.  And the conflicts was not with creditors, but between governments, because the British and Dutch bailed out their people and then demanded recompense.  Private creditors never came into the picture.  And the accounts were never government backed, unlike pretty much everywhere else.  The Icelandic govermnent was required, like everyone, to create a system for backing them, but the system they created was a private fund.   And it was proven that Icesave was not a government-backed account system because EFTA court ruled specifically that.

            And additionally, yes I realize devaluation is horrendous if you have a lot of debt denominated in a foreign currency as do economists like Krugman et al. It's just that it's far better to have debts in a foreign currency and a job that's going to over time (in this case a long time sadly) pay more
            Except that not only did our unemployment rate shoot way up compared to our norms (something Krugman always distorts), and is still very high compared to our norm despite being nearly half a decade after the crisis, but that "pay more" job you talk about is effectively paying a whole lot less because the price of all goods is now higher.

            Oh, and did I mention the austerity, too?

            Sorry, it just gets tiring hearing people talk about how wonderful a currency collapse is.  It's not wonderful.  It sucks.  I see it all over the place.  Don't get me wrong, it serves me well.  It makes all the assets I brought over worth more, and there's all sorts of property for sale from people who lost everything when they could no longer afford it.  But obviously that's small comfort for the other side of the equation.

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