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View Diary: Election Time in Iceland: A Zombie Constitution To The Left, Pirates Sailing To The Right (68 comments)

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  •  Of course currency collapse sucks (1+ / 0-)
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    Stephen Wolf

    but the alternative would have sucked much more. The shock to the Icelandic economy was such that the pain was going to be considerable in any case. I'm not an economist, but here is basically how I understand it:

    1. Peripheral countries in Europe were subject to a boom, largely driven by financial markets, that led to salaries and prices going up much faster in those countries than in Europe's core economies.

    2. Financial collapse. The peripheral countries now have salaries that are way to high to be able compete.

    3. The salaries must come down, in one of two ways. Either you a) devalue your currency, or b) you suffer a long, deep depression that forces salaries down. There is unfortunately no option in which the average Icelander does not lose a big chunk of his or her purchasing power.

    However, while option a) is very painful, b) is extremely painful (just ask Greece).

    In fact, Iceland's experience shows quite clearly the difference. At this link, for instance, you can see how Iceland's unemployment increased much less than Ireland's or Estonia's, and started to come down much earlier (and no, Iceland's bust did not start earlier that other countries). Also, here, you can see how the percentage slump in Iceland's GDP is much smaller than in Ireland, Estonia or Latvia. And this is in spite of the fact that the financial shock to Iceland's economy was much greater than in those other countries.

    I'm not trying to minimize the pain Iceland has gone through. But it could have been much worse. What Iceland did was courageous in that it refused to bail out the banks and let them go under in spite of enormous international pressure. But had Iceland not had its own currency, it would not have mattered.

    "A government that robs Peter to pay Paul can always depend on the support of Paul." - George Bernard Shaw

    by Drobin on Mon Apr 15, 2013 at 03:47:41 PM PDT

    [ Parent ]

    •  Krugman (0+ / 0-)

      I should dig up the link where Krugman admitted he didn't know much about the Icelandic economy.  And its obvious, every time he talks about it.  

      I have no clue where that graph comes from, because Iceland's unemployment rate doesn't look like that.  It looks like this.  Perhaps that's seasonally adjusted?  At the very least it's mislabeled.

      Iceland's unemployment rate is about three times that which it was before the crisis.  Ireland's is about 3.5 times what it was before the crisis, and their crisis began later and slower.  Sooo... what is this supposed to be proving, exactly?  And the Estonia inclusion makes Iceland look pretty poor.  And since when was "Ireland supposed to be an example"?  From who?  Certainly not the IMF.  

      So wages were "unusually high" here before?  So who was overpaying fishermen?  Who was overpaying sheep ranchers?  Who was overpaying aluminum smelter workers?  Yeah, bank bosses and investors were way overpaid, but so your solution to that is to double most people's principle and slash their savings and buying power?  And we're supposed to consider that a progressive solution?

      Krugman loves the lies of omission, posting whatever graphs and data makes Iceland looks good and leaving out what doesn't.  Hey, when was the last time that Krugman mentioned the IMF's latest conclusion that to ever lift capital controls, Iceland is basically going to have to go through another round of nailing creditors again (and the consequences that entails)?  When has he mentioned that the IMF forecasts for Iceland for several years from now are lower than their forecast for Ireland, relative to respective pre-crash GDP figures?  

      Oh, and the graph you're looking for is GDP per capita, not raw GDP.

      Here's another one for you, seasonally-adjusted volume of GDP indices.  Note also the volatility of the Icelandic economy.

      Hey, let's look at mortgage comparisons, here, here, here - so much healthier fundamentals, right?

      Should I really even get started on the Icelandic capital controls and their distorting influence on the economy?  Or the Housing Financing Fund timebomb?

      But no, Krugman has a story he wants to tell, so don't expect any of that from him.

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