How is Iceland functioning after bankruptcy?

Factual Questions
1

Just a couple weeks ago, Iceland’s banks collapsed, having debts more than the Gross National Product of the entire country.
Everybody reported the shock. England especially made much noise about its huge losses to Icelandic banks, using an obscure line in the anti-terrorist laws to issue economic sanctions against them.

Since then, I haven’t seen anything in the news about Iceland.
Presumably the people who live there are not starving to death, so what are they doing to survive?
If I owned a peanut buttter* factory in America or Europe, and wanted to sell them a few thousand jars, what currency would they pay me in, and would I accept a check?
what does it mean that an entire country is bankrupt?

And does Iceland’s situation offer any lessons relevant to other countries whose economies are in meltdown?

*(after all, human life cannot be sustained with out peanut butter) :slight_smile:

2

Resident Icelander checking in.

I’ve got food in the fridge, gas in my car and access to enough booze to get me through the holidays :wink:

But frankly, Iceland is not bankrupt. The major banks folded and have been nationalized. The government therefore had to take on loans from amongst other the IMF, to cover the outstanding accounts in the banks that folded. This is still in process and will be for quite awhile. This also means higher taxes on pretty much everything and cuts in government spending to be able to pay back those loans.

Due to this happening, the Icelandic Krona has sunk like a mobster with concrete shoes, making all imports quite the bit more expensive. Also, the national bank has set the interest rate at 18% (as opposed to the 0,25% at the Fed) to try to pull foreign currency back to Iceland.

Also, the inflation is supposed to hit 20% this year.

This is ain’t fun for us normal people, but nobody is starving and most people still have a job. The main problems are as follows:

[ul]
[li]Unemployment is on the rise and is expected to reach 9% come next year (from below 1% a year ago)[/li][li]Most of those who still have a job have gotten their wages cut by at least 10%[/li][li]Imports are more expensive (and since most things are imported, do the math)[/li][li]People are buying less stuff (due to the reasons above)[/li][li]Mortgage payments are on the rise (since they are tied to inflation, most people are looking at a 25% increase this year)[/li][li]Many people took car and house loans in foreign currency, these loans have increased 60-80% (depending on currency)[/li][/ul]

But lets take you hypothetical Peanut Butter factory:

You’d probably want to get your payment in advance, in USD (if you’re in the States). That would be a problem, since foreign currency is in limited supply, but companies are allowed to buy as much as they need to pay for expired invoices. So you’d get your money, when the invoice expires. If you’re willing to take the risk of the company not going belly up before that happens.

Main lesson learned: Don’t let your banks owe more than ten times your GDP :wink:

These are some of the main things that have happened. If you have any more questions (or want me to clarify what I’ve said, which I’m sure I need to do), shoot!

3

What of the Russians? I vaguely remember they had offered to help out with a big dollop of cash, in exchange for which they were supposed to receive some friendship in return, with the article mentioning that as a coincident, the US had withdrawn military forces from the country.

4

Why couldn’t Iceland just print money like the US and other banana republics do?

5

What, and remove inflation from the mix? :rolleyes:

6

The central bank is trying to raise the value of the currency, not cause it to crater.

7

The USA doesn’t do that. Try reading up on how the Fed and the Treasury works someday.

8

Did the IMF attach a bunch of strings to those loans? I seem to recall they did something similar during the Asian economic crisis. It really made things difficult for the Asian countries that accepted them.

9

I always wondered… Could a small nation secretly print a small amount of bills and somehow inject it into the economy… Hell… Even just have a pack of 20s “fall off the truck” here and there? (I’m sure there’s a more effective and less intrusive way to do this… Hide it in paperwork and such).

Just a thought, one which I’m sure I’ll be set right on, and I’m not exactly schooled in economics.

10

What the heck?

The whole concept of inflation is that there are now more dollars representing the same amount of wealth than there were before. It doesn’t matter if God Himself came down and issued the bills.

Valete,
Vox Imperatoris

11

Yeah, but how do you *know *that there are more dollars representing the same amount of wealth? It’s not as if the government periodically orders everyone to empty out their pockets and count.

12

No one has to know that for inflation to happen. We can infer inflation based on the prices people pay for things. If they are willing to pay more dollars for all goods, then they have more dollars chasing the same number of goods.

13

Bananas are a tropical fruit. Do you know where Iceland is located? :rolleyes:

14

This is a very simple and basic thing to understand about the economy and which everybody should understand. Greter demand makes prices rise, lower demand makes prices fall. Greater supply makes prices fall, lower supply makes prices rise. It is the invisible hand of the market and there is no way around it.

You want to increase demand by giving people spending money while at the same time not causing inflation? It cannot be done. It’s like trying to pour some water into a glass and have the water level in the glass stay the same. It cannot be done.

As always I recommend ** The Use Of Knowledge In Society ** by F. Hayek where he explains that prices in a free market act as a means of transmission of information. If prices go up you know demand is growing with respect to supply. It does not matter whether it is that demand is growing or that it is that supply is shrinking. The effect is the same and it is that prices rise and this acts upon the market to conserve use and find alternatives.
One other point: money is not created by “printing”; it is created by “lending”.

15

People know because of markets. Buying and selling stuff.

Stores have got a fixed amount of stuff, and they normally see that stuff moved from the shelves at a steady rate. But if everyone in town realizes that the Money Fairy left a heavy wad of cash under their pillows last night, they’re all going to go out and buy the next day. If I own a store, and I see everyone rushing my doors to try to scoop up my wares, I’m going to jack up prices to make the most of it. When all the stores jack up their prices, that’s inflation. The problem compounds, too, with expectations. If the Money Fairy visits everyone’s houses every day for a week, then it’s going to be totally reasonable for the stores to jack up their prices again the next business day. After all, once the Money Fairy gets going, why would she suddenly stop?

Same with international currency rates. If everyone’s got a brand new wad of mostly worthless cash, why wouldn’t they try to exchange it for a different nation’s cash? But if everybody floods the currency markets with their cash at the same time, that will result in a big increase in supply, which will cause the price of that cash to drop against other currencies. Expectations also effect this market. If Iceland starts printing money, and everybody knows they’re printing money, then the value of their money will plummet to disaster faster than a skydiver with a parachute malfunction.

This isn’t true. Money is created both by printing and lending.

The monetary base is created by “printing” (or rather, its modern equivalent). The rest of the money supply is created by lending.

16

OK, let me ammend that to “the great majority of money is created by lending” which is more like what I meant and I thought would be understood.

17

So…would this be a great time for a tourist to visit?

18

In the banana belt :smiley:

19

Well I’ll be dammed. :eek::smack::confused::cool:

20

Yes. It would be a really good time to visit.

Cause both would you be able to do some good bargains, you would also be helping the poor Icelanders getting more foreign currency :slight_smile:

However, don’t expect Iceland to be cheap. Expect it to be less expensive than it used to be.