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Iceland: The Lies We've been Told About Iceland's "Recovery"

July 22, 2013
Reykjavik, Iceland

Without doubt, Iceland was the canary in the coalmine for the sovereign debt crisis that is unfolding across the world right now.

It was the first place to go bust, crumbling under the weight of a credit-fueled boom that brought down most of the country's banking sector and sent the currency into freefall.

Banks either went bust or got nationalized. And investors around the world suddenly woke up to a sobering reality of a major default... something that had been considered preposterous only months earlier.

The situation got so bad that the British government (whose taxpayers had much to lose from Iceland bank defaults) used their anti-terrorism legislation to seize Icelandic bank assets in the UK!

It was a spectacular collapse. And the first of many. Ireland, Greece, Cyprus, etc. were soon to follow.

Yet unlike the bankrupt countries of southern Europe, Iceland dealt with its economic emergency in a completely different way.

Politicians here are proud that they never resorted to austere budget cuts that are so prevalent in Europe.

They imposed capital controls. They let the banks fail. And, as is so commonly trumpted in the press, they 'jailed their bankers and bailed out their people.'

Today, Iceland is held up as the model of recovery. Famous economists like Paul Krugman praise the government for rapidly rebuilding the economy without having to resort to austerity.

This morning's headline from The Telegraph newspaper sums it up: "Iceland has taken its medicine and is off the critical list".

It turns out, most of these claims are dead wrong.

For example, they say in the Western press that Iceland bailed out its people and jailed the bankers.

Not exactly. A few bankers were investigated and charged with fraud. The CEO of one of Iceland's biggest failed banks was even convicted, and sentenced.

Now, how long of a sentence does someone get for railroading his nation's economy? Life? 30-years? 10-years?

Actually nine months. Six of which became probation.

Meanwhile, the government ended up taking on massive amounts of debt in order to bail out the biggest bank of all-- Iceland's central bank.

This was a bit different than the way things played out in the US and Europe.

In the US, the Fed conjures money out of thin air and funnels it to the government.

In Iceland, since the Kronor is not a global reserve currency, the government had to go into debt in order to funnel money to the Central Bank, all so that the currency wouldn't collapse.

As a result, Iceland's state debt tripled, almost overnight, in 2008. And from 2007 until now, it has increased nearly 5-fold.

Today, the government is spending a back-breaking 17.3% of its tax revenue just to pay interest on the debt.

And this is real interest, too. Iceland's central bank owns very little of the government debt. The rest is owed to foreign creditors... putting the country in an extremely difficult financial position.

At the end of the day, the Icelandic people are responsible for this. They were never bailed out. They were stuck with the bill.

Meanwhile, although unemployment in Iceland is low, wages are even lower. And the weak currency has brought on double-digit inflation.

So while people do have jobs, they can hardly afford anything.

This is most prevalent in the housing market, most of which is underwater. Interest rates have jumped so much that many Icelanders are now on negative amortization schedules, i.e. their mortgage balances are actually increasing with each payment.

Meanwhile, home prices have been falling dramatically.

So each year, mortgage balances are going up, and home values are falling. Hardly the picture of recovery.

The freshly elected Prime Minister is now promising everyone relief from their mortgage debts via a special state 'debt correction fund'.

The only problem is that the state doesn't actually have any money to do this... and they're running a budget deficit every year.

The only way this can happen is if Iceland defaults... which is becoming a much more likley scenario.

A few years ago, Iceland's banking system was nearly 10 times the entire country's GDP. And it collapsed. You don't paper over a crisis of that magnitude with a few years of good PR.

Despite being so widely reported by the mainstream financial media, Iceland is not a story of model economic recovery. It's a story of how to fool people. And for now, it's working.

Notwithstanding such a harsh appraisal, I should also say that Iceland is simultaneously one of the countries we should be most worried about... as well as the most excited about.

They're not in the EU or on the euro, so they're relatively isolated in their fiscal troubles. This implies that default is inevitable.

And when that happens, Iceland will be shut out of international debt markets and be forced to pull out all the stops to attract foreign investment.

Believe me, the country has much to offer. And this is what's so exciting. More on that another time.
Until tomorrow,
Signature
Simon Black
Senior Editor, SovereignMan.com

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Does any of this sound familiar?

Too bad we don’t get reporting like this in the States, here are some excerpt from another article by the same reporter Jon Danielsson. Thanks for turning us on to this reporter and his work Barracuda Trader.

High domestic interest rates encourage domestic firms and households(and in our case the United States Government) to borrow in foreign currency; it also attracts carry traders speculating against ‘uncovered interest parity’. The result was a large foreign-currency inflow. (KING DOLLAR POLICY OF THE 80’S & 90’s) This leads to a sharp exchange rate appreciation that gave an illusion of wealth and doubly rewarding the carry traders. The currency inflows also encouraged economic growth and inflation; outcomes that induced the Central Bank to raise interest rates further.

The end result was a bubble caused by the interaction of high domestic interest rates, currency appreciation, and capital inflows. While the stylized facts about currency inflows suggest that they should lead to lower domestic prices, in fact the impact can be the opposite.

A key reason seems to be that foreign currency effectively became a part of the local money supply and the rapidly appreciating exchange-rate (UNSTERILIZED INFLOWS) leads directly to the creation of new sectors( and MAL-INVESTMENT) of the economy.

The exchange rate became increasingly out of touch with economic fundamentals, with a rapid depreciation of the currency inevitable. This should have been clear to the Central Bank, which wasted several good opportunities to prevent exchange rate appreciations and build up reserves.

In this crisis, the strength of a bank’s balance sheet is of little consequence. What matters is the explicit or implicit guarantee provided by the state to the banks to back up their assets and provide liquidity. Therefore, the size of the state relative to the size of the banks becomes the crucial factor. If the banks become too big to save, their failure becomes a self-fulfilling prophecy.
The relative size of the Icelandic banking system means that the government was in no position to guarantee the banks, unlike in other European countries. This effect was further escalated and the collapse brought forward by the failure of the Central Bank to extend its foreign currency reserves.

http://www.youtube.com/watch?v=LKsZ1hqHBHU&feature=related

Like I said.... too bad we don’t get reporting like this in the States…..maybe people would then see the reality…..the government is the problem….not the solution.

Kyle Bass at The Strategic Investment conference mentions this

I'm not exactly sure what time signature it is at...but Its in there. He mentions that Iceland is actually having problems.

http://www.youtube.com/watch?feature=player_embedded&v=gJfvL...
55mins

I liked how he said this:

46:35 Do you worry about the US?

"I quit worrying about them because it's just a waste of time - I always leave DC demoralized"

"The central bank is the great enabler of congressional profligacy"

This doesn't sound right....

This doesn't sound right. Isn't what they did the opposite of the BAIL OUTS elsewhere? Rising interest rates are to be expected, followed by incentivized investment and savings. Isn't that how the free market recovers? I may have to brush up on this topic but I could swear this is what Ron Paul has spoken about. Nowhere was a promise that there would be 'zero pain'. But not nearly the amount of pain from a dollar destruction, inflation tax and a propped up economy leading to a HUGE BUBBLE BURST. Right?

Simon Black is awesome!

Sign up for his emails at sovereignman.com

'Peace is a powerful message.' Ron Paul

DJP333's picture

Here's some more info

Iceland’s post-Crisis economy: A myth or a miracle?

Jon Danielsson, 21 May 2013

http://www.voxeu.org/article/iceland-s-post-crisis-economy-m...

"It’s not pessimistic, brother, because this is the blues. We are blues people. The blues aren’t pessimistic. We’re prisoners of hope but we tell the truth and the truth is dark. That’s different."

Very interesting.

Anyone have any links to more info on this?

Hiidden falsehoods

Those who invent falsehoods know that the falsehoods are falsehoods.

Those who have falsehoods hidden from them are subject to those falsehoods.

"Banks either went bust or got nationalized."

What is private?

What is public?

If the bank is private then no one but the owner, or owners, are using that bank.

If the bank is not private, then is the bank public?

If the bank is advertized as a private bank, but the bank is a public bank, then that is a case of falsehood, a crime in progress, and following the money back to the source of it finds the criminals busy at perpetrating their crime.

If the bankers know it is a falsehood, then the bankers are not subject to the fraud in progress.

If the bank is already public, then how can the bank suddenly become "nationalized"?

Before I go on to respond, here, please look at this:

http://alt-money.tribe.net/thread/70e5eb29-853d-44ca-9faa-b7...

If people can stop thinking in terms of either/or Public or Private and begin thinking in terms of the following, then things may be less false for the subjects of falsehood.

1.
Criminals hiding behind the false front of Public

2.
Criminals hiding behind the false front of Private

3.
Non-criminal accurately known as being Public

4.
Non-criminal accurately known as being Private

Private banks are understandable as a water tower on an individual's section of land where that individual has exclusive use of that water tower. That individual puts water in that tower, banking that water, investing in that water being up in that tower. That private individual is then able to draw down that supply of water deposited in that bank of water.

What happens if a nearby group of people place a poison, such as chromium 6 into the water table and then that private banker who banks on water deposited into a tank finds that his water is no longer water, his water is now counterfeit water, or poison?

Does that mean that the private bank used by the private banker now has a public bank?

No.

The water table is public access, obviously, proven by the fact that a group of people gained access to the public access water table, and this would not be so difficult to understand if someone walks up to you at a restaurant and that person pisses in your glass of water, pisses all over your dinner, pisses on you, and then that individual claims that what they are doing to you is helping you with your efforts to find happiness in America, and then that person hands you a bill that you must pay to that individual for all the help in the form of piss.

Joe

Would like to read more about

Would like to read more about this media/pr switcheroo. Does anyone have additional sources?

“Any man who thinks he can be happy and prosperous by letting the government take care of him better take a closer look at the American Indian.” ― Henry Ford.