laugardagur, desember 27, 2008

post mortem

Since the resurrection of the IR in November, I have so far been tiptoeing around the 800-lb. gorilla that's sitting in the room here: the collapse of Iceland's economy and currency. There are so many angles to cover that I am not quite sure where to begin. The Wall Street Journal came out with a pretty good summary today. The saga will be familiar to my Icelandic readers, but probably educational for those outside of the country.

This is something we had been building to, unfortunately, for many years. The fact that the country was in an unsustainable bubble was plain as day to me when I first moved here in 2004, and I wrote about it in 2005 and 2006. The longer a bubble goes on, however, the more we accept it as normal and become blind to its excesses. Iceland saw the mother of all debt bubbles. I think the nation will be paying for this one for the next decade or more.

I know that many of my American readers are under the impression that, once more, the "best" economic collapse is happening in their country. And while playing Depression one-upmanship is surely not the best use of time, just to put Iceland's collapse into perspective: the OECD is predicting that the economy here will shrink by almost 10% in the year 2009. In America, where the newspapers abound with "Great Depression II" headlines, that economy is only predicted to shrink about 1.5%. Inflation, which is running at around 15% here, is expected to increase at the same time. And whereas in 2007, when $1 cost only 60 krónur, as of today, that same dollar costs 126. That means that the ISK price of anything we'd like to buy from the US - be it a crate of Washington apples or a Boeing Dreamliner - is double what it was a year ago. Maybe someday I can tell my grandchildren I lived through one of the greatest national collapses in Western history. But the day-to-day uncertainty here is still for the moment pretty unsettling.


Blogger Stan said...

"He's baaaack!"

Great links. If Iceland is to pull itself out of this mess, people have to be able to understand what got them into it. Your posts of 2005 and 2006 were prescient and certainly predate the Brown-Harding-Terrorist excuses.

Welcome back.


Anonymous Nafnlaus said...

I've been enjoying your blog the last few years and remember reading your bubble posts at a time when prices in US$ were ridiculous and Icelandic hubris was at an all-time high. Frankly, judging by the christmas shopping craze, I think the reality of a 10% contraction next year has not sunk in yet. Lets just hope that the fish can sing.

Your insights are spot on and I hope you'll keep writing. Thanks!

Blogger JB said...

Stan: It's great to be back. I was just re-reading the comments to my 2006 post about the Merrill report. You can get a flavor from those comments about Icelandic reactions at the time. The fact is, a person or a country cannot borrow money endlessly, nor rely on the ability to replace old loans with new to keep to business as usual. I just wonder how many people here "get" this, even now.

Anon: I don't know about that, Christmas in our family was significantly toned down from last year. I think it was more enjoyable, too.

Anonymous Nafnlaus said...

Hi Jared, I think it is necessary to point a few things out here.
You yake the building of a number of new houses as evidence of an unsustainable bubble but the population of Iceland is the fastest growing in Europe, since 1990 the population has grown by ca 70 000 and the buildings that you were referring to (in Hafnarfjörður and Njarðvík) are all sold by now.
Iceland has one of the highest birth rates (no baby boom) and one of the lowest death rates in Europe and a rapid population increase is the logical result.
The reason for the collapse of the economy was the overextension of the banking sector, a sector that was to 60-80% operating outside of Iceland and fuelling a large variety of ventures, most of them abroad.
Neither Iceland nor the population of Iceland were borrowing money endlessly, nor relying on the ability to replace old loans with new to keep to business as usual.

Blogger JB said...

Hi Sigvaldi,

Thanks for reading and writing.

On the housing side, Vellir (the neighborhood I wrote about in Hfj, near Straumsvík) is still nowhere near full. And since I wrote that piece in 2005, there are even more disastrous half-built neighborhoods around that weren't even on the drawing board back then. I fear that these "ghost towns" will remain -- and even expand as people relocate back to the older parts of town -- for many years.

I agree that the population of Iceland is growing, as it is in the USA, but just like there easy credit led to a huge explosion in building that outpaced the need for new housing.

Regarding the banks: yes, they played a big role in this crisis, but there is plenty of blame to go around. Go back and read my 2006 post about the Merrill report: "Household debt in 2004 was 192% of household disposable income. Credit to the private sector amounted to 218% of GDP at the end of last year, doubling in the last 3 years."

The banks relied on wholesale (capital markets) funding to finance themselves and their expansion abroad. But that very same credit spigot was also used to finance loans to Icelandic businesses and individuals for all kinds of frivolous purchases. And Icelanders bought like there was no tomorrow. I am sure you know someone who took out a foreign currency loan to buy a car. I do. Taking an FX loan to buy a depreciating asset is considered folly in our developed-world brethren.

The OECD and the US Treasury also worried about the unsustainably high levels of private debt in Iceland. I believe that at one point they were by far the highest in all OECD countries.

This uncomfortable fact hasn't gotten a whole lot of coverage here, for obvious reasons. But the Merrill boys were onto it back in 2006. The stratospheric levels of debt incurred here by the general public were certainly a contributing factor to the world's loss of confidence in the króna and the Icelandic economy.

Blogger carmen said...

Great article in the WSJ. Even the comments on that article were illuminating. So are there any moves in the country to hold the oligarchs responsible for this mess? Where are they now?

I also really appreciated your two earlier posts about the brewing disaster. Big question: Why did no one else notice this?? Was everyone with any influence also in on the spoils? Where were the regulators? What about academics at least? The Icelandic Jim Cramer? Maybe Iceland needs a pragmatic scold like Suze Orman.

People have been speculating in the US media about what this economic crisis should ultimately be called, a la "Great Depression" or "9/11." Although I prefer Not So Great Depression, this article demonstrates how Too Big To Fail is the catchphrase of the late 2000s.

Here's another link you might enjoy:
Iceland: The Nordic Zimbabwe
by Iris Erlingsdottir

nice to see the blog back in action!

Blogger JB said...

Hi Carmen,

There were a lot of folks outside Iceland (the OECD, Wall St analysts, US Treasury) who saw this coming years ago and were more or less ignored here. There were some economists here in Iceland making similar warnings, with similar results. But it's the age old story of human nature in any bubble: people shrug and ride the wave, believing things to be "different this time" (or "different this country" in this case). Plenty of Americans got suckered in the dot-com bubble, including people who knew they were making irrational decisions and went ahead anyway.

Very interesting link you posted as well. While I think it's an exaggeration, it makes an analogy that is hard to brush aside.

Readers, check it out.


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