A cup of coffee in Reykjavik is getting close to the price of a beer a few years ago. The price of beer is getting close to the price of mojitos a few years ago. A mojito almost requires a second mortgage.

It is worse in the rural areas. We camped in the Western peninsula a few weeks ago. The weather turned ugly and we checked out how much a stay at the local guesthouse would cost us. Twenty-two thousand kronas or almost $200 for a tiny guesthouse a night. I have stayed at four star hotels for less.

It is also very Icelandic to shrug these things away. We stuck with camping…for 4.000 kronas for the night, a butt-numbing amount for pitching your tent anywhere in the world. But when asked to explain these mad prices at Iceland’s tourist destinations an economist for the ASI explained that foreigners’ purchasing power has gone up considerably so they were not so price sensitive to these hikes.

Meanwhile those of us who are unlucky enough to be stuck with the ISK are encouraged to stay at home.

4.500 ISK for bathing with Chinese businessmen swimming in their underwear in the Blue Lagoon anyone?

Related posts:

1. The drinking crisis
2. A Business Friendly Country
3. Another economic car crash

Today when the bank lowered the rates down to 7% from a high of 18% in March of 2009, it barely got a mention.

The rates are at their lowest since 2004. See here at DataMarket.

There is probably a feeling of damned if you do and damned if you don’t. And a sense of having no control.

Other nations with credible currencies have been lowering their rates to encourage investment and growth. And that is something the Central Bank of Iceland must attempt.

But go too low or too quick then precious capital will steer away from Iceland, and what is already there will seek a way out.

It ain’t easy and it ain’t cheap maintaining a micro-currency in a global economy but that is what many Icelanders still want to do after decades of devaluation.

According to Austrian research by Meier-Pesti and Kirchler from 2003, there was a strong correlation between individuals nationalism and their attachment to an own national currency.

Eric Helleiner has claimed that national currencies foster national identities by

(a) providing a vehicle for nationalist imagery that constructs a sense of collective tradition and memory (like 500 kronas with Jon Sigurdsson on the front and the coins depicting the fishing tradition)

(b) acting as a common medium of social communication that may facilitate the “communicative efficiency” of members of the nation and encourage similar frameworks of thought (prices, definitions, valuations etc. Probably responsible for so many Icelanders thinking that consumer price indexation is all good)

(c) creating collective monetary experiences that can bolster the feeling of membership in a national community of shared fate (like say a collective wiping out of assets and increase in debt)

(d) contributing to a sense of popular sovereignty, at least insofar as the national currency is managed in a way that corresponds with the people’s wishes (tricky but the sovereignty issue plays a definite part in the discussion in Iceland. Why anyone would want to endure life under the krona except for producers like the fisheries who can lower their labour costs and krona debts by devaluation is still puzzling)

(e) strengthening the kind of quasi-religious faith that is associated with nationalism, especially when the currency is managed in a stable manner (now you are just assuming that the krona is being managed instead of it being used to manipulate us)

Finance minister Steingrimur J. Sigfusson is a proclaimed fan of the krona at least. He believes that its flexibility offers Icelanders a nice little shovel to dig themselves out of the krona holes they keep getting into.

Realistically though, one would expect more and more Icelanders to vote with their feet and run away from the krona, just like the fisheries have been doing.

Related posts:

1. Another Icelandic Crisis: And Yet, the Krona Doesn’t Seem to Care
2. For Or Against The Krona
3. How Much Is A Krona Worth?

But why did all those Icelanders take on these risky loans? Simply put, the Icelandic krona has been walking dead since early last decade when the Central Bank decided to implement inflation targets on the miniscule floating currency.  As the government proceeded to fulfill all its campaign promises in a couple of years as Geir Haarde was quoted saying, the ever rising interest rates attracted an influx of hot money which created an illusion of wealth, fuelled speculation and a bubble economy to rival all bubble economies.

Ordinary Icelandic consumers soon felt the pinch when the rising inflation started morphing their consumer price indexed loans into double/triple repayment monsters. It started to make sense borrowing in dependable currencies like the Euro, US dollar or the popular basked of Yen and Swiss Franks. The interest rates there were unheard of in Iceland and unavailable to ordinary citizens. That is until every bank in sight begun offering them around 2004-2006. The appeal was obvious and although most consumers balked at the risk involved in paying off their car-loans and mortgages in a currency different from the one in the one they were earning, many jumped on board. The krona would never fluctuate more than 15-20% would it and it would still be worth it?

Well, no…and the consequences were disastrous…

from M5.is. Click to enlarge

Astthor Skulason, a farmer paralyzed below the waist needs special farming machines and equipment to run his farm. “It looks like I have paid them much more than I borrowed”, he said talking to DV.is about Lysing, the financing company which still repossessed the machines. Astthor says the machines not only help him out with his work, but also provide him with much needed exercise as he tries to live with the handicap which he got from a car accident in 2003. An intervention and a collection on behalf of a couple of MP’s managed to allow him to keep his farm equipment.

Curiously, after the economic collapse voices started being heard about the supposed illegality of the currency loans. That was a new and unexpected angle, not heard while consumers were enjoying the benefits of the foreign interest rates. But now they had doubled and suddenly there were entities sprouting which had been unneccessary in the previous years of milk and honey. The Houshold Alliance and Borrowers Alliance as well as the office of the Consumer Spokesman claimed that it was illegal to tie payments of capital in Icelandic kronas to a different currency. This could not possibly be? Yet that was what happened when such a case hit the courts. The financial product had been illegal all along.

Currently the discussion has been about what minister of economic affairs, Gylfi Magnusson said or meant in Althingi last year when he seemed certain that the loans were in fact legal. The government had in fact sold off a couple of banks (Glitnir and Kaupthing) and taken majority ownership in one (Landsbankinn) based on such an opinion.  It then turns out that his ministry and the Central Bank all sat quiet and acted indifferently on legal advice which claimed the loans were illegal. The government stood idly by when people‘s lifes were torn apart becaue of these loans. The fortress promised for the households became the banks‘.

Even more curiously and telling of the political cesspool that is Iceland anno 2010 is that the MP‘s and media calling for Gylfi‘s head on a plate did not raise an argument with his stance at the time. The nerve of the Independence Party knows no limit as they call for Gylfi‘s resignation when lead by failed Central Banker David Oddson and bailed out businessman Bjarni Benediktsson.

In fact, the political elite and Althingi‘s collective shame is all the greater considering that former minister of commerce and industry Valgerdur Sverrisdottir of the Centre Party has stepped forward and claimed that she knew all along that the loans which just about all financial institutions in her nation were making were illegal!

Did you get that? The minister responsible for the banks in Iceland working properly turned a blind eye for nine years on them selling an illegal product which at worst in many cases ruined people‘s lifes or at best changed them completely. She even sponsored a bill in 2001 where it was made clear. The members of Althingi‘s economic committee which should have discussed the bill at the time included Johanna Sigurdardottir, now PM for the Social Democrats and Margret Frimannsdottir who at one point was the party‘s vice chairman, Ogmundur Jonasson, now Left Green xenophobe, Kristinn H. Gunnarsson and Hjalmar Arnason from the Centre Party, the former who has written inspired columns about the potential damage the banks would face if the loans were deemed illegal. The Independence Party had four representatives on that committee, including corrupt Kopavogur mayor Gunnar Birgisson, Fisheries minister to be Einar K. Gudfinnsson, Sigridur A. Thordardottir and the current chairman of the Confederation of Icelandic Employers Vilhjalmur Egilsson.

Where have all these people and all these political parties been sticking their heads for the last decade?

A truck driver in his sixties, Olafur Jon Leosson took his own life in October 2009. Olafur had not been able to make payments of the currency loan he had taken with financing company Lysing to finance the purchase of his truck. Olafur left a letter to his family where he claimed unemployment and debts had left him with no other way out. A big source of desperation was that his good friend Nathaniel B. Agustsson had signed a guarantee for his loans. “He obviously feared that I would be in trouble because of this. He was really affected by being unemployed for a long while and I could feel how the worries were breaking him down”, said Nathaniel to newspaper DV. Ten months after Olafur‘s death, the Supreme Court of Iceland ruled that the loans had been unlawful. Olafur‘s son Gustaf commented to DV that things might have turned out differently for his father if the ruling had come earlier. “The top managers of these companies knew this. It just has to be. When you run a company you have to be clear about what you can and can not do”.

Related posts:

1. The Currency Loans Were Legal – The Dark Side Of The Government’s Inept Solutions
2. In All Fairness: The Currency Loans And What Now
3. The Benefit of The Doubt

The Icelandic krona has been praised by some as the nation’s saviour in some quarters while chastised as a root of many evils in others.

Where you stand on the issue seems to correlate with whether you perceive yourself as nationalistic or international.

Examining the political debate in Iceland, those with a nationalistic self-image are highly likely to view the krona in favourable light, those with a more international self-image were more likely to view it with suspicion and be more open for the adoption of foreign currencies.

So even if economic factors are obviously important, underlying emotional factors also contribute to the policies of the parties.

Related posts:

1. Another Icelandic Crisis: And Yet, the Krona Doesn’t Seem to Care
2. The Icelandic Krona: Dead In The Water
3. How Much Is A Krona Worth?

- Steingrimur J. Sigfusson, Finance Minister of Iceland two years after an economic collapse all but wiped out the Icelandic financial sector after years of “hot money” flowing into the country because of exorbitant interest rates imposed to battle inflation.

He is crediting the arsonist for bringing a bucket of water to the fire.

What he is really celebrating is Iceland moving one step closer to the developing world and  improving our “competitiveness” through a worthless currency. Never mind the comparative loss of wealth to citizens in the developed world.

A classic argument for not joining the EU and improving the livelyhood of Iceland’s citizens.

Related posts:

1. Thanks A Bucket – But Stiglitz Wants IMF Out Of Iceland
2. Finance minister wants to abolish price-indexation
3. UK Crackpot: McDonald’s flight shows Iceland’s policy works

Olafur Isleifsson, lektor at the University of Iceland was quoted yesterday as saying that “it is hard to see a constructive reason behind the bank’s high rates”.

As the nooze tightens, Icelandic businesses and individuals keep asking themselves what is so fabulous about the ISK.

Related posts:

1. A Disappointing Decision On Interest Rates
2. A vicious circle
3. A few words about the 1% cut in Central Bank interest rates…

It is a bit crude and not very imaginative so a friend has thought of a better idea.

Since they’ve taken all our money, why not make a silent protest every time you walk by the house of a Bjorgolfur or a Jon Asgeir by throwing an ISK coin into their garden? The idea he said was to send the message of, “you’ve taken all our money so you just as well might have the rest”.

“Krónum þá” or “lets krona them”.

PS: I am not encouraging you to throw ISK into their garden, just saying it is a funny idea. Besides, what ISK are you going to throw anyways, haven’t they all gone to the Caymans?

Related posts:

1. Valuable employees
2. Government Reaction
3. BBC from yesterday’s protest

“The rebuilding of the banks must be an absolute priority. For the business sector to work, it must be supported by banks that work. But it will be expensive. I don’t think Icelanders realize how expensive that is going to be, around 85% of gross national product. “

Mats Josefsson to Swedish newspaper Uppsala Nya Tidning

Josefsson who is one of the foremost experts on banking crisis in Europe threatened to quit his position as the chair of the committee assigned to rebuild the banking system in Iceland. He is critical of the government for a lack of a clear vision on how to approach the problems and  how slow it is taking to get things done.

He seems especially dissatisfied with the fact that his recommendation regarding creating a special state owned entity that would take over hugely indebted businesses and work their problems out in co-operation with the banks. Instead the banks are forming their own, with no clear rules about how to tackle these instances and lacking in transparancy. 

Yet another evidence that the problems of Iceland are probably too huge for Icelandic politicians to handle. That figure exclaimed by Josefsson is significantly higher than what the government has been claiming, or 1.250 billion ISK instead of 385 billion ISK. Where does that huge gap come from. 

Disillusion is one thing, lacking touch with reality is another. Thor Saari, MP for the Citizen’s Movement describes how 20 persons from different sectors were called before a congressional committee to discuss the situation in the economy. According to Thor, only three out of those people seemed to grasp that Iceland had been hit by an economic hurricane, but others seemed oblivious to that fact and delusionally wishful even that things were just as they were before. They were still completely sure that they were the right people to  keep running the country’s largest corporations. 

They might change their tone soon because the unions have received word to prepare for 5,000 layoffs in the next couple of months. Add to that figure the slicing and dicing of the banking system and there might be 500-1,000 more jobs lost in the summer. 

And now there are talks of placing the exchange rate of the ISK at the index rate of 170 from the current high of 230. It might benefit some businesses with foreign currency loans for a while but the real cost of such an operation might end up being astronomical. Lets remember how long it took for the last attempt to fall on top of itself. 

But hey, at least the sun is shining!

Related posts:

1. Kaupthing Boss – Government’s Solutions Not Enough
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Iceland’s highly indebted banking sector collapsed in October, taking with it the wider economy and the crown currency.

– Iceland attempted to introduce a currency peg — which survived less than a day — before imposing stringent capital controls restricting foreign exchange purchases to those for essential items such as food, fuel and medicine.

– The toughest controls were later relaxed, with new rules set out in November 2008. The central bank said in May that circumstances did not yet allow for the dismantling of capital controls, though progress had been made towards allowing the gradual and systematic easing of controls in the future.

– A gulf remains between the value of the Icelandic crown in the effectively state-controlled local market  of around 174/euro and the barely traded offshore market  which values it at closer to 205/euro.

– Moving capital out of the country in connection with the sale of foreign investments is prohibited. Investing in securities, investment funds and money market instruments denominated in foreign currency is prohibited. However, those who held such investments before the rules were introduced are allowed to reinvest.

– All foreign currency acquired by domestic parties must be submitted to a domestic financial undertaking within two weeks.

– Borrowing and lending between domestic and foreign parties other than transactions with goods and services may not exceed 10 million Icelandic crowns per calendar year. The loan period must be for at least one year.

– Movement of capital for gifts, subsidies or other purposes in amounts exceeding 10 million crowns per calendar year is also prohibited.

From Reuters

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1) The Economics of the Devil

Published in Frettabladid on April 15 by Gunnar Tomasson, economist

Inflation depreaciates the real value of money and that is why many find the price-indexation of monetary debt to be an issue of justice. “If you lend ten horses to someone else then you want ten horses back, not seven”, says economist Gudmundur Olafsson on the web. He is said to be “absolutely tough on that if you borrow a pack of coffee then you should return a pack of coffee. You cannot come back with it and say that a kilo of coffee yesterday is equal to a pound of coffee today. This is absolutely correct”, he adds. 

This is mumbo jumbo, one horse cannot be turned into a pack of horses, nor a pack of coffee into a cargo of joe with a single input into a computer as sufficient enough to multiply the real value of money in the economy. A cargo of products can be lost at sea but paper money can disappear like dew on a sunny day, as happened with the Icelandic banks’ stock in the beginning of October 2008. A sensible discussion on price indexation demands that real valuables are not equalled to paper cheques, i.e. that horses and coffee should not be likened to IOU’s for horses and coffee.

2) Economics And The Devil

Published in Frettabladid on April 17 by Gudmundur Olafsson, economist

The economicst Gunnar Tomasson, who actually has maintained that economics are mostly mumbo jumbo, does me the honor of naming me in connection with what he calls the “economics of the devil”.There he says that debtors must suffer twice the damages compared to creditors when the value of money decreases during inflation. 

The simplest way to explore this theory is to check whether this has really been the case, for example in the last 20 years in Iceland. Then it appears that real interests of price indexed loans are usually 1,5-2% lower than of those who are not, and naturally most Icelanders usually choose price-indexed loans. 

Most people should be capable of calculating the difference between 5% and 6,75% interest rates in the long run, but in one year the difference is 350 thousand ISK of a 20 million ISK loan in the favor of price-indexed loans. Gunnar’s assertion that those in debt lose suffer a double loss is simply wrong. This is in harmony with the opinions of William C. Dudley, manager of the New York branch of the Federal Reserve, from February 10 where he calls on the increased use of price-indexation. Those interested in the subject can also study the articles of Helgi Tomasson in Visbending 2008 and Asgeir Danielsson in Efnahagsmal, the Central Bank’s publication from last February. 

At this moment inflation is negative and therefore the captal of debts will decrease by 0,5% at the beginning of next month. A 20 million ISK loan will decrease by 100.000 ISK. It is therefore the aptly named devil of the public who wants to abolish price indexation now, finally when debtors benefit from it unequivocally.  

3) The Economics Of The Devil II

Published in Frettabladid on April 18 by Gunnar Tomasson, economist

In my article on price-indexation in Frettabladid on April 15 ( Economics of the Devil) I put forth arguments agains the unavoidable effects of price-indexation on the indebted wage earners in Iceland in times of inflation. 

In his reply from April 17 (The Devil and economics), economist Gudmundur Olafsson uses statistical data and calculations that are irrevelant to the theoretical premises of the effects of price-indexation. That kind of operation is one of the reason why I think modern economics is mumbo jumbo as Gudmundur writes. 

Paul Samuelson, the father of modern economics once underlined the importance of operating carefully with these words; „A scholar in economics who is fundamentally confused concerning [methodology] may spend a life-time shadow-boxing with reality.” The irony is that the mainstream economics that Samuelson paved the way for over sixty years ago laid the foundations for the ruins of the economy of Iceland and the whole world today. 

In a eulogy for John Maynard Keynes (Econometrica, July 1946), Samuelson indicated that a) Keynes did not understand his own theories, b) that he had never really had interest in theoretical economics, and C) that Keynes had criticized econometrics without understanding the subject. This is digging deep for the sake of arguments on methodology. Keynes believed „It is a method rather than a doctrine, an apparatus of the mind, a technique of thinking, which helps its possessor to draw correct conclusions.”

The words of Keynes reflect a defenition of economics echoed by John Stuart Mills as, „Such is undoubtely its character as it has been understood and taught by all its most distinguished teachers.” The understanding of Samuelson and Milton Friedman is wholly different and is echoed in the reply of Gudmundur Olafsson against the theoretical arguments that lie behind my definition of price-indexation as the Economics of the Devil. 

Friedman spoke for them both when he said, „Logical completeness and consistency are relevant but play a subsidiary role.” Ye shall know them by their fruits and the judgements born of experience cannot be escaped. 

4) The Devils And The Price Indexation

Published in Frettabladid on April 22 by Ingolfur H. Ingolfsson, CEO of spara.is 

Two economists, Gunnar Tomasson and Gudmundur Olafsson have exchanged entertaining devils on the price indexation and I will allow myself to add my two cents to the discussion

Thirty years ago, when price-indexation was agreed upon in Althingi, the choice stood between politicians giving up their influence on interest rates and let them free or adopting price indexation. The politicians were clearly not prepared to hand over their influence and came to the brilliant conclusion of introducing the price indexation of capital. There began the probably biggest governmental interference of finances known outside the communist economies of the twentieth century. From 1980, two currencies have been used in Iceland, the ISK that was price-indexed and the one that was not. Those who have used the former are those who owned and lent money. Those who have borrowed the price-indexed krona have on the other hand had to pay for it with the latter. In the thirty years since the introduction of the price-indexed ISK, the other has lost 3,250% of its purchasing power! This discrepancy between the ISK’s has probably lead to the largest and most merciless transfer of wealth in the history of Iceland. 

It is probably unheard of worldwide that the government has interfered so directly and of such magnitude in the purchasing power of borrowed money as in this country. How on earth can it be justified with well-founded reasons that only money that is lent out is price-indexed but not those used to pay the loan? It cannot be done and therefore the search for reasons must begin within the spectre of political interests. The state, the largest publisher of price-indexed paper, decides with the support of Althingi to securely insure those who want to lend it money. Because those who pay are always the same, the taxpayers.    

The method used to evaluate the indexation of borrowed money is a chapter to itself. Models are used to calculate seperate indexes, based on what is most popular or convenient at each time. A vivid imagination controls the combination and the different names given to these calculations, such as the consumer price index, loan-term index or the payment alignment index, which is the latest. Some have maintained that noone will lend us money without it being price-indexed. That is as wrong as it can possibly be. 

You can always borrow money in free economies. (The reason why noone can borrow at all in Iceland today has nothing to do with price-indexation like most people probably know). Then theories abound that real interests, i.e. interests above inflation are always higher on those loans that are not price-indexed. These theories do not add up to the thirty years experience of Icelanders. The first ten years of price-indexation (those years that Gudmundur Olafsson doesn’t mention in his article), the real interests of price-indexed loans were 5,6 percent higher. Most amusing though is Gudmundur’s theory of horses, which maintains that if Gudmundur lets me borrow ten horses then he wants them all back. I can assure Gudmundur that he would get them all back, even though I disagree with him about the price-indexation. On the other hand, I could not promise him the same with a monetary note that I would borrow from him, in spite of the note being printed by the Central Bank of Iceland. 

Related posts:

1. The Economics Of The Devil
2. The Dead Horse Called Price Indexation
3. Why do we have price-indexation?