Fridrik Jonsson shows two pictures on his blog today that challenge the wisdom of applying economic theories to large economies and small as if there were no difference.
The first one shows inflation from January 2001 – October 2009.
The second one shows the development of CB interest rates in the same period. Notice a trend?
Those of us who have been paying off loans in the last 8 years or so have always experienced a negative effect when the Central Bank has hiked up its rates.
The problem is a volatile currency in an open and very small economy. The outcome is going to be a lot of hot money flowing into the country and disappearing the same way if rates are lowered. Add the factor of consumer price indexation and you have a vicious circle where the rise in monthly payments for a business means a higher price for the consumer and workers constantly needing more wage hikes. All adding up to a situation where inflation keeps biting you in the arse.
Disastrously failed economic management anyone? Unfortunately, the people now in charge might not have learned anything. Or worse, maybe they are just locked in because of the failed ISK.
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November 18th, 2009 → 10:06 am @ Dadi
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