RE: [gang8] Krugman's mistaken belief that devaluation saves anything, even over-indebtedness
No, Iceland is not OK now.
I’m just back in the US after three weeks in Iceland where I had an opportunity to talk to old friends from all parts of the political spectrum.
There is a strong feeling that the long-established political order has outlived its usefulness - if that is a term which can be used to describe its record.
Is Iceland really OK?
I was on the State TV program Silfur Egils on Sunday April 22.
In a 15-20 minute interview, I addressed among other things the insurmountable – on present policies – problems faced by Iceland in the monetary/balance of payments field.
Briefly, Iceland’s current foreign exchange reserves are of the order of ISK 1000 billion (US$ 1 = ISK 125).
Did I say reserves?
Yes, but they are borrowed reserves – not reserves that Iceland has accumulated from past surpluses on its balance of payments.
Iceland’s GDP is currently of the order of ca. ISK 1800 billion (my guesstimate – may be off by ISK 50 billion or so in either direction).
In October 2008 Iceland responded to the collapse of its banking system – and much else – by introducing pretty harsh foreign exchange controls.
For example, foreign owners of pre-crash Glacier Bonds were estimated to be holding ISK 400 billion which were essentially “locked in”.
Just recently, it dawned on the authorities – and, apparently, the IMF – that they had forgotten to factor in another factor.
The Icelandic currency claims of the creditors of the old banks, whose assets are being liquidated for eventual distribution to creditors.
So, to the ISK 400 billion, add another ISK 700 billion – and Iceland’s borrowed foreign exchange reserves become even less impressive than before.
That’s one part of the monetary/foreign exchange problem.
The other part resides in the globs of ISK monetary and other liquid assets left over from the “good years” prior to October 2008.
If the foreign exchange controls were lifted tomorrow, Iceland’s borrowed foreign exchange reserves would vanish in the blink of an eye.
In other words, from a macro-economic point of view, the REAL worth of foreign and domestic ISK balances waiting to exit through the foreign exchange market is a fraction of their pseudo-worth at the current ISK exchange rate.
What to do?
In Silfur Egils I made a twofold suggestion – a summary version is as follows:
1. Let the Glacier bond etc. money exit at a STEEP premium over the current exchange rate of the ISK.
2. Call in outstanding ISK balances and exchange them for New ISK at differential rates – say, one to one for household balances and something much less favorable for larger balances.
The problem at hand is clear as daylight – the chances of anything being done about it along the above lines are zilch, given the current political power structure.
What to do?
Change the current political power structure!
A general election must be held no later than a year from now and there is turmoil in the Old Guard and hopeful urgency in its would-be replacement which cuts across conventional political party lines.
I had an opportunity to meet one-on-one with leaders of two of the latter parties for lengthy and fruitful discussions.
I am hopeful that they will be able to join forces, attract a large number of voters – and
Throw out the rascals come next year!
But what about ICELAND? His “prime example” that “works”? IS Iceland really OK now?
On 5/7/12 8:15 PM, "Gunnar Tomasson" <gunnar.tomasson@...> wrote:
If the facts of the matter were other than they are, Krugman would be right on the money!
Within the EU, however, one country’s competitive advantage gained through devaluation comes at the “expense” of its fellow EU members.
If devaluation works wonders for, say Greece, Italy or Spain, it just as surely would work wonders for the other EU countries.
And quicker than you can say nonsense, competitive devaluations would become the order of the day.
As in the 1930s.
From: firstname.lastname@example.org [mailto:email@example.com] On Behalf Of Michael Hudson
Sent: Monday, May 07, 2012 6:33 PM
To: GANG8; Steve Keen
Cc: Jeffrey Sommers
Subject: [gang8] Krugman's mistaken belief that devaluation saves anything, even over-indebtedness
Note Krugman’s belief that devaluation can overcome the debt problem. If this were right, Germany’s hyperinflation would have enabled it to sell enough exports to pay its reparations debt.
This is the kind of bad trade theory based on bad financial theory that won PG the Nobel Prize (for not offending free traders, bankers and anti-labor advocates by drawing attention to the fact that debt overhead creates problems that can’t be cured by reducing labor’s wages).
PAUL KRUGMAN, “Those Revolting Europeans,” The New York Times, May 7, 2012.
“One answer — an answer that makes more sense than almost anyone in Europe is willing to admit — would be to break up the euro, Europe’s common currency. Europe wouldn’t be in this fix if Greece still had its drachma, Spain its peseta, Ireland its punt, and so on, because Greece and Spain would have what they now lack: a quick way to restore cost-competitiveness and boost exports, namely devaluation.”
He also imagines that Iceland has solved all its problems.