FrankRep
10-14-2009, 10:13 AM
Learning From Iceland's Economic Meltdown (http://www.jbs.org/jbs-news-feed/5494-learning-from-icelands-economic-meltdown)
James Heiser | John Birch Society (http://www.jbs.org/)
14 October 2009
As the political leadership of the United States is obsessed with madcap schemes to collectivize massive segments of the economy, even while continuing the exportation of American jobs and the elimination of many other jobs through proposed environmental regulation which would stifle the economy if implemented, it is understandable that most citizens are keeping their gaze quite close to home: when your family, your job and your home are at risk, it is hard to think of much else.
But while it is quite understandable that most Americans are simply hunkering down, it is important to look beyond our shores to see that our crises are part of a larger pattern. Like the canary in the coal mine, the fate of the tiny nation of Iceland highlights the dangers facing the United States and Europe. Comparing a nation of 300,000 to one which is a thousand times larger might seem reckless, but consider the fact that political corruption, exploitation by powerful foreign financial interests, the machinations of the International Monetary Fund and European Union, and the abuse of "antiterrorism" laws all combined to work financial devastation on one of the smallest European nations.
The economic meltdown in Iceland began a few months before the crisis which enveloped the American economy last fall. As the Times Online (http://business.timesonline.co.uk/tol/business/economics/article3671359.ece) reported in April 2008:
Iceland has long privatised and monetised its public assets, even including its fish stocks. Catch quotas are tradeable among fishing companies, creating a capital resource worth a total of about $5 billion that has been used as collateral for investments.
The investment boom in Iceland has created an extremely tight labour market, soaring wage costs and galloping inflation, which in February reached 6.8 per cent.
The resulting high interest rates have made the krona a favourite for currency speculators in the “carry trade”, in which money is borrowed in low-interest currencies, such as the yen, and invested in financial assets in high-yield currencies, such as the krona. However, a loss of confidence has pricked the bubble in the carry trade, causing the krona to tumble.
Corporate and household debt levels have soared and much of the corporate debt is believed to be denominated in foreign currencies, a consequence of the acquisition spree by Iceland’s ambitious companies. The falling value of the krona is likely to put pressure on the ability of these companies to service that debt, creating further problems for the economy.
In a very short period of time, the speculation and massive debt swamped Iceland’s economy and left devastation. Iceland Review Editor Bjarni Brynjólfsson wrote (http://www.icelandreview.com/icelandreview/search/news/Default.asp?ew_0_a_id=313694) on October 15 of last year:
People here are extremely angry. We are angry because we were told that everything was in order with the banks. More than 50,000 small shareholders had stakes in the banks and their savings were simply wiped out. These were ordinary people like you and me who had decided to stick with the banks through the financial meltdown and had been assured that everything would be all right in the long run.
We are angry because the banks seem to have organized programs to trick people in Iceland into placing their savings in bond accounts which were claimed to be 99 percent safe instead of keeping them in normal deposit accounts.
We are angry and shamed over the fact that normal people overseas have to tighten their belts and face loosing their savings because of our banks.
We are angry with the politicians who obviously knew of the difficulties the banks were facing after many warnings from abroad and from skeptics of the Icelandic economic boom who said that the banks had become too large and greedy.
We are angry with the billionaire owners who ran the banks and pretty much everything else in this country and have now disappeared in times of trouble.
We are angry with the authorities who did not step in and demand some securities from the conglomerate banks to prevent this economic meltdown from happening.
We are angry with ourselves for being foolish and for not having listened to the voices that warned us about the recklessness of the banks.
And then, Iceland’s ‘ally’— the United Kingdom — exploited antiterrorism laws to seize Icelandic assets and hold the nation hostage. Again, in the words of the Iceland Review editor:
And we are extremely angry over the outrageous behavior of Britain’s Prime Minister Gordon Brown who invoked anti-terrorism legislation to freeze the assets of Icelandic banks in the UK when the British government had been assured by our government that depositors of Icelandic banks in the UK would be paid. Many believe this led to the downfall of Kaupthing Bank, the last of our three largest commercial banks to remain standing after the others were nationalized, like the last tree in the hurricane.
We have always considered Britain to be one of our closest allies and friends. For a British politician to gain momentum by stepping on the toes of a miniscule state like ours is simply too much for us to stomach on top of the economic difficulties we are now facing. It is like stomping on a lying man’s head.
Now, more than a year into the crisis, the ‘free fall’ Iceland’s economy continues. According to a report (http://www.bloomberg.com/apps/news?pid=20601087&sid=awXzaHHx8T6M) at Bloomberg.com:
Prime Minister Johanna Sigurdardottir, who took office in February, pinned hopes for a recovery on the International Monetary Fund after Kaupthing hf, Landsbanki Islands hf and Glitnir Banki hf racked up $80 billion in debt, 16 times Iceland’s economic production. Now she says the economy may implode again as a dispute over Icelandic savings accounts held by overseas depositors delays a promised $5.1 billion bailout. ...
Iceland’s economy will shrink 8.5 percent this year and consumer prices will climb 11.7 percent, both the worst performances among the world’s 33 advanced economies, according to the IMF’s latest forecasts. As the rest of the world begins to recover, Iceland’s recession will stretch into next year, with the economy contracting 2 percent, more than any developed nation except Ireland.
Unemployment will rise to 8.6 percent this year, from less than 1 percent in December 2007, the IMF estimates. Iceland will still trail the eurozone average of 9.9 percent and Spain’s 18.2 percent jobless rate, the highest in the developed world. One of the hardest-hit industries has been construction, where 202 companies filed for bankruptcy in the 11 months after the crash, 67 percent more than in the same period a year earlier, according to data compiled by Statistics Iceland.
Skyrocketing deficit spending by federal and state governments, combined with the burgeoning ranks of the unemployed and underemployed, unbelievably high rates (http://www.creditcards.com/credit-card-news/bankruptcy-filings-q3-2009.php) of bankruptcy, and allegations of a concerted effort to undermine the dominance of the American dollar in the global economy all point out troubling parallels. (To make the parallel even more complete, feel free to substitute Chinese leverage over the America’s debt — and our economy, in general — for the role played by the United Kingdom in Iceland’s crisis.)
With few serious solutions to America’s crisis actually being considered in the counsels of the mighty, it is certainly time to become far more aware of the on-going crisis, and the shapes it is assuming throughout the world.
SOURCE:
http://www.jbs.org/jbs-news-feed/5494-learning-from-icelands-economic-meltdown
James Heiser | John Birch Society (http://www.jbs.org/)
14 October 2009
As the political leadership of the United States is obsessed with madcap schemes to collectivize massive segments of the economy, even while continuing the exportation of American jobs and the elimination of many other jobs through proposed environmental regulation which would stifle the economy if implemented, it is understandable that most citizens are keeping their gaze quite close to home: when your family, your job and your home are at risk, it is hard to think of much else.
But while it is quite understandable that most Americans are simply hunkering down, it is important to look beyond our shores to see that our crises are part of a larger pattern. Like the canary in the coal mine, the fate of the tiny nation of Iceland highlights the dangers facing the United States and Europe. Comparing a nation of 300,000 to one which is a thousand times larger might seem reckless, but consider the fact that political corruption, exploitation by powerful foreign financial interests, the machinations of the International Monetary Fund and European Union, and the abuse of "antiterrorism" laws all combined to work financial devastation on one of the smallest European nations.
The economic meltdown in Iceland began a few months before the crisis which enveloped the American economy last fall. As the Times Online (http://business.timesonline.co.uk/tol/business/economics/article3671359.ece) reported in April 2008:
Iceland has long privatised and monetised its public assets, even including its fish stocks. Catch quotas are tradeable among fishing companies, creating a capital resource worth a total of about $5 billion that has been used as collateral for investments.
The investment boom in Iceland has created an extremely tight labour market, soaring wage costs and galloping inflation, which in February reached 6.8 per cent.
The resulting high interest rates have made the krona a favourite for currency speculators in the “carry trade”, in which money is borrowed in low-interest currencies, such as the yen, and invested in financial assets in high-yield currencies, such as the krona. However, a loss of confidence has pricked the bubble in the carry trade, causing the krona to tumble.
Corporate and household debt levels have soared and much of the corporate debt is believed to be denominated in foreign currencies, a consequence of the acquisition spree by Iceland’s ambitious companies. The falling value of the krona is likely to put pressure on the ability of these companies to service that debt, creating further problems for the economy.
In a very short period of time, the speculation and massive debt swamped Iceland’s economy and left devastation. Iceland Review Editor Bjarni Brynjólfsson wrote (http://www.icelandreview.com/icelandreview/search/news/Default.asp?ew_0_a_id=313694) on October 15 of last year:
People here are extremely angry. We are angry because we were told that everything was in order with the banks. More than 50,000 small shareholders had stakes in the banks and their savings were simply wiped out. These were ordinary people like you and me who had decided to stick with the banks through the financial meltdown and had been assured that everything would be all right in the long run.
We are angry because the banks seem to have organized programs to trick people in Iceland into placing their savings in bond accounts which were claimed to be 99 percent safe instead of keeping them in normal deposit accounts.
We are angry and shamed over the fact that normal people overseas have to tighten their belts and face loosing their savings because of our banks.
We are angry with the politicians who obviously knew of the difficulties the banks were facing after many warnings from abroad and from skeptics of the Icelandic economic boom who said that the banks had become too large and greedy.
We are angry with the billionaire owners who ran the banks and pretty much everything else in this country and have now disappeared in times of trouble.
We are angry with the authorities who did not step in and demand some securities from the conglomerate banks to prevent this economic meltdown from happening.
We are angry with ourselves for being foolish and for not having listened to the voices that warned us about the recklessness of the banks.
And then, Iceland’s ‘ally’— the United Kingdom — exploited antiterrorism laws to seize Icelandic assets and hold the nation hostage. Again, in the words of the Iceland Review editor:
And we are extremely angry over the outrageous behavior of Britain’s Prime Minister Gordon Brown who invoked anti-terrorism legislation to freeze the assets of Icelandic banks in the UK when the British government had been assured by our government that depositors of Icelandic banks in the UK would be paid. Many believe this led to the downfall of Kaupthing Bank, the last of our three largest commercial banks to remain standing after the others were nationalized, like the last tree in the hurricane.
We have always considered Britain to be one of our closest allies and friends. For a British politician to gain momentum by stepping on the toes of a miniscule state like ours is simply too much for us to stomach on top of the economic difficulties we are now facing. It is like stomping on a lying man’s head.
Now, more than a year into the crisis, the ‘free fall’ Iceland’s economy continues. According to a report (http://www.bloomberg.com/apps/news?pid=20601087&sid=awXzaHHx8T6M) at Bloomberg.com:
Prime Minister Johanna Sigurdardottir, who took office in February, pinned hopes for a recovery on the International Monetary Fund after Kaupthing hf, Landsbanki Islands hf and Glitnir Banki hf racked up $80 billion in debt, 16 times Iceland’s economic production. Now she says the economy may implode again as a dispute over Icelandic savings accounts held by overseas depositors delays a promised $5.1 billion bailout. ...
Iceland’s economy will shrink 8.5 percent this year and consumer prices will climb 11.7 percent, both the worst performances among the world’s 33 advanced economies, according to the IMF’s latest forecasts. As the rest of the world begins to recover, Iceland’s recession will stretch into next year, with the economy contracting 2 percent, more than any developed nation except Ireland.
Unemployment will rise to 8.6 percent this year, from less than 1 percent in December 2007, the IMF estimates. Iceland will still trail the eurozone average of 9.9 percent and Spain’s 18.2 percent jobless rate, the highest in the developed world. One of the hardest-hit industries has been construction, where 202 companies filed for bankruptcy in the 11 months after the crash, 67 percent more than in the same period a year earlier, according to data compiled by Statistics Iceland.
Skyrocketing deficit spending by federal and state governments, combined with the burgeoning ranks of the unemployed and underemployed, unbelievably high rates (http://www.creditcards.com/credit-card-news/bankruptcy-filings-q3-2009.php) of bankruptcy, and allegations of a concerted effort to undermine the dominance of the American dollar in the global economy all point out troubling parallels. (To make the parallel even more complete, feel free to substitute Chinese leverage over the America’s debt — and our economy, in general — for the role played by the United Kingdom in Iceland’s crisis.)
With few serious solutions to America’s crisis actually being considered in the counsels of the mighty, it is certainly time to become far more aware of the on-going crisis, and the shapes it is assuming throughout the world.
SOURCE:
http://www.jbs.org/jbs-news-feed/5494-learning-from-icelands-economic-meltdown