*T*
11-24-08, 09:56 AM
http://www.itulip.com/images/itulipreportfromiceland.jpgReport from the Front: Post-crash Iceland
I just returned from a brief sojourn in Iceland a month after the currency collapse there. Not the end of the world for Icelanders, but no picnic either.
The first thing to note is that everything still works. The banks are open, the ATMs work, and you can change money. The social order has not broken down. Throughout my trip I received the official rate of about 200Kr to one Pound Sterling. Before the collapse, the exchange rate was 100Kr or so. During the maelstrom we read reports of extreme depreciation reaching 400Kr to the pound. In the light of the local prices those reports appear ridiculous. However, as you might expect, the trip was much cheaper than it would have been a year ago.
I witnessed no rioting, civil unrest, vandalism, muggings or other social discontent. Icelanders are hardy bunch historically used to grinding poverty. By contrast to the past poverty in modern Iceland is almost unknown. The nation's past experience with hardship imbues Iceland society with a culture of thrift, to make do with enough, to share fairly, and to look after each other. Iceland will not collapse into a lawless Mad Max state, a dark fantasy of a particular strand of American politics. They will just be poorer. The country is also small enough to adapt quickly and has plenty of indigenous food resources – fish and lamb – to feed itself without relying heavily on imports, although oil imports may become more expensive; petrol remains fairly cheap by UK standards, about 150Kr/l.
The capital of Reykjavík is renowned for its party atmosphere at the weekend. Certainly this was obvious on the Saturday night I arrived. As I remarked on the revelry to my taxi driver, he said ruefully, "It should be twice this... the atmosphere is a bit strange." Throughout the trip there was an absence of the liveliness and confidence that the Icelandic people were known for. Indeed there is a sense of something dark having happened, and the recriminations are only starting. It is anyone's guess whether the right people will be pinned down for blame. To give a flavour of the mood, the picture that accompanies this iTulip Report from the Front was spotted on the window of, of all places, an optician's on Reykjavík's main street. It is a variation on a popular theme. http://www.itulip.com/forums/attachment.php?attachmentid=833&stc=1&d=12275454902 A local English-language paper printed some interesting letters blaming, by turns, an usurious international banking system, Gordon Brown, the Icelanders, the Jews, and the Danes. Some of the letters were by ex-patriots working in Reykjavík.
What is notable is that the relative pricing is now different from the UK. Luxury services – spas, the fancier restaurants – have experienced in Krona terms a significant inflation of about 20%-30%, at a guess. Presumably this is because they are tourist oriented. Food is more difficult to pin down. Supermarket items are reasonable by UK (London) standards but I imagine more expensive by local standards. It is still possible to get imported food. Books priced in Krona kept their tag, while those priced in Euros kept their Euro tag. Car hire was very reasonable, while the hotel was, given the location, extremely cheap, although keep in mind it was November. As I signed the hotel bill the chap at reception remarked "That's a lot of money," as I was thinking "Wow, that's cheap." This leads me to believe that Icelandic wages have not gone up 20-30% to keep up with inflation.
Some businesses were keen to take foreign currency directly, all took Krona, and all would give you the official rate. What is also noticeable is that business with locals was slow. The frequency of transactions in the internal economy, as compared to the tourist-facing economy, has clearly dropped sharply. This seems to invite the interesting possibility that, in one sudden move, the velocity of money has dropped, total credit has dropped, and yet inflation has occurred, due to the interface with external economies, both inflation and debt-deflation at the same time. This seems to run counter to the conventional MV=PQ theory.
Editor's Note: We are grateful to iTuliper *T* for his timely first hand report. In the context of iTulip Ka-Poom Theory, Iceland is a particularly interesting case. Here is an example of the coincidence of debt deflation and inflation that you expect in a post Ka-Poom economic environment, that is, after a rapid currency depreciation.
The debt deflation results from the over-extension of credit both within the domestic economy and by foreign creditors over a long period of time. The currency depreciation occurs when foreign investors withdraw funds, fearing losses due to the collapse of the over-indebted domestic economy. The net impact is deflationary with respect to the loss of purchasing power from credit and inflationary, and only just beginning in Iceland, due to rising import costs.
This is similar to the mechanism that occurred gradually in the US between 2002 and 2008 when the dollar depreciated 40% and commodity prices increased markedly, pushing up US inflation. The dollar depreciation suddenly reversed mid-year with panic selling of non-dollar assets for US treasury bonds, driving the dollar rapidly higher and import prices, especially oil, through the floor and producing short term price effects, especially in commodities, that many have confused for monetary deflation. The monetary deflation in the US is caused by debt deflation. The Fed challenge is that both will reverse suddenly after the panic selling ends and the dollar reverses course again in 2009.
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Copyright © iTulip, Inc. 1998 - 2007 All Rights Reserved
All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Nothing appearing on this website should be considered a recommendation to buy or to sell any security or related financial instrument. iTulip, Inc. is not liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. Full Disclaimer (http://www.itulip.com/GeneralDisclaimer.htm)
I just returned from a brief sojourn in Iceland a month after the currency collapse there. Not the end of the world for Icelanders, but no picnic either.
The first thing to note is that everything still works. The banks are open, the ATMs work, and you can change money. The social order has not broken down. Throughout my trip I received the official rate of about 200Kr to one Pound Sterling. Before the collapse, the exchange rate was 100Kr or so. During the maelstrom we read reports of extreme depreciation reaching 400Kr to the pound. In the light of the local prices those reports appear ridiculous. However, as you might expect, the trip was much cheaper than it would have been a year ago.
I witnessed no rioting, civil unrest, vandalism, muggings or other social discontent. Icelanders are hardy bunch historically used to grinding poverty. By contrast to the past poverty in modern Iceland is almost unknown. The nation's past experience with hardship imbues Iceland society with a culture of thrift, to make do with enough, to share fairly, and to look after each other. Iceland will not collapse into a lawless Mad Max state, a dark fantasy of a particular strand of American politics. They will just be poorer. The country is also small enough to adapt quickly and has plenty of indigenous food resources – fish and lamb – to feed itself without relying heavily on imports, although oil imports may become more expensive; petrol remains fairly cheap by UK standards, about 150Kr/l.
The capital of Reykjavík is renowned for its party atmosphere at the weekend. Certainly this was obvious on the Saturday night I arrived. As I remarked on the revelry to my taxi driver, he said ruefully, "It should be twice this... the atmosphere is a bit strange." Throughout the trip there was an absence of the liveliness and confidence that the Icelandic people were known for. Indeed there is a sense of something dark having happened, and the recriminations are only starting. It is anyone's guess whether the right people will be pinned down for blame. To give a flavour of the mood, the picture that accompanies this iTulip Report from the Front was spotted on the window of, of all places, an optician's on Reykjavík's main street. It is a variation on a popular theme. http://www.itulip.com/forums/attachment.php?attachmentid=833&stc=1&d=12275454902 A local English-language paper printed some interesting letters blaming, by turns, an usurious international banking system, Gordon Brown, the Icelanders, the Jews, and the Danes. Some of the letters were by ex-patriots working in Reykjavík.
What is notable is that the relative pricing is now different from the UK. Luxury services – spas, the fancier restaurants – have experienced in Krona terms a significant inflation of about 20%-30%, at a guess. Presumably this is because they are tourist oriented. Food is more difficult to pin down. Supermarket items are reasonable by UK (London) standards but I imagine more expensive by local standards. It is still possible to get imported food. Books priced in Krona kept their tag, while those priced in Euros kept their Euro tag. Car hire was very reasonable, while the hotel was, given the location, extremely cheap, although keep in mind it was November. As I signed the hotel bill the chap at reception remarked "That's a lot of money," as I was thinking "Wow, that's cheap." This leads me to believe that Icelandic wages have not gone up 20-30% to keep up with inflation.
Some businesses were keen to take foreign currency directly, all took Krona, and all would give you the official rate. What is also noticeable is that business with locals was slow. The frequency of transactions in the internal economy, as compared to the tourist-facing economy, has clearly dropped sharply. This seems to invite the interesting possibility that, in one sudden move, the velocity of money has dropped, total credit has dropped, and yet inflation has occurred, due to the interface with external economies, both inflation and debt-deflation at the same time. This seems to run counter to the conventional MV=PQ theory.
Editor's Note: We are grateful to iTuliper *T* for his timely first hand report. In the context of iTulip Ka-Poom Theory, Iceland is a particularly interesting case. Here is an example of the coincidence of debt deflation and inflation that you expect in a post Ka-Poom economic environment, that is, after a rapid currency depreciation.
The debt deflation results from the over-extension of credit both within the domestic economy and by foreign creditors over a long period of time. The currency depreciation occurs when foreign investors withdraw funds, fearing losses due to the collapse of the over-indebted domestic economy. The net impact is deflationary with respect to the loss of purchasing power from credit and inflationary, and only just beginning in Iceland, due to rising import costs.
This is similar to the mechanism that occurred gradually in the US between 2002 and 2008 when the dollar depreciated 40% and commodity prices increased markedly, pushing up US inflation. The dollar depreciation suddenly reversed mid-year with panic selling of non-dollar assets for US treasury bonds, driving the dollar rapidly higher and import prices, especially oil, through the floor and producing short term price effects, especially in commodities, that many have confused for monetary deflation. The monetary deflation in the US is caused by debt deflation. The Fed challenge is that both will reverse suddenly after the panic selling ends and the dollar reverses course again in 2009.
__________________________________________________
To receive the iTulip Newsletter or iTulip Alerts, Join our FREE Email Mailing List (http://ui.constantcontact.com/d.jsp?m=1101238839116&p=oi)
Copyright © iTulip, Inc. 1998 - 2007 All Rights Reserved
All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Nothing appearing on this website should be considered a recommendation to buy or to sell any security or related financial instrument. iTulip, Inc. is not liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. Full Disclaimer (http://www.itulip.com/GeneralDisclaimer.htm)