sunnudagur, janúar 04, 2009

39 cents

One thing I find myself struggling to explain to American friends is the effect of the collapse of the Icelandic króna on our buying power and sense of wealth. When I try to explain how it is to be here I hear responses like, "it's bad everywhere." And truly it is, in the sense of collapsing stock markets, falling house prices, and rising unemployment. Iceland has those, too: the stock market has lost 90% if its value in this crisis, according to a recent paper.

But in addition to all of this, our currency has collapsed. That means that on top of the value of assets collapsing, the value of cash itself has collapsed. Money that people had in their wallets or bank accounts is worth a fraction of what it was.

I just ran the numbers for a hypothetical investor who one year ago (1 January 2008) came to Iceland with a single dollar bill. With the dollar bill she buys Icelandic krónur and puts them in a money market fund for safekeeping. On the first of this year, 2009, she withdraws the money and changes it back into dollars. The cashier hands her 39 cents.

That sense of loss is now pervasive here. When we looked into our wallets or our savings accounts a year ago, we saw dollars and euros, or the foreign travel or foreign goods they could buy. Now we see a handful of coins.


Blogger JB said...

I want to make a couple of additional points without cluttering up the original post:

- In the example, I invest in a money market fund (i. peningamarkaðssjóður) as that was common with cash savings here for most of the decade. In my example, the money market fund I chose lost more than 30% of its value in October, 2008, in connection with the collapse of the banking sector.

- Under Iceland's new capital controls laws, my example investor would then not be able to take these 39 cents out of Iceland.

Blogger Unknown said...

This makes our paltry Christmas gift to you seem all the more sad.

Blogger JB said...

What you talkin' bout? There is none finer than Christmas Crunch. I just got done with a bowl of the magic stuff, in fact.


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